[2008] 19 SOT 612 (DELHI)

In the ITAT Delhi Bench ‘A’

Smt. Madhu Tyagi

v.

Deputy Commissioner of Income-tax, Circle 26(1), New Delhi

Vimal Gandhi, President

P.M. Jagtap, Accountant Member

IT Appeal Nos. 2501 to 2506 (Delhi) of 2007

[Assessment year 2001-02]

September 17, 2007

Section 55, read with section 2(22B), of the Income-tax Act, 1961 - Capital gains - Cost of acquisition - Assessment year 2001-02 - Whether wording and purpose of allowing deduction towards cost of acquisition, for computing capital gain, is quite different from purpose of levy of wealth-tax and it is not permissible to import and apply principle laid down under Income-tax Act to Wealth-tax Act or vice versa - Held, yes - Whether fair market value of a capital asset under Act is to be taken in terms of section 55(2)(b)(ii), read with section 2(22B) and not at some artificial value as per rules framed under Wealth-tax Act, 1957 - Held, yes

Facts

The assessee along with other persons including family members of ‘A’, prior to 1-4-1981 held certain shares in a private company, which owned a cinema hall. They jointly disposed of their shares at the rate of Rs. 1,83,250 per share to sell the said hall on 28-9-2000. Since the shares were held much before 1-4-1981, all the shareholders including the assessee claimed deduction towards cost of acquisition by adopting indexed fair market value of said shares as on 1-4-1981 while computing capital gains on sale of said shares. The Assessing Officer, however, holding that rule 1D of the Wealth-tax Rules, 1957 was applicable, reworked the capital gains by adopting face value of said shares as the cost of acquisition thereof, even though in the assessment, he got valuation of said cinema building done through the Departmental Valuation Officer (DVO) and the said value was substituted in place of the value shown in the balance sheet.

On appeal, the Commissioner (Appeals) upheld the impugned order. In the instant appeal, the assessee contended, inter alia, that value of same shares as on 1-4-1981 having been accepted in the case of A’s family members, it was not open for the revenue to take value of same shares for same purposes at some other rate, and that both the Assessing Officer as well as the Commissioner (Appeals) were in error in applying rule 1D for determining fair market value of said shares as on 1-4-1981 before applying indexed cost.

Held

The wording and purpose of allowing deduction towards cost of acquisition, for computing capital gain, is quite different from the purpose of levy of wealth-tax. Further, under the Wealth-tax Act, rules have been framed to avoid litigation in determining the value of the assets subjected to tax. As a policy decision, certain values have been freezed like value of a residential house under section 7(4) of the Wealth-tax Act, 1957 or made applicable for 3 to 4 years. It is not permissible to import and apply principle laid down under the Income-tax Act to the Wealth-tax Act or vice versa. [Para 7]

The value determined under the Wealth-tax Rules does not represent the fair market value but the position under the Income-tax Act is quite different. Although the term “fair market value” is not defined, it has to be the market value of the property, which is fair and reasonable. It must appear to be as close to the market value as possible. It must be intrinsic value. As rightly observed in the case of Smt. B. Subhadra L/R of B. Paparaju v. ITO [2005] 92 ITD 285 (Hyd.), in most of the cases value so arrived by applying Schedule III are totally different from the fair market value as understood under the Wealth-tax Act. This is apparent from reference to Rules 8 and 20 of Schedule III to the Wealth-tax Act. Rule 8 excludes application of Rule 3 in certain cases. Rule 20 provides for valuation of assets in other cases. - (1) The value of any asset, other than cash, being an asset which is not covered by rules 3 to 19, for the purposes of this Act, shall be estimated to be the price which, in the opinion of the Assessing Officer, it would fetch if sold in the open market on the valuation date. (2) Notwithstanding anything contained in sub-rule (1), where the valuation of any asset referred to in that sub-rule is referred by the Assessing Officer to the Valuation Officer under section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date. Thus, it is evident that assets covered by Rules 3 to 19 are given special treatment and may not represent the price of asset, “it would fetch if sold in the open market on the valuation date”. Otherwise there was no need to have this provision. Further sub-rule (2) above attaches due importance to the value determined by Valuation Officer and the same cannot be ignored as had been done in the instant case. Therefore, having regard to the purposes of two enactments, it is not possible to treat application of rule 1D mandatory under the Income-tax Act, 1961 or ignore the value of cinema determined by the DVO. [Para 7.2]

The fair market value of a capital asset under the Act is to be taken in terms of section 55(2)(b)(ii), read with section 2(22B). Thus, open market value on the relevant date was required to be taken and not some artificial value as per rules, which had no application. [Para 7.3]

In the instant case, shares had been sold at the rate of Rs. 1,83,250 per share. That value had been accepted but if value of the shares sold on the date of sale as on 28-9-2000 was taken under rule 1D, it was much less than the price received. Obviously, the price charged had not been worked out as per rule 1D. Therefore, it would not be legally fair or equitable to apply rule 1D for working out the cost of acquisition. One cannot have a different approach in fixing the price of same asset for a single purpose of computing capital gain. Further, written down value or value shown in the balance sheet was just a fraction of the value of main asset held by the company, i.e., cinema hall. If one would take only a fraction of the market value for computing value of share as on 1-4-1981, the value taken, could by no stretch of imagination, be said to be the fair market value of the asset. Obviously, one acts not only contrary to the statutory provisions, but also to advance injustice. Therefore, on facts and circumstances of the case, there was no justification for not taking the fair market value of cinema building as on 1-4-1981 as per relevant provisions of Income-tax Act on which no dispute had been raised. Further, there was no justification as to why the market value of the cinema hall would not be adopted in taking the value of the unquoted shares of the company. There was no justification for taking only a fraction of market value on some technical grounds. [Para 8]

Therefore, the value as adopted in other cases of A’s family members on 1-4-1981 and, thereafter, indexed, was to be adopted in all the appeals under discussion. [Para 8.1]