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Vastal N. Parikh Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)14ITD208(Ahd.)
AppellantVastal N. Parikh
Respondentincome-tax Officer
Excerpt:
1. these two appeals, involving a common point of dispute, are disposed of together for the sake of convenience.2. the assessees are individuals. the assessment year is 1980-81 and the relevant previous year ended on 31-12-1979. (i) one shri tulsidas hargovindas was a member of the joint hindu family of hargovindas girdharlal. (ii) on 8-4-1960, the said joint hindu family was partitioned under a registered deed. (iii) on the said partition, shri tulsidas hargovindas got the following properties : (b) 77 shares/debentures of seven companies mentioned in the order of the ito. (iv) on 16-5-1960, shri, tulsidas hargovindas settled the aforesaid properties in a trust. under the said deed of trust, the income/assets were to be administered by the trustees as under : 5. (a) the trustees shall.....
Judgment:
1. These two appeals, involving a common point of dispute, are disposed of together for the sake of convenience.

2. The assessees are individuals. The assessment year is 1980-81 and the relevant previous year ended on 31-12-1979.

(i) One Shri Tulsidas Hargovindas was a member of the joint Hindu family of Hargovindas Girdharlal.

(ii) On 8-4-1960, the said joint Hindu family was partitioned under a registered deed.

(iii) On the said partition, Shri Tulsidas Hargovindas got the following properties : (b) 77 shares/debentures of seven companies mentioned in the order of the ITO. (iv) On 16-5-1960, Shri, Tulsidas Hargovindas settled the aforesaid properties in a trust. Under the said deed of trust, the income/assets were to be administered by the trustees as under : 5. (a) The trustees shall give to the party of the first part the net income that remains from all the properties of the trust as stated in above para after deducting the expenses for the administration and management of trust properties and also the taxes of local authorities and other Government taxes, till the lifetime of the party of the first part.

(b) If the net annual income as stated above is less than Rs. 12,000, the trustees shall give to the party of the first part on demand by the party of the first part such amount of the trust properties.

(c) The trustees shall give Rs. 1,000 per month towards the said amount, and if at the end of the year the net income is more than Rs. 12,000, the trustees shall give the surplus amount at the end of the year after the accounts are prepared.

(d) If I, the party of the first part, fall ill, entire expenses thereof shall be given by the trustees out of the trust properties.

Over and above this, if the party of the first part need money for any reason, the trustees shall give, if found fit and reasonable, the amount which may be reasonable to the party of the first part.

6. I, party of the first part, shall have the right to reside in the bungalow named 'Tulsi Kunj' stated in sub-para (a) of para (1) and Hargovindas, father of the party of first part and Lalitaben mother of the party of the first part shall have the right to reside therein till their lifetime during and after the lifetime of the party of the first part. After the death of the party of the first part, father of the party of the first part and mother, the bungalow named 'Tulsi Kunj' stated in sub-para (a) of para (1), shall be given as its proprietary owner to Smt. Shakuntala, sister of the party of the first part. If my said sister Smt. Shakuntala is not living, it should be given to the son of the said Smt. Shakuntala and if there are more sons than one, it should be given to all the sons in equal proportion. If the circumstances arise to divide the bungalow between the sons of Smt.

Shakuntala, sister of the party of the first part, the divisions shall be made as stated in para 8 below.

The income of the bungalow during the period after my death till arrival of the time for its distribution shall be distributed in the proportion in which the property is to be distributed according to the circumstances as stated in sub-paras (a), (b) and (c) of para 7 below.

7. The trustees shall perform the funeral ceremony of the party of the first part according to the status of the family and meet with Government taxes, estate duty and other liabilities and expenses as necessary out of the properties excepting properties stated in sub-para (a) of para (1) and the properties which remain thereafter shall be distributed by the trustees as under: (a) If Smt. Shakuntala, sister of the party of the first part has one daughter at the time of the death of the party of the first part, 10 per cent of the trust properties except property of sub-para (a) of para (1), shall be given to her and if there are more daughters than one, 10 per cent shall be distributed among all of them in equal proportion. The trustees shall decided according to their absolute desire as to which kind and nature of properties may be given towards the said 10 per cent and no said daughter shall have any right to receive or to demand any nature or kind of property.

