1. In compliance with the direction of this court in T.C.P. No. 9 of 1973 dated 18th February, 1974, the following question has been referred under Section 256(2) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the cost of acquisition of assets of the firm shall be their market value as on July 1, 1962 ?'
2. The assesses is a firm composed of two partners, who are related to each other as father and son. They were members of an HUF which owned house properties, rubber garden, etc., in Rewang in Malaysia. These properties had been acquired prior to 1st January, 1954. There was a complete partition of the properties between the father and son on 1st July, 1962, under which the properties owned by the family were divided by metes and bounds and on the same day they entered into a partnership under which the properties allotted to them were brought into the firm as its assets. The partnership deed is dated 6th July, 1962.
3. During the calendar year 1966, seven house properties in Rewang and a rubber garden in the same place were sold for a total sum of $ 26,260.15. In the books of the firm their total value was shown as $ 11,671.88, In the return filed by the assessee for the assessment year 1967-68, the capital gains derived by the sale of the aforesaid properties was shown as $ 6,565, the same being computed at 25% of the total sale proceeds. The ITO did not accept this computation and he took the book value of the properties as their market value as on January 1, 1954, and computed the capital galas as $14,588 equivalent to Rs. 35,594. The assessee preferred an appeal to the AAC. He rejected the contention of the assessee that the firm was not liable to be taxed on the capital gains. Noticing that the assessee-firm had exercised the option to have the market value as on January 1, 1954, at 70% of the sale proceeds, he directed the computation, of capital gains at 30% of the sale proceeds. The department preferred an appeal against the orders of the AAC and wanted the computation made by the ITO restored. The Tribunal felt that the I.T. authorities had not considered the matter in the proper perspective. According to the Tribunal, the assets in question became the property of the firm after partition between the coparceners of the quondam undivided Hindu family. The Tribunal, therefore, directed by its order dated 24th September, 1971, that the appeal should be reheard according to law and in the light of its observations.
4. It may be mentioned here that the assessee had not disputed the order of the AAC and had not also filed cross-objections. The departmentalrepresentative, therefore, filed a miscellaneous application before the Tribunal contesting the manner in which the order of remand had been made by the Tribunal. The Tribunal by its order dated 8th August, 1972, dismissed the application holding that it had not given a finding that the cost of acquisition of the properties should be taken as the market value thereof on July 1, 1962. The assessee also filed a miscellaneous application wanting certain alterations to be made in the order of the Tribunal by way of rectification of the mistakes therein. The Tribunal by its order dated 22nd February, 1973, dismissed the said application also.
5. The matter was brought to this court by way of reference in T.C. No. 195 of 1973 and in the said reference the following question was referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in setting aside the order of the Appellate Assistant Commissioner in the absence of any Hading by him and directing him to rehear the appeal when the assessee had not raised the question that the cost of acquisition of the capital assets should be taken as their market value as on July 1, 1962, either before the Appellate Assistant Commissioner or before the Tribunal ?'
6. The above reference came to be disposed of by a judgment dated 15th December, 1976. In the course of the judgment, it was pointed out that what in effect was complained of by the department was that the assessee was likely to get a benefit as a result of the restoration of the appeal to the AAC. As the assessee had accepted the order of the AAC as it was, this court held that if in the final proceedings taken as a result of the order of the Tribunal, capital gains were found to be lower than Rs. 19,222, then the said figure of Rs. 19,222 would bo left undisturbed, but if it was a higher figure than the said amount, the higher amount should be determined as the capital gains liable to be taxed. The question was answered accordingly.
7. It is against the same order of the Tribunal that the present question has also been referred as a result of the order of the direction of this court as seen already.
8. The learned counsel for the Commissioner contended that the provisions of the I.T. Act did not envisage any computation of capital gains on the basis of the market value of the assets on any date other than 1st January, 1954. In view of the fact that- in the present case the assets had been acquired by the firm after 1st January, 1954, the contention was that the cost of acquisition of assets as on the date of acquisition alone should be taken into account. For the assessee, the submission was that there was no error in the order of the Tribunal which required interference at the hands of this court. It was submitted that the market value of the assets as on 1st July, 1962, could be taken as the basis for the computation of the capital gains.
9. Section 45 of the I.T. Act, 1961, provides for profits and gains arising from the transfer of a capital asset effected in the previous year being charged to income-tax under the head 'Capital gains'. The amount of such profits and gains is to be deemed to be the income of the previous year in which the transfer took place. Section 48 provides for the mode of computation of the capital gains and the deductions from the amount for which the capital was so transferred. Under that provision, the income chargeable under the head 'Capital gains' is to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following two amounts, namely :--
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset arid the cost of any improvement thereto.
10. Section 49 provides for the cost being determined with reference to certain specified modes of acquisition as described thereunder. One of those modes dealt with thereunder is, where the capital asset became the property of the assessee on any distribution of assets on the total or partial partition of an HUF, and with reference to this mode, the cost of acquisition of the asset 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 asset incurred or borne by the previous owner or the assessee, as the case may be. There are other modes of acquisition, namely, under a gift or will, by succession, inheritance or devolution, etc. The present case does not fall within any of the modes of acquisition mentioned in s. 49. Section 49(1)(i) would have applied if the capital assets had been sold by a quondam member of the HUF who obtained the assets on partition. In the present case, the person who transferred the capital asset was not a member of the HUF, but a partnership in which quondam members became partners. The result is, s. 49(1)(i) will not apply and no other part of s. 49 appears to apply to the present case.
