1. The primary question in this income-tax reference is about the proper way to ascertain the cost of a capital asset for the purpose of computation of the capital gains arising therefore.
2. One Krishan Rao owned a steel press. This is an item of machinery useful for bus-body-building operation. Krishan RAO was earning income from the lease of the machinery. The machinery belonged to Krishna Rao as his separate property although there was all the time a joint family of which he was the karta. On November 1, 1969, Krishan Rao, declared by writing that the machinery shall be the property of the joint family. Barely two months afterwards, on December 31, 1969, this item of machinery was disposed of as an item of joint family property. It was sold to a third party. The sale consideration received by the family was Rs. 44,000. It was conceded that the family was liable to capital gains tax on this transaction. But the question arose as to how the cost of this machine in the hands of the assess-family had to be determined for purposes of quantifying the capital gains. When the machinery was Krishan Rao's separate property, its written down value in his hands was Rs. 25,639, just before it became the property of the assessee-family on November 1, 1969. The ITO adopted this value as the cost to the assessee-family of the machinery, and proceeded on that basis to determine the capital gains.
3. The Tribunal took a different view in appeal. the rejected the written down value as the basis of cost, and and adopted the market value as on November 1, 1969, as representing the cost to the assessee-family, for the purpose of assessment., The market value of the machinery as on November 1, 1969, was ascertained to be Rs. 44,000. The Tribunal directed this figure to be substituted for Rs. 25,639 adopted as cost of the capital asset in the assessment order.]
4. In this reference, the Department canvasses the correctness of the Tribunal's decision.
5. Under the scheme of the I. T,. Act, 1961, the charge to tax on capital gains is not on the assessee's gross relation on the transfer of the capital asset by sale, exchange and the like. The tax attaches only to what may be described as the net capital gains. This necessarily involves that in every case the cost of the capital asset must be deducted from the gross receipts realised on the transfer of the capital asset. Normally, the cost of the capita asset to be deducted is the cost to the assessee who realised the capital gains. This stands to reason. But the Act makes for a few exceptions. In these exceptional cases, the cost to be adopted is the cost to the precious owner of the capital asset, and not the cost to the assessee himself who got the asset from the previous owner. Section 49 lists out these exceptional cases. For instance, where the assessee got the capital asset under a gift inter vivos or under a will, the cost to the donor or the testator, as the case many be, has to be adopted as the assessee's cost. AGain, where a Hindu coparcener gets the capital asset in a family partition, his cost must be based only on the cost at which the joint family has acquired the asset for itself. What we have in this reference is the reverse case of a joint family becoming the owner by operation of the relevant rule of Hindu law, of the separate property of an individual member of that family by the process of blending or conversion. This reverse case has now been specially provided for under clause (iv) of s. 49. It wa introduced in s. 49 in 1975 and it came into force only on April 1, 1976. The case under reference is concerned with an assessment to capital gains for the assessment year 1971-72. clause (iv) has no come into the statue book at the time. Section 49 as it stood prior to april 1, 1976, did not provide de that the cost at which an individual coparcener acquired a capital assets as his separate property must be regarded as the cost of acquisition of his joint family hotchpot. We must therefore, examine the question in this case on general principles and not on the basis of any express statutory provision.
6. In the course of argument Mr. Jayaraman for the Revenue made a reference to s. 50 of the Act. This provision enacts that in ascertaining the cost of a depreciable asset like machinery, the depreciation actually allowed to that machinery in the assessment shall be deducted. This provision, however, will not apply to the present case, because no depreciation was actually allowed in the assessment of the assessee-family. It is true that depreciation had been allowed to this machinery in the assessment of Krishan Rao, and that is how its written down value has become ascertainable at Rs. 25,639. But the written down value in the hands of Krishan RAO is irrelevant, because the question doe not arise in his where the machinery has not suffered any depreciation and has not been granted any depreciation. As we earlier mentioned, the machinery stayed with the family for a few days, alone, before the family sold it to a third party.