(b) After administering 10 per cent of property as slated in above sub-para (a), balance of properties shall be distributed in equal proportion between Smt. Shakuntala, sister of the party of the first part, and her sons who may be living at the time of death of the party of the first part.

(c) However, if any son of Smt. Shakuntala, sister of the party of the first part has died at the time of the death of the party of the first part, the share of such deceased son shall be given in equal proportion to the heirs of the said deceased's son.

8. Whenever occasion arises to distribute the immovable properties stated above in sub-para (a) of para (f), it shall be the absolute right and authority of the trustees to decide whether the properties be distributed by metes and bounds and to allot the portion or to divide by paying compensation and to decide to whom to give compensation and of such amount and in such a manner or to divide the immovable properties by selling the same.

(vi) In their wealth-tax return for the assessment year 1971-72 the assessees had shown the value of their remainderman's interest in the aforesaid trust at Rs. 71,585 each, as on 31-12-1970 being the valuation date.

(vii) On 29-12-1979, the assessees sold their remainderman's interest in the aforesaid trust to Nishant trust for a consideration of Rs. 1,76,000 each.

4. In their income-tax returns for the year under appeal, the assessees claimed that on the aforesaid transaction, no capital gains was chargeable under Section 45 of the Income-tax Act, 1961 ('the Act') in the following terms : 2. I was having remainderman's interest in Tulsidas Hargovindas trust which I have sold to Nishant trust on 29-12-1979 for a consideration of Rs. 1,76,000. It is submitted that as the aforesaid property did not cost anything to the assessee the capital gain is claimed in view of the decision of the Madras High Court in CIT v. K. Rathnam Nadar [1969] 71 ITR 433.

5. During the course of the assessment proceedings, the assessee reiterated their claim in the following manner : Please refer to your above cited notice. In this connection I beg to submit as under : Under deed of settlement dated the 16th May, 1960, made by Tulsidas Hargovindas, I became entitled to remainderman's interest in the value of the property compressed under the trust on the expiry of the last survivor. Settlor, Shri Tulsidas Hargovindas, is still alive. In the circumstances the date of the creation of the will and the other day in connection with the will are not necessary.

The value of the remainderman's interest as on the date of the settlement is not known and there is no previous owner of the property sold by me, i.e., remainderman's interest. Thus, as there was no previous owner of the remainderman's interest I do not know the cost of acquisition of the remainderman's interest.

I may again reiterate that what is sold by me is remainderman's interest which is a property to which the computation provisions of Section 45 is not applicable and all transactions covered by Section 45 must fail under the computation provisions. I may rely on the decisions of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.

6. The ITO, vide his letter dated 22-11-1982, called upon the assessees to furnish him the cost of the remainderman's interest as on 1-1-1964 in the following manner : 3. On verification of your above statements from your case records it is seen that in your case the previous owner is the settlor of the trust who is Shri Tulsidas Hargovindas. You have got your remainderman's interest under the trust after the death of Smt.

Shakuntala. She cannot be stated to be the previous owner as per the Explanation of Section 49(1) of the Income-tax Act, 1961, because she did not acquire the asset in the form of remainderman's interest by a mode of acquisition other than that referred to in clauses of Sub-section (1) of Section 49. In this case the asset in the form of remainderman's interest became the property in her hands under a transfer to a trust. Therefore, in this case the last previous owner is the settlor. Thus, the cost of acquisition in your hands is to be determined as the cost of acquisition which was in the hands of previous owner or the fair market value of the asset on the 1st day of January, 1964, at your option. Here the capital asset, namely, the corpus of the trust become the property of the previous owner before the 1st day of January, 1964, and the capital asset in the form of remainderman's interest become the property in your hands by the modes specified in Sub-section (1) of Section 49. Now you furnish the working of the cost of acquisition of this asset as per above provisions.

