The Commissioner of Income-tax, Mysore v. Daisy Devaiah
[Citation -2014-LL-0722-30]

Citation 2014-LL-0722-30
Appellant Name The Commissioner of Income-tax, Mysore
Respondent Name Daisy Devaiah
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 22/07/2014
Assessment Year 2005-06
Judgment View Judgment
Keyword Tags indexed cost of acquisition • benefit of indexation • cost inflation index • capital asset • capital gain • assessment • sale of property • erroneous and prejudicial to interest of revenue • long-term capital gain • long-term capital asset • fair market value
Bot Summary: The Commissioner of Income Tax exercising his power under Section 263 of the Act was of the view that the Assessment Officer s order in the case of the assessee allowing the benefit of indexation from 1.4.1981 was erroneous and prejudicial to the interest of the revenue because, as per explanation to Sec.48 of the Act, indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April 1981, whichever is later. Per contra, learned counsel for the assessee submitted that, if the cost of acquisition of the property as on 1.4.1981 is taken into consideration, then the indexed 6 cost of acquisition has to be calculated from that date, not from the day the assessee held the property by way of succession. If, cost of acquisition is to be computed as on the day the previous owner held the property on 1.4.1981, though the assessee acquired the said property by way of succession, indexed cost of acquisition is to be allowed from the day the property was owned by previous owner and not when the assessee held the property after his death and that is the ratio decided by the Bombay High Court in the aforesaid Judgment and therefore, he submits that no case for interference is made out. The 2nd proviso to Section 48 provides where long term capital gain arises from the transfer of a long term capital asset, the cost of acquisition of the asset has to be read as indexed cost of acquisition. Indexed cost of acquisition has been defined in the explanation to the said Section, it means an amount which bears to the cost of acquisition, the same proportion as Cost Inflation Index for the year in which the asset is transferred, bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April 1981, whichever is later. One such mode is, if the assessee acquires a capital asset by way of succession, inheritance or devolution, then the cost of acquisition of the asset shall be deemed to be the cost for which the previous 9 owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Though in the definition of indexed cost of acquisition , the word used are, in which the asset was held by the assessee , a harmonious reading of Sections 48 and 49 makes it clear that, for the purpose of Indexed Cost of Acquisition , it has to be understood as the first year in which the previous owner held the said property.


1 IN HIGH COURT OF KARNATAKA, BANGALORE DATED THIS 22ND DAY OF JULY, 2014 PRESENT HON'BLE Mr. JUSTICE N. KUMAR AND HON'BLE Mr. JUSTICE B. MANOHAR I.T.A. No. 109/ 2014 BETWEEN: 1. Commissioner of Income Tax, Vidyaranyapura, Mysore APPELLANT (By Smt/Sri. E.I. Sanmathi, Advocate) N D: Smt. Daisy Devaiah, By Legal Representative- Sri. C.B. Madaiah, Mettacad Estate, Uliguli-Nargane, Suntikoppa-571237 RESPONDENT This I.T.A. is filed under Section 260-A of Income-tax Act, 1961 praying to decide foregoing question of law and/or such other questions of law as may be formulated by Hon ble Court as deemed fit and to set aside appellate order dated 11.10.2013 passed by Income Tax Appellate Tribunal, Bench, Bangalore, in ITA No.205/Bang/2013 for Assessment Year 2005-06. 2 This I.T.A. coming on for admission this day, N. KUMAR, J., delivered following: JUDGMENT This appeal is preferred by revenue against common order passed by Tribunal in respect of assesses setting-aside order passed by Commissioner of Income Tax under Section 263 of Income Tax Act, 1961 (for short hereinafter referred to as Act ) and granting relief to assessee. 2. assessee in this appeal is one of legal heirs of One Mr C. B. Devaiah. Mr C. B. Devaiah, owned property, which had been acquired by him prior to 1.4.1981. Mr C. B. Devaiah died on 23.4.2000. His legal heirs sold property owned by him during previous year relevant to 2005-06 i.e., on 18.10.2004. assessee as one of legal heirs was entitled to have 1/5th share in property owned by Mr C. B. Devaiah. assessee declared his capital gain on sale of property in his returns of income filed for assessment year 2005-06. In computation of capital gains, assessee adopted 3 fair market value(FMV) of property as on 1.4.1981 as cost of acquisition of property. revenue did not dispute this valuation. assessee while computing his cost of acquisition also claimed indexation on FMV as on 1.4.1981. assessing authority while completing assessment of assessee, accepted claim of assessee in order of assessment dated 30.11.2009 passed under Section 143(3) of Act allowing benefit of indexation from 1.4.1981. Commissioner of Income Tax exercising his power under Section 263 of Act was of view that Assessment Officer s order in case of assessee allowing benefit of indexation from 1.4.1981 was erroneous and prejudicial to interest of revenue because, as per explanation (iii) to Sec.48 of Act, indexed cost of acquisition means amount which bears to cost of acquisition same proportion as Cost Inflation Index for year in which asset is transferred bears to Cost Inflation Index for first year in which asset was held by assessee or for year beginning on 1st day of April 1981, whichever is later. According to appellate authority, asset was 4 held by assessee only from 23.4.2000 when Mr. C. B. Devaiah died. Therefore, benefit of indexation has to be allowed only from 23.4.2000 and not from 1.4.1981 as claimed by assessee. Accordingly, order passed by Assessing authority was revised and assessing authority was directed to allow indexation benefit from financial year 2000-01 only. 3. Aggrieved by said order, assessee preferred appeal to Tribunal. Tribunal after hearing both parties and relying on judgment of Bombay High Court in case of Commissioner of Income Tax vs Manjula J Shah reported in (2012) 68 DTR 269 (Bombay) held that Commissioner was not justified in not following decision of Hon ble Bombay High Court, as ratio of decision of Bombay High Court rendered in context of acquisition of property by way of gift will apply with greater force when property devolves by succession. view taken by assessing authority was correct and therefore, Commissioner of Income Tax was not justified in exercising his jurisdiction 5 under Section 263 of Act and in interfering with order passed by Assessing Authority. Therefore, appeal was allowed. order of Appellate Authority was set-aside. order of assessment was restored. Aggrieved by said order, revenue is in appeal. 