11. We have, therefore, to consider the computation of capital gains only with reference to the cost of acquisition and the cost of any improvement made thereto, as referred to in s. 48(ii). Section 50 makes a special provision in the case of certain assets. If they are depreciable assets in respect of which a deduction on account of depreciation has been obtained by the assessee, then the written down value of the asset shall be taken as the cost of acquisition. With reference to other assets acquired before 1954, it is the market value of the asset on 1st January, 1954, that has to be taken into account at the option of the assessee. The cost of acquisition of the asset has then to be taken as the fair market value as on that date (i.e., January 1, 1954) as reduced by the amount of depreciation, if any, allowed to the assessec. In the present case, the asset having been acquired by the firm only on 1st July, 1962, s. 50 has also no scope for application.
12. In para. 4 of the order of the Tribunal it is mentioned :
'It is not disputed that when the partnership was commenced on July 1, 1962, the value of the assets was mentioned in the books not with reference to their market value as on that date but only with reference to their original cost of acquisition.'
13. However, in para. 6 of its order, the Tribunal has observed :
'As a result of the partition, the quondam coparceners would become exclusively entitled respectively to the properties allotted to them and not the partnership which in prior point of time (sic) was subsequently entered into by them. In this view of the matter, the cost of acquisition of the capital assets in question may have to be taken only as their market value as on July 1, 1962. This aspect has got to be considered for the purpose of computing the capital gains which is the subject-matter of the appeal. This aspect of the case and the materials necessary to decide it have not been considered by the authorities below. Having regard to this position and in the interests of justice, we set aside the order of the Appellate Assistant Commissioner and restore the appeal to his file and direct him to rehear it according to law and in the light of our observations above.' (Underlined by us).
14. In its order dated August 8, 1972, the Tribunal pointed out:
'It is alleged in paragraph 3 of the instant petition that the Tribunal had observed in paragraphs 4, 5, 6 and 7 of its order dated September 24, 1971, that the cost of acquisition to be adopted in this case should be the market value of the capital assets as on July 1, 1962, the date on which the partnership was formed on the disruption of the erstwhile Hindu undivided family. The above averment is not correct because no such finding has been given by the Tribunal.'
15. This observation of the Tribunal is at variance with what we have extracted earlier from para. 6 of its order dated September 24, 1972. It is contrary to the terms of the direction it has itself given.
16. The learned counsel for the Commissioner contended, as stated earlier, that there was no question of the market value as on July 1, 1962, being taken in this case because there was no statutory provision authorising it. The learned counsel for the assessee was not in a position to controvert this statement of the learned counsel for the Commissioner. We have also referred to the relevant provisions and those provisions do not in any manner envisage the market value of the assets being taken with reference to any date other than 1st January, 1954. As in this case the assets did not become the property of the firm prior to January 1, 1954, the market value as on January 1, 1954, is not relevant and the cost of acquisition alone should be taken into account. Thus, the present case comes clearly under Section 48(ii) and not under any other provision.
17. We had occasion to consider a similar question, namely, whether the market value as on a date subsequent to January 1, 1954, could be taken into account with reference to an asset which became the property of the assessee subsequent to that date in T.C. No. 174 of 1975--judgment dated 18th June, 1979 [Addl. CIT v. Govindoss Purushothamdoss (see p. 319 supra)]. That case was with reference to a mode of acquisition not covered by s. 49. In that case, there was a partition of a HUF consisting of one Jumnadoss Dwarakadoss and his brother, Amichand Doss Dwarakadoss. As a result of the said partition, a fresh partnership deed came into existence on 14th November, 1959, between those two persons on the one hand and Purusho-thamdoss Gokuldoss and his son on the other. The property which was the subject-matter of consideration in the said case was taken out of the firm on April 1, 1964. The question was, whether the value as shown in the books of account at the time when the property was taken out of the firm and taken by the partnership was to be adopted or whether the market value as on April 1, 1964, of the said property was to be adopted. After referring to decided cases, it was pointed out (p. 327):
' We do not consider that the Tribunal was justified in describing the valuation put by the parties as on April 1, 1964, as a notional valuation. There was nothing notional about it, because the accounts of the parties were adjusted with reference to these amounts totalling Rs. 94,000. It may be that the prices of properties went up in this period and that the property would have fetched a higher price if sold to a third party on April 1, 1964. But nothing prevented the partnership from parting with its property at a particular price agreed to between its own partners, especially when the transfer was in favour of the partner. As credits and debits were made in the firm's books there was nothing notional about the sum of Rs. 94,000 in the present case. An estimated value taken by the partners for adjustment of their rights inter se cannot be taken as a notional value.'
18. In the same case, it was further observed (p. 327) :
'Learned counsel for the assessee next contended, as a general proposition of law, that wherever the market value was higher than the value as shown by any arrangement between the parties, it is the market value that should be taken into account as the actual value. There is absolutely no warrant in any statutory provision or any decided case in support of this proposition. In the circumstances, we are unable to accept this proposition put forward by the learned counsel for the assessee.'
19. The result was that the question referred in that case was answered in the following manner, namely, in computing the capital gains arising to the assessee by the sale of the property in question, its cost of acquisition should be taken at its value as per books as on April 1, 1964.
20. Applying the above reasoning, in the present case, the cost of acquisition of the assets should be taken at the value at which they appeared in the books of the firm as on July 1, 1962. That is the cost to the assessee. The question is acccordingly answered in the negative and in favour of the revenue. There will be no order as to costs.