7. For the reasons stated in the assessment orders, the ITO did not accept the stand taken on behalf of the assessees and worked out taxable capital gains of Rs. 74,561 each on the basis that the value of the remainderman's interest as on 12-10-1970, the day on which Smt.

Shakuntala died was Rs. 71,585 as per the wealth-tax assessment for the assessment year 1971-72 in each of the cases.

8. In appeals before the Commissioner (Appeals) the assessee reiterated their stand that since there was no cost in acquiring the remainderman's interest, no capital gains could be worked out under Section 45. Reliance was placed on the decision in the cases of CIT v.B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), CIT v. Clive Mills Co.

Ltd. [1982] 9 Taxman 80 (Cal.) and CIT v. Satya Paul [1983] 13 Taxman 235 (Cal.). Distinguishing the decisions in these cases, the Commissioner (Appeals) held that "remainderman's interest was a capital asset whose cost of acquisition was capable of estimation and whose cost in fact was estimated at Rs. 71,585 as on 31-12-1970..." In this view of the matter, the Commissioner (Appeals) confirmed the action of the ITO.9. Being aggrieved by the orders of the Commissioner (Appeals), the assessees have come up in appeal before the Tribunal. The learned counsel for the assessees submitted that the Commissioner (Appeals) has failed to appreciate the ratio laid down in the case of B.C. Srinivasa Setty (supra). In this connection, he invited the attention of the Tribunal to the following observation : What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it.... (p. 300) and submitted that the remainderman's interest is not an asset which could be available for a price. Till Smt. Shakuntala was alive, the assessee had only contingent interest in the trust properties and, therefore, there was no question of acquiring such an interest for a price. It was only on her death that the remainderman's interest sprang up for which the assessees had paid nothing or for that matter the settlor too had paid nothing. In fact, it was only by the deed of trust, the remainderman's interest was created and that too on the happening of certain contingency, for which no cost element could be identified or envisaged. He further submitted that even assuming that the assessees had acquired the remainderman's interest under Section 49(1)(iii)(d) of the Act, since there was no 'last previous owner' of such an interest as contemplated in the Explanation to Sub-section (1) of Section 49, its cost of acquisition could not be conceived. In other words, he emphasised the fact that even though the remainderman's interest is an asset, the provisions of Section 45 cannot be attracted because on the facts and in the circumstances of the case, no cost at all could be conceived for acquiring such an asset. He, therefore, urged, that the income-tax authorities were not justified in working out the chargeable capital gains in the instant case. In support of his contentions the learned counsel for the assessees, apart from relying on the decision in the case of B.C. Srinivasa Setty (supra), relied on the decisions in the cases of Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493 (Bom.), CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702 (Bom.), CIT v. Mrs. Shirinbai P. Pundole [1981] 129 ITR 448 (Bom.) and Nila Products Ltd. v. CIT [1984] 148 ITR 99 (Bom.). The learned representative for the revenue strongly relied on the orders of the income-tax authorities and urged that the Tribunal should uphold the orders of the Commissioner (Appeals).

10. We have carefully considered the rival submissions of the parties and we find considerable force in the stand taken on behalf of the assessees. It is no doubt true that the remainderman's interest is an asset. In fact, the assessees had shown its value at Rs. 71,585 each in their wealth-tax returns for the assessment year 1971-72. It is also not in dispute that the assessees have sold such interest at Rs. 1,76,000 each, to Nishant trust. On these facts, the question is whether the provisions of Section 45 are attracted. Now in order to apply the provisions of the said section, two things are required, viz., (i) the cost of acquisition of the asset, and (ii) the price at which such asset was sold. As stated earlier, the assessees have sold their remainderman's interest at Rs. 1,76,000 each. The question now to be examined is the cost of acquisition of such an interest. The assessees acquired such interest only on 12-10-1970 when Smt.

Shakuntala died. Prior to that date this interest was not in existence and there was no 'last previous owner' of such an interest as contemplated in the Explanation to Sub-section (1) of Section 49.