4. Learned counsel for revenue assailing impugned order contends that, as is clear from explanation (iii) to Section 48, indexed cost of acquisition is to be allowed for first year in which asset was held by assessee or in year beginning on first day of April, 1981, whichever is later. Therefore, Tribunal was not justified in interfering with order passed by Commissioner of Income Tax. In fact, revenue has preferred Special Leave Petition against judgment of Bombay High Court and it is pending consideration before Apex Court and therefore, he submits that order requires to be interfered with. 5. Per contra, learned counsel for assessee submitted that, if cost of acquisition of property as on 1.4.1981 is taken into consideration, then indexed 6 cost of acquisition has to be calculated from that date, not from day assessee held property by way of succession. He submits that in view of Section 49, cost of acquisition of asset shall be deemed to be cost for which previous owner of property acquired it, as increased by cost of any improvement of assets incurred or borne by previous owner or assessee, as case may be, if acquisition is by way of succession, inheritance or devolution. If, cost of acquisition is to be computed as on day previous owner held property on 1.4.1981, though assessee acquired said property by way of succession, indexed cost of acquisition is to be allowed from day property was owned by previous owner and not when assessee held property after his death and that is ratio decided by Bombay High Court in aforesaid Judgment and therefore, he submits that no case for interference is made out. 6. appeal is admitted to consider following Substantial question of law: 7 Whether on facts and in circumstances of case, tribunal is right in law in concluding that while computing capital gains arising on transfer of capital asset acquired by assessee through succession, indexed cost of acquisition has to be computed with reference to year in which previous owner first held asset and not year in which assessee actually became owner of asset through succession? 7. Section 45 of Act provides that any profits or gains arising from transfer of capital asset effected in previous year shall be chargeable to income tax under head Capital gains . Capital Gains is of two types. Short-term capital gains and long term capital gains. Depending upon nature of capital gains liability of tax is determined. mode and manner of computing capital gains is provided under Section 48 of Act. income chargeable under head capital gain shall be computed by deducting from full value of consideration received or accruing as result of 8 transfer of capital asset, expenditure incurred wholly and exclusively in connection with such transfer and cost of acquisition of asset and cost of any improvement thereon. 2nd proviso to Section 48 provides where long term capital gain arises from transfer of long term capital asset, cost of acquisition of asset has to be read as indexed cost of acquisition . Indexed cost of acquisition has been defined in explanation to said Section, it means amount which bears to cost of acquisition, same proportion as Cost Inflation Index for year in which asset is transferred, bears to Cost Inflation Index for first year in which asset was held by assessee or for year beginning on 1st day of April 1981, whichever is later. 8. Section 49 deals with cost with reference to certain modes of acquisition. One such mode is, if assessee acquires capital asset by way of succession, inheritance or devolution, then cost of acquisition of asset shall be deemed to be cost for which previous 9 owner of property acquired it, as increased by cost of any improvement of assets incurred or borne by previous owner or assessee, as case may be. Therefore, when asset is acquired by way of inheritance, cost of acquisition of asset should be calculated on basis of cost of acquisition by previous owner and said cost of acquisition of previous owner has to be calculated on basis of indexed cost of acquisition as provided in explanation (3) to Section 48. 9. Though in definition of indexed cost of acquisition , word used are, in which asset was held by assessee , harmonious reading of Sections 48 and 49 makes it clear that, for purpose of Indexed Cost of Acquisition , it has to be understood as first year in which previous owner held said property. Otherwise, if date of inheritance is taken into consideration, then cost of acquisition of asset on that date corresponding to market value is to be taken into consideration. Otherwise, take cost of acquisition on day previous owner acquired it and apply 10 Indexed Cost of Acquisition and then calculate capital gains and tax payable. That is precisely what has been held by Bombay High Court in aforesaid Judgment which in our view is correct legal decision. 10. In that view of matter, Tribunal was justified in following Judgment of Bombay High Court and in setting-aside order passed by Commissioner of Income Tax. Therefore, substantial question of law framed is answered in favour of assesses and against revenue. Appeal is dismissed. No costs. Sd/- JUDGE Sd/- JUDGE KGR* Commissioner of Income-tax, Mysore v. Daisy Devaiah
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