IN THE ITAT KOLKATA BENCH “E”

Smt. Mina Deogun

v.

Income-tax Officer, Ward-29(4), Kolkata

K.S.S. Prasad Rao, Judicial Member

and B.R. Kaushik, Accountant Member

IT Appeal No. 1003 (Kol.) of 2007

[Assessment year 2004-05]

August 3, 2007

I. Section 55, read with sections 48 and 45, of the Income-tax Act, 1961 - Capital gains - Cost of acquisition - Assessment year 2004-05 - Assessee’s father purchased a property on 16-4-1958 - He died on 29-6-1968 and thereafter, his wife ‘B’ became owner of said property - ‘B’ expired on 16-9-1999 and thereafter, assessee inherited said property and sold same subsequently - Assessing Officer while determining cost of acquisition of assessee’s share in property under section 55(2)(B)(ii) adopted case of inflation index applicable to financial year 1998-99 as base on ground that in said year assessee first held asset on demise of her mother - Whether when an assessee sells an inherited capital asset, capital gain is to be computed with reference to period of holding and cost of acquisition incurred by first owner - Held, yes - Whether if an asset is acquired before 1-4-1981, market value of capital asset as on 1-4-1981 would be taken for purpose of indexation - Held, yes - Whether since assessee’s father who was first owner of said property had acquired same in year 1958, i.e., before 1-4-1981, Assessing Officer was required to compute capital gain by applying cost inflation index applicable for financial year 1981-82 and not to financial year 1998-99 - Held, yes

Interpretation of statute : Rule of Schematic interpretation and Rule of Harmonious interpretation

Circulars and Notifications : CBDT Circular No. 636, dated 13-8-1992

Section 55, read with section 48, of the Income-tax Act, 1961 - Capital gains - Market value - Assessment year 2004-05 -Whether in valuing market value of any property, consideration should not only be given to locality but also to other facts relatable to specific property - Held, yes - Whether where registered valuer had valued market value of property acquired by assessee by comparing sale instance of other property situated in that area and had also considered other facts  relatable to that specific property and its location, in such circumstances, value of the property as estimated by regis­tered valuer deserved to be accepted - Held, yes

II. Section 22 of the Income-tax Act, 1961 - Income from house property - Chargeable as - Assessment year 2004-05 - Assessee along with her husband had constructed a residential building on a plot of land, which was registered in name of her husband - This building was let out since 1973-74 and in all past assessments of assessee and her husband till assessment year 2003-04, one-third of rental income was assessed in assessee’s hands under head ‘Income from house property’ - However, in assessment year 2004-05, Assessing Officer assessed rental income received by asses­see under head ‘Income from other sources’ - Whether since for past several years rental income was assessed as ‘income from house property’, there was no reason to take a different view assessment year 2004-05 - Held, yes

Facts-I

A residential house property at Golf Links, New Delhi was pur­chased by the father of the assessee on 16-4-1958. On his death on 29-6-1968, his wife B became its owner. She expired on 16-9-1999 and thereafter the assessee along with her three sisters became co-owner of the said property by virtue of succession. During the financial year 2003-04, the said property was sold by the co-owners. As the said property was owned by the predecessor in title to the assessee prior to 1-4-1981, the assessee obtained a valuation report of the property from a registered approved valuer. The registered approved valuer in his valuation report estimated the fair market value [FMV] of the property as on 1-4-1981 at Rs. 73,60,975. This, inter alia, included the estimated value of building at Rs. 5,67,500 and land at Rs. 67,93,475 at the rate of Rs. 6,500 per sq. mtr. The assessee while arriving at the capital gains to be taxable in her hands had taken the cost of acquisition of the property at Rs. 18,40,240, i.e., one-fourth share of Rs. 73,60,975. The Assessing Officer having noticed that the FMV of the property estimated by the registered valuer prima facie indicated substantial increase over cost of acquisition, made a reference of valuation under section 55A(b)(ii) to the DVO. The DVO estimated the value of the said property at Rs. 42,62,280. In valuing the property, the DVO estimated value of land at the rate of Rs. 3,910 per sq. mtr. at Rs. 40,94,780. He, however, accepted the registered valuer’s estimate of building at Rs. 5,67,500. Accordingly, the assessee’s one-fourth share in the property was estimated by the DVO at Rs. 11,65,570. The Assessing Officer completed the assessment of the assessee by adopting the valuation report of the DVO.

