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Commissioner of Income-tax, Gujarat Vs. AshiwIn M. Patel - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Judge
Reported in[1983]144ITR566(Guj)
ActsIncome Tax Act, 1961 - Sections 45 and 48
AppellantCommissioner of Income-tax, Gujarat
RespondentAshiwIn M. Patel
Appellant Advocate B.R. Shah, Adv.
Respondent Advocate J.P. Shah, Adv.
Cases ReferredIt v. A. V. Appu Chettiar
Excerpt:
direct taxation - assessment - sections 45 and 48 of income tax act, 1961 - assessee hindu undivided family (huf) - karta along with other members of family purchased certain equity shares in his individual capacity - huf claimed cost of acquisition of shares should be taken to be market value on which shares were thrown into common stock - substance of transaction is that as result of throwing shares into common stock huf acquired absolute title to shares - cost of acquisition is market value of shares on date of acquisition - question referred to court answered in favour of huf. - - no doubt, if the assessee purchased the property the best evidence of the value of the property to the assessee would be the price that he paid for it;.....by manubhai b. patel, it karta. the huf claimed that for the purpose of working out capital gains, cost of acquisition of these shares should be taken to be the market value as on the date on which the shares were thrown into the common hotchpot. the ito, however, rejected this contention holding hat so far as the huf was concerned, it has not to incurs any expenses of acquiring these shares. in his view, therefor, the cost of acquisition for the purpose of working out capital gains was 'nil'. he, accordingly worked out capital gains and included them in the huf's total income for the year under the references. 4. in the appeal preferred by the huf, the ac, however, m upheld its contention and held that the cost of acquisition of the above shares high the shares were thrown into.....
Judgment:

Manjad, J.

1. The Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'), has at the instance of the REvenue referred the following questions for our opinion u/s 256(1) of the I. T. Act, 1961 (hereinafter referred to as 'the ACt) :

' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the REvenues contention that the cost of acquisition of shares under consideration was not nil for the purposes of determining the capital against

(2) If the answer to question No. 1 is in the affirmative, whether the |Tribunal, was correct in taking the cost of acquision of the shares at their, market value on the dates these were thrown into common hotchpot

(3) If the answer to question No. 1 is in the affirmative and to question No. 23 is in the negative, what should be taken as the o its of acquisition of shares under consideration?'

2. Facts leading to this references may be briefly stated as under. The assessee is a Hindu undivided family (hereinafter referred to as'HUF' for brevity' sake). Munubnhai B. Patel, who was the karta and one of the member of the members of the HUF, purchases equity shares,'A' preference share and ''B' preference shares of m/s. New Rajpur Mills Company Ltd. in his individual capacity. he threw these shares in the common hotchpot of the HUF on different dates which are not relevant for the purposes of this reference. The HUF itself had also purchased equity shares,'A' preference and 'B' preference shares of the said mills comapny. The HUF sold 2,431 equity shares, 145 'A' preference shares and 236 'B' preference shares of the said mill company on August 9, 1971 which fell within the previous year relevant to the assessment year 1972-73 for a total consideration of Rs. 2,92,459. Out of the shares sold by the HUF 2,285 equity shares, 85'A' preference shares and the 236 'B' preference shares were those which were originally owned by Manubhai B. Patel and which were thrown by him in the family hotchpot as stated above.

3. One of the question which arose in the court of assessment proceedings was what was the capital gains which arose to the HUF as a result of sale of the above shares, which were not purchase by its but were thrown into the common hotchpot by Manubhai B. patel, it karta. The HUF claimed that for the purpose of working out capital gains, cost of acquisition of these shares should be taken to be the market value as on the date on which the shares were thrown into the common hotchpot. The ITO, however, rejected this contention holding hat so far as the HUF was concerned, it has not to incurs any expenses of acquiring these shares. In his view, therefor, the cost of acquisition for the purpose of working out capital gains was 'nil'. He, accordingly worked out capital gains and included them in the HUF's total income for the year under the references.

4. In the appeal preferred by the HUF, the AC, however, m upheld its contention and held that the cost of acquisition of the above shares high the shares were thrown into the common hotchpot of the HUF. The view taken by the AAc was confirmed by the Tribunal in the appeal preferred by the REvenue and, therefore, at the instance of the Revenue, the questions set out above, are refereed to us for our opinion.