Therefore, the cost of acquisition of such an interest cannot be identified or conceived which is required for computing the chargeable capital gains under Section 45. The settlor of the trust was the full owner of the properties settled in trust and, therefore, there is no question of his having the remainderman's interest in the trust properties for which he might have said something as 'the last previous owner'. In other words, in our opinion, the cost of acquisition of the remainderman's interest cannot be conceived or identified. Therefore, the assessees' case squarely falls within the ratio laid down in the case of B.C. Srinivasa Setty (supra). In this view of the matter, the provisions of Section 45 cannot be attracted and the assessees would not be liable to capital gains on the transactions involved in the instant cases. The ITO is, therefore, directed to modify the assessments accordingly.

1. I have gone through the order of my learned brother colleague. I have also taken full benefit of the indulgence granted to me in the matter of discussing and making all efforts to understand and appreciate each other's views. I am thankful to my brother colleague. I have, however, found myself in respectful disagreement with him.

2. The facts have been discussed at length in the order of my learned brother and need no repetition but the following aspects may be highlighted : (a) Shri Tulsidas Hargovindas who had received certain properties on partition was considered fully competent to alienate the properties in the form of (i) bungalow Tulsi Kunj, (ii) shares, and (iii) securities of the aggregate value of Rs. 1,70,500.

(b) Shri Tulsidas settled the above properties in trust on 16-5-1960 under certain terms mentioned in paragraph No. 3 of the order of my learned brother.

On the fulfilment of certain conditions the trustees were required to distribute the immovable property to the assessee. As Shri Tulsidas is alive the question of distribution did not arise.

(c) Before the occasion for actual handing over the property arose the assessee sold his interest to Nishant trust for Rs. 1,76,000.

3. The assessee's contention was that as he had no cost for the asset, there is no question of capital gain. This contention was rejected by the authorities below for the reasons given by them.

4. I do not find any basis for the proposition canvassed on behalf of the appellant that wherever there is no cost of an asset to the assessee there are no capital gains liable to be taxed. CIT v. K.Rathnam Nadar [1969] 71 ITR 433 (Mad.) had the following observation : ... Though goodwill is a capital asset, in the case of a goodwill of a business, it cannot be said that it became capital asset of the firm at any particular point of time. It is something which goes on slowly growing and perhaps waxing and waning also. What exactly is the value of the goodwill of a business at any point of time may have to be worked on a proper basis by cost accountants. (p. 434) It was further observed that unlike British and American taxation laws, Indian Act did not have in its contemplation that self-created assets like copyright, patents and goodwill should be subjected to capital gains arising on their transfer.

This judgment was followed by other High Courts. The Gujarat High Court held a contrary view in CIT v. Mohahbhai Pamabhai [1973] 91 ITR 393.

However, now we have to see the Supreme Court judgment in B.C.Srinivasa Setty's case (supra). Their Lordships did not agree that goodwill is a capital asset within the scope of Section 45, as goodwill denotes only a benefit arising on account of a variety of elements going into its making and its composition varies in different trades and businesses. Its value may fluctuate from one moment to another. It is also impossible to predicate the moment of its birth. What is contemplated by Section 48(ii) of the Act is an asset in the acquisition of which it is possible to envisage a cost.

5. The above legal position, thus, can be summed up by stating that there can be no capital gains liable to tax on assets (i) which are self-generated having no cost (ii) whose moment of birth is not ascertainable. Neither of these conditions hold in this case. The asset sold by the assessee cannot be said to be self-generated. Its moment of birth is also known, v/z., date of execution of the trust. It may be that between the date of execution of trust dated 16-5-1960 and the date of death of Smt. Shakuntala having prior interest (12-10-1970) the interest of the assessee was contingent, but this does not lead to the conclusion that the asset was not an asset under Section 2(14) of the Act or that it was self-generated or that the moment of birth is not known. It may also be mentioned here that the instances covered by the Supreme Court judgment above do not extend to cases covered by Section 49 which makes special provision for 'deemed cost'. It cannot be disputed that the asset in question, viz., remainderman's interest became the property of the assessee in terms covered by Section 49(1)(m')(W). Consequently read with the Explanation to Section 49, the cost to the assessee is the cost of the previous owner. In this case the previous owner was Shri Talsidas. Since, however, Shri Tulsidas ;himself obtained the assets under conditions mentioned in Section 49(1)(i), we will have to trace the ownership back to the bigger HUF which perhaps acquired the property otherwise than under the process mentioned under Section 49. The fact that the ITO has not gone through this exercise and wrongly adopted wealth-tax value as the cost cannot be allowed to colour the issue regarding the liability to capital gains.