7. Mr. Jayaraman, however, urged that even is s. 50 doe not apply because s. 49, as it stood at the time, does not apply for, the assessment year in question, still the written down value of the machinery affords a reasonable basis for ascertaining the cost in the hands of the assessee-family, because that was the value in the hands of Krishan RAO when he gave it over, gratis, to the family. Learned counsel cited a Supreme Court decision in Bist and Sons v. CIT : 116ITR131(SC) , as affording guidance in the matter. In the case before the Supreme Court, the depreciation on certain trucks granted to an HUF over a period of years has reduced their written down value to nil. It was in that situation that the family business, with all its struck and other assets, was taken over by a partnership concern which was formed by the members of the family who has got divided in the meantime,. The question before the Supreme Court was whether in the hands of the successor-firm the trucks which has become its assets must be revalued for purposes of working out depreciation allowance, or whether they should be pinned to their written down value which was nil.
8. The Supreme Court laid down the correct position with the following observations (p. 133) :
'Where a business is taken over as a running concern by an assessee the cost to it of the assets must ordinarily turn on the value of the assets as on the date of acquisition...... It cannot be disputed that the actual cost to the appellant of the three trucks must be regarded that the actual cost to the appellant of the three trucks must be regarded as nil, and that being so no depreciation can be said to have been ever actually allowed to the appellant.'
9. Mr. Jayaraman urged that the same principle must be applied to the present case. He said that since the written down value of the machinery in the hands of Krishan Rao was Rs. 25,639, that must be taken as the cost of the machinery to the assessee-family, when it became the property of the family be being thrown into the family hotchpot.
10. Mr. Rangarajan, learned counsel for the assessee, said that Bist and Sons v. CIt : 116ITR131(SC) , did not raise any question of ascertainment of cost in the context of capital gains taxation. He said that the Supreme Court themselves were careful to pint out that they were not going into any aspect of levy of capital gains having regard to the limited scope of the question at issue before them.
11. We are, however, of the view that the Supreme Court's decision, even though it appertains to the ascertainment of cost for purposes of working out depreciation allowance or balancing charge, lays down a principle which can be reasonably applied to the present case. The principle can be stated thus : Where a depreciable asset in the hands of one is given over gratis to another, the gratuitous transferee must be treated as having acquired that asset at its then written down value. Applying this principal. we are satisfied that the ITo was correct in determining the assessee-family's cost of acquisition of the machinery at Rs. 25,639, which is the figure of written down value which the machinery bore at the time the family got it, gratis, from Kirshan Rao.
12. The Tribunal has expressed the view that cost of acquisition must be equated to real value to the acquire where the acquisition is obtained, as the in this case, without consideration. By real value, the Tribunal meant intrinsic value to market value. We do not think there is any scope for introducing into the discussion of cost of acquisition, such notions as real value or intrinsic value and on that basis proceed to equate market value as representing real value or intrinsic value. In cases of the present kind we deal, not with any valuation question, but with the assortment of cost arising out of transactions in which two parties figure,. The cost to the assessee-family must, therefore, be ascertained not in the abstract, but with a sense of reality on the basis of what it was in the hand of Krishna Rao. The ascertain cost historically is a recognized method of ascertaining it. The written down value in the hands of Kirshan Rao, therefore, affords, in the circumstances of the present case, the only proper basis for cost in the hands of the assessee-family.
13. Learned counsel for the Department said that the I. T,. Act has, in certain special situations, taken market value as the guiding figure for ascertainment of cost. He cited s. 55(2) of the Act. His point was that in cases not covered by s. 55(2), market value cannot be taken to be the cost of the capital asset. We, however, think it is unnecessary in this case to decide the larger question whether s. 55(2) is exhaustive.
14. It remains for us to state the questions of law referred to us, for entering our formal answers thereto. The questions are as under :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the market value of the assets on the date on which the property was thrown into the common hotchpot of the Hindu undivided family by the individual coparcener is to be taken as the cost of acquisition?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was, the Appellate Tribunal was right in deleting the capital gains brought to tax in the assessment year 1971-72?'
15. Our answer to the first question is against the assessee. We hold that the cost of acquisition of the asset in this case must be taken to be the written down value of the asset to Krishan Rao for whom the assessee acquired it. The answer to the second questions is consequential. The answer is that the assessment of capital gains made by the ITO on the basis that the cost of acquisition was Rs. 25,639 was correct. The decision to the contrary, rendered by the Tribunal, is wrong. In the circumstances, the reference is answered accordingly. The Department will have its costs. Counsel Fee Rs. 500.