Cost of acquisition in case of inherited property

Roop Chand, Sr. D.R. for the Appellant. J.P Shah, A.R. for the Respondent.

ORDER

Mukul Kumar Shrawat, Judicial Member – This is an Appeal filed by the Assessee arising from the order of learned CIT(A)-XVI, Ahmedabad, dated 22.04.2013 and the grounds raised are reproduced below:

The Income of HUF may be deleted and there is no meaning in applying cost as of Accounting year 2003-04 as HUF Income is added is to be deleted.”

1.1 Later on, the Appellant has also raised an additional ground as under:

“Without prejudice to the above three grounds, in any case, the Lower Authorities erred in computing the taxable Long Term Capital Gain by taking the sale consideration in the hands of the assessee at Rs. 13,33,333/- when in fact the Sale Deed specifically mentions that he gets the sale consideration of Rs. 4,00,000/- only, and therefore, the calculation of the taxable capital gain of Rs. 11,71,597/- which is far much more than the actual sale consideration of Rs. 4,00,000/- is patently bad in law.”

2. At the outset, learned A.R., Mr. J.P. Shah has informed that considering the additional ground now raised and ground no.3 being dependent upon the additional ground. The grounds no.1 and 2 are not pressed.

3. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) dated 21.12.2011 were that the Assessee in individual capacity has filed a return of income at Rs. 1,82,280/-, however the assessment was completed on the assessed income of Rs. 12,84,474/- after making an addition of Rs. 11,71,597/- as “Long Term Capital Gain” in the hands of the Assessee.

3.1 The observation of the AO was that the Assessee had sold a plot situated at Maninagar admeasuring 411.15 sq. along with construction for a consideration of Rs. 80 lac. The next observation of the AO was that on verification of the sale deed, it was found that the Assessee had acquired 1/6th share of “Babulal Group and another 1/6th share of Bansilal Group” respectively on 23rd October, 2003 and 19th February, 2004. The AO has therefore opined that the cost of acquisition to be considered as 463 instead of 100 as shown by the Assessee. The AO has cited the provision of Section 49 to be read with Section 48 Explanation (iii) of IT Act. A show cause was issued as to why the capital gain to be taxed in the hands of the Assessee after taking cost of acquisition at 463.

3.2 The Assessee s reply was that only 1/6th share of Babulal was acquired by him. A family tree was furnished by the Assessee. It was also clarified that inadvertently PAN card of the individual was submitted to the sub Registrar at the time of registration of the document. It was contended that by mistake the PAN card of individual was given but in fact considering the family tree the property in question belonged to the HUF of the Assessee. It was also mentioned that instead of 1/6th only 1/3rd share in the property was acquired by the Assessee that too in HUF capacity. However, the AO was not convinced and held as under:

“The submissions made by the assessee have been carefully considered. However, the same is not acceptable; the property in question has been registered with sub-registrar individual capacity. The PA. Number mentioned in the sale deed is of individual. It is admitted by the assessee vide letter dtd 07/10/2011 that the sale price of his share has been credited Individual bank account with Dena Bank and not in the bank account in the name of HUF. The valuation report furnished in respect of the property for the valuation as on 01/04/1981 from M.C. Dalal and company letter 25/04/2009 in the said valuation report the name of the owner has been mentioned as Shri Vikrambhai &. others. It means that the property is co-owners property. In the sale deed PA. number mentioned belongs to Individual in respect of all the co-owners. The return of income in the HUF capacity has been furnished by the assessee only after the receipt of notice from Income Tax Department. The return of income in the HUF capacity has been furnished on 21/09/2011. The said return is to be treated as non-est as the same has not been furnished within the stipulated time provided u/s 139 of the IT Act and hence no cognizance of the said return is to be taken. All this sequence of events proved that the property belongs to assessee’s Individual and therefore long term capital gain arising out of the sale of the above property is to be taxed in the hands of Individual. As per family tree furnished by the assessee, the assessee is having only 1/6th share received from Babulal Group in the said property. The assessee acquired rights in the said property on the death of Shri Rohitkumar Babulal on 19/02/2004 and therefore the cost of acquisition is to be considered for F.Y.2003-04 of 463 u/s.49 r.w.s. 48(iii) of the Act. ”

3.3 In respect of determination of the year of cost inflation index, the AO has discussed as under:

“Cost inflation index for the year in which the asset is transferred /(Divided By) – 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.