6. The main questions now are if 'the asset' sold by the assessee is the remainderman's interest in the trust who was the previous owner of this asset Was there any previous owner at all If there was no previous owner, can it be said that the case is not covered under Section 49 and consequently the asset should be considered as one of the types referred to in B.C. Srinivasa Setty's case (supra) In my opinion, the words 'the capital asset' have to be taken as referring to the asset even if it existed in a conglomeration or in inchoate or nebulous form. There is no dispute that Shri Tulsidas settlor was the full owner of the properties at the time of execution of trust.

Ownership is a bundle of rights. All these rights dovetailed into single ownership in the hands of settlor Shri Tulsidas who through the settlement dated 16-5-1960 scattered them into different categories and distributed them amongst the trustees, himself, first beneficiaries and remainderman, etc. A transferor cannot give to the transferees any better type than those vesting in the transferor. Therefore, unless the right in the form 'remainderman's interest' was embedded in the ownership rights of the settlor the assessee could not have acquired any such title. This right was valued for the wealth-tax purposes. On its sale gave capital gains arose. No authority has been placed in support of the contention that the asset sold must exist in the same identifiable form in the hands of the previous owner to fall under Section 49. The wordings of Section 49(1 )(m) itself show that such identity was not envisaged because in every settlement on trust the rights in the settled property gets, distributed amongst the trustees and beneficiaries. It follows that the asset sold by the appellant does not answer the description of asset described in B.C. Srinivasa Setty's case (supra) for taking it out of the purview of Section 45.1, therefore, hold that there was an asset and that the asset did exist in the hands of the previous owner. The ratio of B.C. Srinivasa Setty's case (supra), therefore, does not apply to this case. It is to be noted that existence or otherwise of the previous owner is not one of the criteria referred to in Supreme Court judgment. I am, therefore, of the opinion that this asset sold by the assessee does constitute a capital asset under Section 2(14) and that the capital gains are assessable under Section 45. The ITO has doubtless made a mistake in determining the 'cost' but as neither side has addressed any argument on this I am not in a position to propose expansion of the enquiry at this late stage.

7. The argument regarding non-liability on account of the no cost, thus, has its own limitations. For example in a case of adverse possession there could be no cost. Still Sampath Iyenger's Law of Income-tax, Vol. 2, Seventh edn. (p. 2162) has opined that capital gains would arise on the expiry of twelfth year. Further relying on A.R. Krishnamurthy v. CIT [1981] 6 Taxman 289 (Mad.) the author has made a distinction between cases where it is difficult to say that the assessee has acquired asset at a cost are distinguishable from cases where it is difficult for certain reasons to evaluate the cost. The case before us falls under the latter category. Consequently capital gain is liable to tax.

8. I, therefore, hold that in this case the capital gain is correctly assessed to tax and that the appeals should be dismissed.

1. Difference of opinion has arisen between the Members, who constituted the Bench. The following point of difference is referred to the Hon'ble President of the Tribunal under Section 255(4) of the Act : Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed as capital gains arising on account of sale of his interest in the trust dated 16-5-1960 1. On a difference of opinion between the learned Members who heard the appeals originally, the following point of difference was stated : Whether, on the facts and in the circumstances of the case, the assessee is liable to be taxed as capital gains arising on account of sale of his interest in the trust dated 16-5-1960 2. The relevant facts have been stated correctly and in detail, by the learned Judicial Member in his order. There is no dispute about them.

For the sake of brevity, those are not stated here, in detail. Suffice it to say that the assessees herein are the grandsons of Shri Tulsidas, hereinafter referred to as the settlor, who had received certain assets of the value of Rs. 1,70,500 on partition of a joint Hindu family on 8-4-1960. On 16-5-1960, the settlor settled those assets on a trust.

