OZA J. - This is a reference made under section 256(1) of the income-tax Act by the Income-tax Appellate Tribunal seeking an answer on the question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to a capital loss of Rs. 90,753.'
The facts relevant for the decision of this reference are that the assessee is a registered firm with its head office at Indore and branches at various other places in Madhya Pradesh. The assessee carries on business in grain, money-lending, etc., and also runs a cotton ginning and pressing factory. The assessment year is 1962-63 and the previous year ended on November 8, 1961.
The assessee claimed a capital loss of Rs. 93,917 in respect of its Sanawad branch as a factory named Kailash Ginning Factory at Sanawad was purchased by the Hindu undivided family, M/s. Binodiram Balchand, in Samvat year 1986-87 for an amount of Rs. 1,25,000. Eventually, the said Hindu undivided family wrote down the value of the factory to Rs. 35,000 in Samvat year 2003-2004. Later, there was a partial partition in the said Hindu undivided family and in Samvat year 2013-14 the various business assets of the said Hindu undivided family were brought under partial partition. The Kailash Ginning Factory was one of the assets which was included in the assets introduced in the assessee-firm which came into existence after the partial partition of the Hindu undivided family. The value of the ginning factory was shown in the books of the assessee-firm to be Rs. 35,000. It is stated by the assessee that part of the machinery of the ginning factory was sold in Samvat years 1999-2000 for Rs. 4,247. The whole factory including land, buildings, machinery, stores, etc., except one boiler had been sold during the previous year for Rs. 15,000. The assessee valued the boiler at Rs. 6,836 and carried forward the same. The assessee has reconstructed the asset-account and worked out a capital loss of Rs. 93,917 which it claimed in the course of the assessment proceedings.
The Income-tax Officer held that the cost of acquisition of the property was Rs. 35,000 and on that basis he proceeded to compute the capital loss. The Income-tax Officer relied on the decision in Kalooram Govindram v. Commissioner of Income-tax : 57ITR335(SC) . Before the Appellate Assistant Commissioner it was contended by the assessee that the Income-tax officer was wrong in taking the value of the capital assets at Rs. 35,000. The contention was not accepted. On appeal before the Appellate Tribunal it was contended by the assessee that the actual cost of acquisition of the assets to the assessee-firm should be taken to be Rs. 1,25,000 within the meaning of section 49(1) of the Act. The Appellate Tribunal accepted the contention of the assessee and held that considering the language of section 49(1) the value of the ginning factory in the hands of the firm should be taken as Rs. 1,25,000 which was the value for its original acquisition by the Hindu undivided family and thus the Tribunal allowed the capital loss of Rs. 90,753. The department thereafter sought a reference and at the instance of the department the present reference has been made by the Tribunal.
Learned counsel appearing for the department contended that in view of the decision in Kalooram Govindram v. Commissioner of Income-tax : 57ITR335(SC) , the value of the ginning factory in the hands of the assessee could not be taken to be anything more than Rs. 35,000 which was the written down value of the factory by the Hindu undivided family and also by the firm. In that decision their Lordships of the Supreme Court were considering sections 10(2) and 10(5) of the Indian Income-tax Act, 1922. Admittedly, in the present case there is no question pertaining to section 10 of the Act. The question in this reference pertains to section 49 of the 1961 Act. Learned counsel for the department conceded that section 49(1)(i) of the Act will come into play. Section 49 reads :
'49. (1) Where the capital asset became the property of the assessee -
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) under a gift or will;
(iii) (a) by succession, inheritance or devolution, or
(b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) of section 47;
(iv) such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the December 31, 1969,
the cost of acquisition of the assets shall be deemed to be the cost for which the previous 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.
Explanation. - In this sub-section the expression previous owner of the property in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) of this sub-section.
(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.'
It is not disputed that section 49 has been provided in the Chapter of 'Capital gains' and this section provides for the cost of acquisition in certain modes of acquisition. Sub-section (1) provides that when a capital distribution of assets on the total or partial partition of a Hindu undivided family, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. This clearly goes to show that this is a deeming provision in order to meet certain specific contingencies. It could not be disputed that this ginning factory became the property of the assessee-firm on distribution of assets on the total or partial partition of a Hindu undivided family. Under these circumstances, therefore, the cost of acquisition of the assets under this provision will be deemed to be the cost for which the previous owner of the property acquired it. The previous owner admittedly was the Hindu undivided family and it is not disputed that the Hindu undivided family acquired this property for Rs. 1,25,000. In these circumstances, therefore, to the facts of the present case the provisions contained in section 49(1)(i) squarely apply. It is also not disputed that the matter in hand pertains to capital gains and, therefore, section 49 of the Act is attracted. In view of this it could not be doubted that for the purpose of this section the cost of acquisition of the ginning factory will be deemed to be the cost at which it was initially acquired by the previous owner, i.e., the Hindu undivided family; and, that, admittedly, being Rs. 1,25,000 it appears that the Tribunal was right in allowing the capital loss to the tune of Rs. 90,753.
In this view of the matter our answer to the question is in the affirmative that the Tribunal was justified in holding that the assessee was entitled to capital loss of Rs. 90,753. As none appeared for the assessee, the parties are directed to bear their own costs.