3.4 In the instant case, 1/6th undivided share in the property in question was first held by the assessee on 19/02/2004 on the death of Rohitkumar Babulal. As such the index cost of inquisition is to be taken at to 463 which is being notified by the Central Govt. for every year under clause-(v) of the Explanation to Section 48 of the Act as against 100 shown by the assessee.

3.5 Further, plain reading of Explanation-(iii) to Section 48, shows that it describe the term index cost of acquisition which is defined as an amount which bears to the cost of acquisition in the same proportion of cost of inflation index for the first year in which the assets was held by the assessee or the year beginning from 1st day of April, 1981 whichever is later.

3.6 Here, emphasize is laid down on the denominator of the fraction which is expressly given by the wordings – “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”. This clearly given the formulae by which the indexed cost of Acquisition of any property needs to be compute in the hands of the assessee.

3.7 Here the definition of indexed of acquisition is being exhaustive, and the same cannot be further stretched to suit needs of any particulars assessee. Had the intention of legislature was not to use these words specifically then the same could have been substituted as “CII of the year in which asset was first held by the previous owner”. In commensuration with the “cost of acquisition of previous owner” being utilized in the numerator of the same formulae. As such, it can be inferred that the intention of the legislature was loud and clear.”

3.4 Thereafter, the AO has computed the capital gain as under:

“4. Thus, the long term capital gain is to be worked out by adapting correct cost of indexation. Considering the above facts, the long term capital gain is computed as under:

4. When the matter was carried before the First Appellate Authority, learned CIT(A) has upheld the action of the AO in the following manner:

“2.4 I have carefully considered the facts of the case and the submissions made by the appellant and the arguments taken by the A.O. The written submissions made by the appellant indicate that the appellant has contested the both the cost of acquisition adopted by the A O as well as the taxation of the capital gain in his individual capacity. As far as the controversy regarding cost of acquisition is concerned, from the perusal of grounds of appeal raised at para-2.1 above, it would be seen that the appellant has not challenged the action of the A O through any ground of appeal and hence no adjudication is required to be made to the controversy. As far as the action of the A O of taxing the amount of money as capital gains in the hands of the appellant is concerned, the same has been found to be a legally correct action. The Id A O has rightly pointed out that the P.A. No. used for the registration of the documents is that of appellant as an individual and not as HUF and hence legally the seller of the property is the individual and not the HUF. I have gone through the English version of the registered sale deed provided by the appellant which nowhere indicate that the impugned property was sold by the HUF. Then again assuming without conceding that the PA No. of the individual was inadvertently given, then the sale deed should have atleast that the seller was the HUF, which is not the case. The registered sale deed clearly mention that the seller is Harishkumar Babulal Shah having PANo. AFLPS8310P, Assuming without conceding that there was still some scope for clarity, then the consideration should have gone to the HUFs bank account and not to the appellants bank account which again is not the case, I also find force in the argument of the Id A O that the hypothesis of HUF filing the return on 21-9-2011 and showing the impugned capital gains is merely an afterthought to avoid the incidence of taxation. Assuming that the HUF had rightfully and legally earned the capital gains during A Y 2009-10, then the return of income u/s. 139(1) ought to had been filed on or before 30-7-2009. Further, assuming that the return could not be filed in time, then again the time limit for filing a valid return u/s. 139(5) expired on 31-3-2011. Consequently, the argument of the A O that the HUFs return is a non est return are based on firm legal findings. It is accordingly held that action of the Id A O in taxing LTCG in the hands of the appellant is a correct legal action is based upon correct understanding of the facts of the case and the contemporary direct tax statute. Consequently, the action of the AO is confirmed and the ground of appeal raised is dismissed.”

5. From the side of the Assessee, learned AR, Mr. J.P. Shah appeared and pleaded that his first plank of argument revolves around the question raised in the “additional ground”. He has mentioned that the Assessee has acquired the property in question as per the following family tree.