While he reserved the life-interest in himself, the assets, after meeting certain obligations, were to be distributed amongst his sister and her sons, if any, equally after his death. A provision was made for meeting certain other contingencies in this regard. The fact of the matter is that his sister died during his lifetime, i.e., on 12-10-1970, whereafter the remainderman's interest in the trust properties get vested in her (deceased sister) two sons, the assessees herein. In their wealth-tax assessments, the assessees have been showing the value of their interest in the trust properties at Rs. 71,585 each. Both the assessees herein have sold their interest on 29-12-1979 to another trust by the name Nishant trust for a consideration of Rs. 1,76,000 each.

3. It has been the claim of the assessee that no surplus liable to tax as capita] gains arose on the above transactions as the asset in the form of remainderman's interest in the trust property did not cost them or anybody else anything. The claim has been rejected by the ITO and the Commissioner (Appeals) has agreed with the ITO. As already stated, the learned Members who heard the appeals, originally, have differed.

The learned Judicial Member has taken the view that the remainderman's interest in the trust property, which has been sold in this case, did not cost the assessee anything and assuming the capital asset, i.e., the remainderman's interest in the trust properties, became the property of the assessees in terms of Section 49(1)(iii)(d), there being no previous owner of such a capita] asset, its cost of acquisition cannot possibly be conceived. For this and other reasons given in paragraph No. 10 of his order, the learned Judicial Member has taken the view that the surplus is not liable to tax as income under the head 'Capital gains' within the meaning of Section 45. The learned Accountant Member has been of the view that the settlor has been the full owner of the properties at the time of the execution of the trust, that ownership is a bundle of rights and, that the remainderman's interest is a part of those rights and therefore, the remainderman's interest was also owned by the settlor as a part of his overall ownership rights over the assets. For this and other reasons given in paragraph Nos. 6 and,? of his order, he has held that the surplus has been rightly assessed to capital gains tax.

4. It is reiterated before me by Shri J.P. Shah, the learned counsel for the assessees, that the remainderman's interest in the trust properties is altogether a new asset. Placing reliance on the observations of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 at p.

596, it is submitted that the right to receive a share in the corpus of a trust at an uncertain future date cannot, certainly, be correlated with the trust property itself. More or less, the same view, it is stated, has been taken by the Bombay Bench 'E' of the Tribunal in the case of Gopaldas T. Aggarwal v. ITO [1983] 6 ITD 451. Referring to the observations of the Supreme Court in the case of B.C. Srinivasa Setty (supra) that all transactions to be covered by Section 45 must fall under the governance of its computation provisions, it is contended that the transactions to which the computation provisions cannot be applied, must be regarded as never intended by Section 45 to be the subject-matter of the charge. What is contemplated by Section 48(ii) is an asset, in the acquisition of which it is possible to envisage a cost, it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. Referring then to the decision of the Bombay High Court in the case of Evans Fraser & Co. Ltd. (supra), it is stated that the above observations of the Supreme Court are equally applicable as regards the 'cost of improvement'. According to Shri Shah, the value of the asset in the shape of remainderman's interest fluctuates as a result of a number of factors, such as, the age and health of the settlor. Though the value of the asset will increase with the passage of time, it is difficult to value the cost of any improvement of the asset. In any event, it is not capable of improvement at an ascertainable cost.

Reliance is also placed on a decision of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29 and the Bombay High Court's decisions in the cases of Nila Products Ltd. (supra) and Mrs. Shirinbai P. Pundole (supra). Fairly admitting that in all the above three cases, the question involved was that of surrender of tenancy rights, it is urged that the ratio laid down is that the cost of acquisition of the asset and the cost of improvement thereon must be fairly and reasonably ascertainable in order to attract the provisions of Section 45. In this context, my attention was also invited to an order of the Bombay High Court under Section 256(2) of the Act holding that no question of law arose out of the Tribunal's conclusion that the amount of Rs. 3 lakhs received by the assessee on relinquishment of the tenancy right was not taxable under Section 45-CIT v. A.R. Dias & Bros.