On appeal, the Commissioner (Appeals) averaged out the two valua­tions and adopted Rs. 15,02,907 as cost of acquisition of the assessee’s is one-fourth share in the said property under section 55(2)(b)(ii) as on 1-4-1981 and directed the Assessing Officer to recompute the capital gains. He agreed with the Assessing Officer that cost of inflation index applicable to the financial year 1998-99 was to be adopted as base, since in the said year, the assessee first held the asset on demise of her mother.

On second appeal :

Held-I

As per section 49(1)(ii), the cost of acquisition to the ‘previ­ous owner’ constituted cost of acquisition to the assessee. Further, as per section 55(2)(b)(ii), fair market value on 1-4-1981 could be opted for by the assessee as cost of acquisition. [Para 7.1]

The DVO accepted the value of the building as estimated by the registered valuer and the point of difference related only to valuation of land. In both valuation reports, the reference was made of a comparable sale instance in respect of land in Safdarjung Enclave which fetched price of Rs. 3,128 per sq. mtr. Both valuers agreed that the Golf Links area, where the subject property was situated, was much better than Safdarjung Enclave area. In valuing the market value of any property, the consid­eration should not only be given to the locality but also to other facts relatable to the specific property. In the DVO’s report, the reference was made only to Golf Link locality in general and being a better locality token increase of 25 per cent was given by him without giving any specific reasons. The DVO did not even discuss the relative advantages or disadvantages of the impugned property. On the other hand, the registered valuer dis­cussed advantages enjoyed by the property in question. The regis­tered valuer also referred to the sale instance of a plot of land in Vasant Vihar area which fetched Rs. 8,000 per sq. mtr. in 1985. Since Golf Links area in general was a better locality as compared to Safdarjung Enclave and Vasant Vihar and further considering the other locational advantages enjoyed by the property in question, the registered valuer estimated the value of land at the rate of 65,000 per sq. mtr. Further, in India, the prices of real estate have gone up more than the general rate of inflation. The cost inflation index which is prescribed under section 48 is based on the ‘wholesale price index’ and during the period 1981 and 2003, the cost inflation index recorded increase of 4.6 times. There­fore, the value of the property as estimated by the registered valuer deserved to be accepted. [Para 8]

The property in question was acquired by B on demise of her husband in 1968. Accordingly, B was the owner of the property on 1-4-1981. As per the provisions of section 2(42A) in determining period of holding of the capital asset, the period for which the previous owner held the asset was includable. Therefore, as per section 2(42A), the assessee was deemed to have held the said capital asset since 1958. [Para 8.1]

In assessing capital gain in the hands of successor, date of acquisition and period of holding is determined taking into consideration the date on which and the cost of which the first owner acquires the capital asset. It is for this reason, section 2(42A) uses the expression ‘in determining the period for which capital asset is held by the assessee’. Section 48 incorporates computation mechanism for qualifying the ‘capital gain’ and, therefore, the expressions used in the computation formula should be given schematic interpretation. The scheme of taxation of ‘capital gain’ can be understood by applying provisions of sec­tions 2(4A), 2(47), 47(ii), 48, 49(i) (ii) and 55(2)(b)(ii). As per the provisions of these sections, where an assessee sells an inherited capital asset, the capital gain is to be computed with refer­ence to the period of holding and cost of acquisition incurred by the first owner. It is so because in fact the successor asses­see does not actually incur any cost. [Para 8.4]