5.1 Mr. Shah has argued that the property in question was an ancestral property which was inherited by the Assessee from his ancestors. His grandmother, Smt. Tara Lakshmi Popatlal has expired on 6th October, 1976, his father, Sri Babulal Popatlal expired on 19th of December, 1961 and his mother, Sushilaben Popatlal expired on 23rd October, 2003. The Assessee, Sri Harish Babulal had acquired this property along with Vikram Babulal and Sri Rohit Babulal. Sri Rohit Babulal had expired on 19.02.2004. The Assessee, Sri Harish Babulal is also blessed by children. So, the argument of the Assessee is that the property was not acquired in the Year 2003 but it was acquired way back after the death of his father hence thecost of acquisition index as on 1.4.1981 was to be applied by the AO. For this legal proposition, he has placed before us today a computation of capital gain as under:

5.2 Mr. Shah has placed reliance on a decision of Hon’ble Gujarat High Court pronounced in the case of CIT v. Gautam Manubhai Amin [2013]  218 Taxman 319 wherein it was decided as under:

‘6. Heard Shri K.M. Parikh, learned advocate appearing on behalf of the Revenue and considering the material on record and the impugned order passed by the learned ITAT as well as the order passed by the CIT(Appeals), the question which is posed for consideration is whether for considering the long term capital gain “Cost Inflation Index” is required to be considered at the date on which the property was inherited in the name of the assessee or as per the previous cost of acquisition at which previous owner had acquired the capital asset. The issue involved is squarely covered by the decision of this Court in the case of B.N. Vyas v. CIT [1986] 159 ITR 141 (Guj.) and the decision of the Bombay High Court in the case of Manjula J. Shah (supra).

7. In the aforesaid decisions, it is held that for the purpose of computation of long term capital gain, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. In the aforesaid decisions, it was a case of gift. However, same analogy would be applied with respect to the property ofinheritance.

8. In view of the above, no error has been committed by the learned ITAT in dismissing the appeal preferred by the Revenue and confirming the order passed by CIT(Appeals) allowing the indexed cost of acquisition from the base year i.e., from 1.4.1981 and thereby deleting the addition of Rs. 1,00,76,878/- on account of long term capital gain. No substantial question of aw arise and hence present appeal deserves to be dismissed and is accordingly dismissed.’

5.3 Mr. Shah has also drawn our attention on a valuation report of one Sri M.C. Dalal & Co. for the purpose of adopting the value of the property in applying the cost inflation index. On one hand, as per the valuation, it was Rs. 7,72,000/- as against that as per AO it was Rs. 1,28,666/-. Mr. Shah has pleaded that the AO has failed to examine the said valuation report.

6. From the side of the Revenue-Department, learned Sr.D.R., Mr. Roop Chand appeared and vehemently objected that the indexation is to be applied as on 1.4.1981. Because the property in question devolved to the share of the Assessee only when Sri Rohit Babulal expired on 19th of February, 2004. The date of acquisition of an asset should be the date on which the Assessee has obtained a legal enforceable right over theproperty. Even the conduct of the Assessee has also demonstrated that the Assessee has executed the sale deed on 27th of March, 2009 when he has obtained the rights over the property; Ld. DR has pleaded.

7. We have heard both the sides at some length. We have perused the orders of the authorities below in the light of a short compilation filed before us. On perusal of the sale deed stated to be registered on 27th of March, 2009 we have noted that the executors of the sale deed were the family members of the Assessee. Meaning thereby the Assessee was not the only seller of the property but the property in question was sold jointly by all the members of the family. The property in question was sold for a consideration of Rs. 80 lac.

8. It is worth to mention at this stage that although we have found that the property in question was inherited by the Assessee but we are not going to disturb the status under which the assessment was completed. The assessment order was passed by the AO in the “status of individual” which is not going to be disturbed especially when ground no.1 and 2 are not pressed by learned A.R. before us. With this legal finding now we proceed hereinbelow.