[IT Appeal No. 61 of 1984 dated 21-9-1984]-Bombay Chartered Accountant Journal, December, 1984 edn., p. 996.

5. It is pertinent to mention that at the time of hearing on 15-2-1985 at Ahmedabad, Shri Shah had raised a new point, namely, that the remainderman's interest was a mere chance to succeed and, therefore, as held by the Supreme Court in the case of Smt. Rukhamanbai v. Shivram AIR 1981 SC 1881 at p. 1886, such an interest is in the nature of spes successions and, therefore, not a property. The departmental representative, Shri S. Bhattacharya, had then sought an adjournment on the ground that it was a new point raised and that he wanted time to meet the point. However, when the case was heard at Bombay, Shri Shah submitted that he was not serious in contending that the remainderman's interest is in the nature of spes successions and, therefore, not a property. His only attempt was to establish that the reasoning of the Supreme Court and of the Bombay High Court, as given in respect of goodwill, will strongly apply to the case of an asset of the type of remainderman's interest.

6. Shri Bhattacharya, the senior departmental representative submits that the Third Member has no jurisdiction to entertain a new point, as, according to him, if the Third Member accepts the new point, his view is going to be a minority view and for the purpose of finally disposing of the appeal in a case like the present one, there has got to be a majority view. Reliance in this behalf is placed on a decision of the Patna High Court in the case of Hanutram Chandanmul v. CIT [1953] 23 ITR 505. On merits, he stated that the expression 'property' has not been defined in the Act. Section 6 of the Transfer of Property Act, 1882, refers to all types of properties which can be transferred except a few mentioned in the section. One such exception is property in the nature of spes successionis. This, according to Shri Bhattacharya, only means that spes successionis is also a property though it may not be transferable. Referring to the facts in the present case, Shri Bhattacharya submits that there cannot even be a dispute in this case as the remainderman's interest has, as a matter of fact, been transferred. Therefore, it is not a case which can even fall within the exception. My attention is also invited to Salmond on Jurisprudence, Twelfth edn., where it has been stated as under : Ownership is either vested or contingent. It is vested when the owner's title is already perfect, it is contingent when his title is as yet imperfect, but is capable of becoming perfect on the fulfilment of some condition. In the former case the ownership is absolute ; in the latter it is merely conditional. In the former case the investive fact from which he derives the right is complete in all its parts ; in the latter it is incomplete, by reason of the absence of some necessary element, which is nevertheless capable of being supplied in the future.... (p. 262) It is argued that the Supreme Court's decision in the case of B.C.Srinivasa Setty (supra) deals with intangible asset, i.e., goodwill, which has three peculiar features, namely, (i) indeterminate factors contributing to the formation of the goodwill, (ii) its time of birth is not known, and (iii) its value is fluctuating from year to year, etc. Therefore, great caution is necessary while applying the ratio of B.C. Srinivasa Setty's case (supra) to a case like the present one where the capital asset is a tangible asset. Taking me through paragraph Nos. 8 to 11 of the Commissioner (Appeals)'s order, Shri Bhattacharya submits that the remainderman's interest can be purchased even at the initial stage. According to him, the ownership is a bundle of rights. A person who owns a property also owns life-interest as well as remainderman's interest and, therefore, it is not correct to say that the remainderman's interest was not owned by anybody. As regards the cost of improvement also, Shri Bhattacharya points out that the fluctuation in the price of the asset on account of the passage of time is not an improvement of the asset and the market value goes up because of fluctuation. The case of goodwill is different. The value of goodwill goes up and goes down with the business and fluctuation of business prospects. The decisions in regard to the tenancy rights, relied upon by Shri Shah, according to Shri Bhattacharya, are distinguishable as tenancy rights cannot, admittedly, be acquired at a cost, there being prohibition of accepting salami, etc. As regards the Bombay Bench order of the Tribunal, Gopaldas T. Aggarwal's case (supra), and the Bombay High Court's decision under Section 256(2), the essential fact has been that the property was received on inheritance which could not have been visualised. In other words, the submission is that the remainderman's interest is a capital asset, that it is possible to envisage the cost of acquisition of the remainderman's interest and that the question of any improvement in the case of remainderman's interest does not, possibly, arise.