5. The provision dealing with capital gains are contained in Chap. IV-E if the act,. Section 45 of the Act provided that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provide3de in ss. 53,54,54B, 54D and 54E, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be income of the previous year in which the transfer took place. Section 46 deals with capital gains on distribution of assets by companies in liquidation., Section 47 enumerates the trisections not regarded as transfer. Section 48 is an important section for our purpose. It deals with the mode of computation of of capital gains' shall be computed by deducting from th full value of the consideration received or accruing as a result of the transfer of the capital asset th following amounts, namely, (i) expenditure, incurred wholly or exclusively in connection with us h transfer; and (ii) the cost of acquisition of the capital asset and th cost of any improvement thereto. it is in the context of s. 48 that the question has arisen as to what is the cost of acquisition of hears in question which were thrown into the common hotchpot of the HUF by its karta. The contention of the HUF is that for the purpose of compassion of capital gains, cost of equation should be taken to be the market value of the shares as on the date on which the share were thrown into the common hotchopt. On the other hand, the Revenue's contention is that so far as the HUF is concerned, it had not incurred any cost for acquiring these shares and, therefore, the cost of acquisition should be taken to be 'nil' a was done by the ITO. There is no direct authority which covers the controversy. We however, find that decisions of the Rangoon High Court, Madras High Court and Supreme court, rendered in the context of claim of resolving the controversy. In working out depreciation so often the question arises what is the original or actual cost of an asset to an assessee in respect of which original or actual cost of an asset to an assessee in respect of which the assessee claims depreciation? Such a question has also arisen in cases where the assessee himself has not purchased the asset but has acquired under inheritance, partition, etc., The decision wherein question of actual cost has arisen for consideration in such cases will have a great bring on the arisen for consideration in such cases will have a great bearing on the question which is raised before us. In CIt v. Solomon & Sons [1933] 1 ITR 324 a question arose as to the basis of the depiction allowance in regard to a property obtained by the assessee under a will. Under s. 10(2) (vi) of the Indian I. T. ACt, 1922, then in force, depreciation9n was allowed in regard to buildings machinery, etc., at a certain percentage on the principal cost thereof to the assessee. It was held that the original cost to the assessee in a case where he obtained property under a will would be the real value of the property at the time when the assessee acquired it. Page C,. J. delivering the judgment of the Special Bench, observed (p. 328) :

'In my opinion, however, the intention of the Legislature in using the words' the original cost thereof to the assessee,' was that the owner to be assessed should not receive an allowance for depreciation based on a capital value of the property higher than or different from the value of the property to the assessee at the time when he originally acquired it. No doubt, if the assessee purchased the property the best evidence of the value of the property to the assessee would be the price that he paid for it; but where, as in the present cause, the assessee acquired the property otherwise than by purchase, in my opinion, the original cost thereof to the assessee means and is the real value of the property at the time when the assessee acquired it less the expenditure necessary for the purpose of completing the title. I am disposed to think that the probate charges actually paid by the assessee would be included in such expenditure.'

6. In CIt v. A. V. Appu Chettiar : [1962]45ITR152(Mad) , the question which arose for consideration before the Madras High Court was as to the cost of the open stock which the assessee in that case has inherited from their father. Facts in that case were as follows :

A person who carried on business in silk goods died leaving a will under which his tow daughter as residuary legates, became entitled to carry on the business under the old firm name. The testator has followed the system of valuing stock according to the cost, and on his health the closing stock was valued at Rs. 2,78,866. The two daughters formed themselves into a firm some time after the death of the testator to carry on the business and valued the opening stock left by the testator at its market value, viz., Rs. 3,53,064. It was contended on behalf of the Department that the opening stock should be valued by the new firm at nail as the partners of th firm has not paid anything for it, or at any rate, it should be valued at Rs. 2,78,866 and not its market value of Rs. 3,53,064. The Madars High Court referred to the decision of the Rangoon High Court in CIT v. Solomon & Sons [1933] 1 ITR 324, and earlier decision in Francis Vallabarayar v. CIt : [1960]40ITR426(Mad) , and held that as the daughters has not acquired the opening stock by purchase, it could not be valued at its cost to the firm; the daughters household be regarded as having put their own property into the business and the opening stock has to be valued at its real value on the date of the death of the testator, that is, its market value on that date. As the business of the assessee was a new business nd not the testator's business it was not necessary to value the stock as at the last valuation, viz., Rs. 2,78,866. It was held that the stock was, therefore, correctly valued at its market value of Rs. 3,53,064.