9. The next issue is as per ground no.3 raised before us that whether the Revenue Authorities were correct in adopting the index price in A.Y.2003-04 instead of 1.4.1981. In this regard, relevant paragraph of the Assessment Order has also been reproduced above. The AO has held that the saidproperty had devolved on the Assessee on the death of Sri Rohit Kumar Babulal on 19th February, 2004 and thereafter he has held that the cost ofacquisition would be considered for F.Y.2003-04 on 463 in terms of the provision of Section 49 r.w.s. 48(iii) of IT Act. Section 48 Explanation (iii) of IT Act prescribes that the “index cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as CostInflation 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. As per this Explanation, the cost inflation index is to be adopted of the year in which the asset is transferred and to be divided by the cost inflation index of the year in which the asset was first held by the Assessee or as on 1.4.1981, whichever is later. As far as the cost inflation index of the asset when it was transferred is concerned there is no dispute because the Assessee as well as the AO both have adopted this figure at 582. The dispute is that whether the cost inflation index is to be adopted as prescribed for 1.4.1981 which is 100 or as on F.Y.2003-04 which is 463. Although, it is not required to mention being known to everyone that if the denominator is higher than the resultant figure is lower and if the denominator is lower than the resultant figure is higher. The resultant figure is prescribed to be reduced from the sale consideration. To resolve the issue of the correct year of acquisition of this asset it is worth to examine the provisions of Section 49 of IT Act. This Section prescribes the cost with reference to certain modes of acquisition and one of such mode is “succession”. As per this section where the capital asset became the property of the Assessee by succession or inheritance then the cost ofacquisition of the asset shall be deemed to be the cost for which the previous owner of the property had acquired it. In this case, the Assessee, Sri Harish Babulal had acquired this property by inheritance on death of his father Sri Babulal Popatlal who expired on 19th December, 1961. We, therefore, hereby hold that if the dates are correct than the index cost of acquisition is required to be adopted as on 1.4.1981, i.e., 100 instead of 463 as alleged by the AO. Since, the family tree was not disclosed in the assessment order therefore, at this stage of second appeal it is not clear that whether the dates as mentioned were verified by the AO or not. The only reference which we have noticed is in paragraphs 3, 4 & 5 of the sale deed. Therefore, the AO is required to investigate this issue in the light of the dates mentioned in the said registered sale deed, especially, the date of death of the father of the Assessee. If it is found to be prior to 1.4.1981 then naturally the year of inheritance shall be held as 1.4.1981 for the purpose of fixation of cost indexation. With these remarks this issue raised as per ground no.3 of ground of appeals is restored back for denovoadjudication. This ground may be treated as allowed but for statistical purpose only.

9.1 An another issue has been raised through additional ground which pertains to the cost of acquisition. The cost on one hand, as AO had adopted at the figure of Rs. 1,28,666/-; but on the other hand the Assessee had adopted Rs. 7,48,833/-. As far as the claim of Assessee is concerned, reliance was placed on a valuation report of M.C. Dalal and Company. Although, the Assessee has certified this valuation report was filed before the AO but it appears that the same has not been properly discussed. The AO has formed an opinion that the asset in question was acquired by the Assessee on 19th of February, 2004 on the death of Sri Rohit Kumar Babulal and therefore on that basis he has proceeded to assess the capital gain in the hands of the Assessee. Although, this issue has already been discussed in above paragraphs but for the sake of clarity we again reiterated that the Assessee got his share in the property after the death of his father and later on after the death of Rohit Babulal his already existed share was enhanced or increased by the death of Sri Rohit Babulal. So the Assessee is required to place on record the correct factual position in respect of theproperty which was inherited by the Assessee on death of his father and the portion of the property which he received on the death of Sri Rohit Babulal. After verifying this fact, the AO shall examine the datas referred in the valuation report so as to decide the correctness of the value of theproperty for the purpose of applying the value in the formula of cost inflation index. Since certain facts are yet to be determined as discussed by us therefore, the additional ground is also allowed for the statistical purpose.

9.2 The sub ground of ground no.3 has no relevance; hence considering the statement of learned A.R. pertaining to ground no.2 which is not pressed; hence this sub ground of ground no.3 is also dismissed being not pressed.

10. Before we conclude, it is worth to mention that the Assessee has cited a decision of Hon’ble Gujarat High Court in the case of Gautam Manubhai Amin, (supra) wherein it was opined that for the purpose of computation of Long Term Capital Gain, the index cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the Assessee became the owner of the asset. Our decision hereinabove is also based upon the same legal proposition. Therefore, respectfully following this decision of the Jurisdictional High Court, we have restored the ground involved primarily because of the reason that certain factual investigation are yet to be verified by the AO so as to apply the ratio of this decision.

11. In the result, this Appeal of the Assessee is allowed for statistical purpose protanto.