7. As stated earlier, Shri Shah, the learned counsel for the assessee, has not pressed his contention that the remainderman's interest is not a capital asset. Even otherwise, I am of the view that the assessees, herein, were to get the right of enjoyment over the trust property after the death of the settlor which event is bound to happen. What is uncertain about it is only the timing of it. Accordingly, it is difficult to accept that such an interest is not a property and, therefore, not a capital asset. Moreover, the assessees have been able to sell their interests in this case and if it was not a property, it would be difficult to conceive how such an interest could be transferred in view of Section 6. I, therefore, proceed on the basis that the remainderman's interest is a property and, therefore, a capital asset.

8. There being no dispute that if the surplus arising on the sale transaction of the remainderman's interest herein is to be taxed as income under the head 'Capital gains', it has to fall within Sub-clause (d) of Clause (iii) of Sub-section (1) of Section 49 and if that be so, it has to further fall within the purview of Explanation 1 which reads as under : 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 (Hi) or Clause (iv) of this sub-section.

This takes me to the question whether there was 'previous owner' of the property which in this case is remainderman's interest. It was vehemently argued by Shri Shah that the previous owner which would be the joint Hindu family on the partition of which the settlor acquired this property, owned the entire corpus of the trust and never owned the remainderman's interest as such. In other words, his submission has been that even if it is held that the remainderman's interest is covered by Section 49(1)(iii)(d), there being no previous owner of the remainderman's interest, the transaction will not attract capital gains liability. In my view, the argument, though ingenious, is fallacious.

It does not need an argument to say that ownership is a bundle of rights over a property. A person cannot give what he does not possess.

The fact that the settlor has created the remainderman's interest, is in my view, sufficient to justify a finding that he possessed or owned the interest. It is a different thing that he owned both the life-interest and the remainderman's interest and the two taken together constituted full ownership. As I understand, an owner of a property can divide his ownership rights in a number of ways. For instance, if he owns a big house, he can dispose it of room by room, floor by floor and wing by wing. He can also dispose of his ownership rights by providing for its enjoyment periodwise. Likewise, he can also dispose of those rights in the manner it has been done in this case, i.e., by creating life-interest for somebody and remainderman's interest for somebody else. These are different methods of disposing of the ownership rights. It does not mean that merely because the owner of a building has decided to dispose of a room, he is not the owner of the room as such. A person who is the full owner of a property is also the owner of its parts. Accordingly, I am inclined to hold that the previous owner in this case, is also the owner of the remainderman's interest.

9. This takes me to the third and more important aspect of the matter, namely, what is its cost to the previous owner. The Supreme Court has, admittedly, held in the case of B.C. Srinivasa Setty (supra) that unless it is possible to conceive the cost of the capital asset and it is available on the expenditure of the amount, the surplus arising on the sale thereof will not attract capital gains tax. In my view, for the purpose of finding whether the remainderman's interest is available for a price or not one has to assume that there are people who have remainderman's interest. The assessees herein having disposed of their remainderman's interest, it is difficult to accept that a person possessing the remainderman's interest would not sell it for a price. I also do not find any difficulty in computing the value of the remainderman's interest in the hands of the previous owner once it is accepted as a concept that the previous owner owned the entire property and could dispose of his ownership rights in any manner he liked including by creating a life-interest and remainderman's interest. The mere fact that it is difficult to compute the cost of the remainderman's interest in the hands of the previous year does not justify the conclusion that the cost cannot be conceived. For this and other reasons given by the learned Accountant Member, I hold that the remainderman's interest is a capital asset and that the said capital asset was owned by the previous owner in terms of Explanation 1 to Section 49(1). Accordingly, I further hold that the assessees are liable to tax under the head 'Capital gains' on the surplus arising from the sale transactions of their remainderman's interest.

10. In the result, I agree with the learned Accountant Member. This order will now go to the Division Bench for decision according to the majority view.


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