7. Similar question has also arisen before the Supreme Court in Kalooram Govindram v. CIt : [1965]57ITR335(SC) , wherein it was observed as under (p. 340) :

'Analogy drawn from comparable cases may also throw some light on the questions, In the case of an assessee acquiring a property by purchase, gift, bequest or succession, courts have held that the cost of the property to the assessee was not the original cost of it to his predecessor but it actual cost to him at the time of the purchase, gift bequest, or succession, as the case may be : see CIT v. Buckingham & Caranatic Co. Ltd. : [1935]3ITR384(Mad) , Jogta Coal Ltd. v. CIT [1969] 36 ITR 521 purchase; Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328, and Franciss Vallabarayar v. CIt : [1960]40ITR426(Mad) succession; and CIT v. Solomon & Sions [1933] 1 ITR 324 bequest. A Division Bench of the Napgur High Court in CIT v. seth Mathuradas Mohta , dealt with a case of partition. Therein, if held that the cost to the assessee, who was a divided member, m of a property was the cost of it to the original joint Hindu family at the time it was acquired. The learned judges gave various illustrations in support of their conclusion. It is true that, if the valuation of the properties was given nationally, as a more of choosing properties, there will be some plausibility in the contention that there is no change in the valuation between the date the property was purchased and the date when it was allotted to one of the members of the family. But, if the valuation of a property was not national but was real and that wa the basis for allocating properties to different shares, we did not see how the cost of a property allocated to a member would be that at which it was purchased in the remote past. WE cannot agree with the view expressed by the Napgur High court.

In substance, we do not see any difference in. the matter of ascertaining the cost of an asset to an assessee whether he is a done, purchaser, m legatee, successor or a divided member of a joint Hindu family. It may be that in stick legal theory partition may not involve transfer, but the substance of the transaction is that an erstwhile member of a joint Hindu family, who has only an interest in the entire joint family property acquires an absolute title to a specific property. The cost of the property to the member at th date to partition would be the value given to it for th purpose of allotment, provided it wa real, of the process at which he purchased it in auction or the value of it ascertained otherwise.'

8. It would, therefore, appear that the courts have consistently taken the view that where the assessee has acquired property by inheritance to will or by partition, original or actual cost of acquisition of the property would be the real value thereof to the assessee, namely, the market value on the date of its acquisitions for 5the purpose of depreciation. WE do not see why the principle laid down in the aforesaid decision would not apply to a case arising under chap. IV-E for computation of capital gains., Under s. 48, cost of acquisition of the capital asset has to be deducted from the value of the consideration for the purpose of working out capital gains. It is therefore, clear that as in the case of depreciation for the purpose of working out capital gains what is important is to find out what is the cost of acuqistion. In other word, both in the case of capital gains and depreciation, the vital question which is to be decided is what is the cost of acqusition. In out opinion, the expression 'cost of acquisition cannot have one meaning for the purpose of depreciation and another for working out capital gains. for both the purpose cost of acuqistion will have to be worked out on same principles. In our opinion, therefore, for the purpose of working out capital gains on the transfer of a method of finding out the cost of acquisition of the capital assets to the assessee at the time he acquired it. The real value of the capital asset to the assessee is the maker value of the capital asset to the assessee at the time he acquired it. The real value of the capital asset to the assessee is the market value as on the date of acuqistion.

9. Applying the ratio of the aforesaid decision it must beheld that so far as the HUF is concerned, cost of acuqistion is the market value of the share as on the date on which it acquired them, namely the date on which they were thrown in the common hotchopt by its karta. It is true that the transaction of throwing shares into the common hotchpot is not a transfers in the strict legal sense. However the substance of the transaction is that as a result of throwing the shares into the common hotchopt the HUF acquired absolute title to the shares. Held the HUF purchased the shares from its karta it would have has to pay the market value as on the date of the purchase from the karta. If the karta of the HUF has instead of throwing the shares into the common hotchopt, thrown cash amount-say Rs. 5,000-into the family hotchpot, the value of the property thrown into the family hotchopt would be Rs. 5,000. Whether the karta or a member of the HUF throws into the common hotchpot, cash amount or property, would not make any difference in principle. In case property is thrown into the common hotchpot, what is material is its market value on the date on which it is thrown into the common hotchopt. Therefore it is that value which must be taken to be th cost of acquisitions so far as the HUF is concerned.

10. In the result, questions Nos. (1) and (2), set out above are answered in the affirmative and against the Revenue. In the view which we are taking the third question doe not survive, and therefore, it need not be answered.

11. Reference answered accordingly with no orders as to costs.


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