The provisions of section 48 prescribing indexed cost of acquisi­tion were enacted by the Finance Act, 1992. A co-joint reading of the Memorandum explaining the Finance Bill, 1992 and CBDT Circu­lar No. 636, dated 31-8-1992 shows that the indexation is to be allowed in respect of period of holding of the asset and not in relation to the individuality of the assessee. For the purpose of determining the period of holding, intermediate transfers on account of succession are to be ignored. This proposition is quite clear from Circular No. 636, dated 31-8-1992, which states that if an asset was acquired before 1-4-1981, then the market value of the capital asset as on 1-4-1981 is to be taken for indexation. In the instant case, the Assessing Officer himself allowed the benefit of ‘fair market value’ of the property as on 1-4-1981 to be cost under section 55(2)(b)(ii). As per section 2(49A), the period of holding of the capital asset in the hands of the assessee was the period commencing from 16-4-1958 till the date of transfer. It was, therefore, quite clear that as on 1-4-1981, the asset was statutorily considered to be held by the assessee under section 55(2)(b)(ii), read with section 2(49A) Therefore, the cost inflation index applicable for the financial year 1981-82 and not to the financial year 1998-99 should have been applied by the Assessing Officer. A similar view was taken by Chandigarh Bench of the ITAT in the case of Smt. Puspa Sofat v. ITO [2002] 81 ITD 1. In that case the house property was inherited by the asses­see from her father which was sold in assessment year 1993-94. The father of the assessee acquired the property in 1972 and therefore, the assessee opted for fair market value of 1-4-1981 to be the cost of acquisition. The assessee computed the indexed cost of acquisition with reference to the cost of inflation index of 1-4-1981 being 100 per cent. Assessee’s father expired on 17-2-1991 and the Assessing Officer allowed the indexation of cost with reference to the cost inflation index of financial year 1990-91 as against inflation index of 100 per cent. The Tribunal, however held that the assessee was entitled to compute capital gain by applying cost inflation index of 1-4-1981. Similar view was also taken by Mumbai Bench of the ITAT, in the case of Dy. CIT v. Mrs. Meera Khera [2004] 136 Taxman 174. Considering the totality of the facts and the Scheme of the Income-tax Act relating to taxation of capital gains, Tribunal was of the considered opinion that as per the schematic interpretation, the cost of inflation index should be made applying with reference to the year in which the capital asset was first acquired by the previous owner. If only for the purpose of com­puting indexed cost of acquisition, the date of acquisition by the previous owner is excluded, then it will lead to absurd re­sult. Such interpretation of section 48 will be against the intent and object of the enactment and will be against the over­all scheme of taxation of capital gains in case of inherited assets. The cardinal principles of interpretation of statutes is that if literal meaning of the statute leads to an absurdity, then the statute should be interpreted in a manner which will result in harmonious interpretation which avoids absurdity and promote the objective of an enactment. Therefore, the Assessing Officer was to be directed to re-compute the capital gains by applying cost inflation index of 100 per cent applicable for the financial year 1981-82. [Paras 8.5 and 8.6]

Facts-II

A co-operative housing society had allotted and leased a plot of land to one ‘R’, husband of the assessee. ‘R’ along with the assessee, constructed a residential building on the said plot. The assessee incurred cost of construction of Rs. 40,600 out of aggregate cost of construction of Rs. 1,22,595. This property was let out since 1973-74 and in all the past assessments of the assessee and her husband till the assessment year 2003-04, one-third of the rental income was assessed in the assessee’s hands under the head ‘Income from house property’. In the wealth-tax assessments of the assessee till the assessment year 1992-93, the revenue assessed one-third share in the said property as immova­ble property and valued it on rent capitalization method. For the assessment year 2004-05 the Assessing Officer, however, held that since the land on which the building was constructed was registered in the name of the assessee’s husband, the assessee was not the owner of the house property and, therefore, assessed the rental income received by the assessee under the head ‘Income from other sources’.

On appeal, the Commissioner (Appeals) confirmed the impugned order.

On second appeal :

Held-II

From the assessment order of the assessee’s husband for the assessment year 1972-73, it was clear that the revenue accepted that the cost of construction of the said property was Rs. 1,22,595 and the assessee’s contribution thereto was Rs. 40,600. Further, in the income-tax assessment for the past several years, the Assessing Officer assessed one-third rent in the hands of the assessee under the head ‘Income from house property’ and the re­maining second-third in the hands of the husband. In the wealth assessment under section 16(3), the assessee’s one-third share in the property was assessed by applying rental capitalization method thereby accepting that the assessee was one-third owner of the said property. No new fact had been brought on record and no material change took place in the assessment year 2004-05 to take a different view. Therefore, the Assessing Officer was not justi­fied in not considering the assessee as the one-third owner of the property. Therefore, the one-third rent received by the assessee from the letting of the residential house property was assessable under the head ‘Income from house property’. [Para 8]