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ADIT,Circle 1 (1),International Taxation,204, Drum Shaped Building,IP Estate,New Delhi. Vs. Shekhar Dasgupta,R-06B,Windsor Court, DLF City Phase IV, Gurgaon.
July, 09th 2012
              IN THE INCOME TAX APPELLATE TRIBUNAL
                   DELHI BENCH : G : NEW DELHI

            BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
                                AND
                 SHRI A.D. JAIN, JUDICIAL MEMBER

                        ITA No. 1110/Del/2012
                     Assessment Year : 2007-08

ADIT,                      Vs.        Shekhar Dasgupta,
Circle 1 (1),                         R-06B,Windsor Court,
International Taxation,               DLF City Phase IV,
204, Drum Shaped Building,            Gurgaon.
IP Estate,
New Delhi.                            PAN : AAFPD6942B


    (Appellant)                          (Respondent)

            Assessee by       :   Shri Vinay Chowla, Advocate
            Revenue by        :   Shri J.S. Ahlawat, DR


                             O R D E R


PER A.D. JAIN, JUDICIAL MEMBER:

     This is an appeal filed by the Revenue for Assessment Year 2007-
08 against the order dated 23.11.2011 passed by the Director of
Income Tax (International Taxation), Delhi-XXIX. The grounds of appeal
read as under:-

        1. On the facts and in the circumstances of the case
        the Ld. CIT (A) has erred in holding that the capital
        gain arising to the assessee are to be computed by
        applying Cost Inflation Index for the year of
        acquisition by the previous owner, in violation of the
        provisions of explanation (iii) to Section 48, which
        provides that "indexed cost of acquisition" means an
        amount which bears to the cost of acquisition the
        same proportion as Cost Inflation Index for the year in
        which the asset is transferred bears to the cost
                                     2                  ITA No.1110/Del/2012






          inflation index for the first year in which the asset was
          held by the assessee.

          2. On the facts and in the circumstances of the case
          the Ld. CIT (A) has erred in relying upon the
          provisions of explanation 1 (i) (b) to Section 2 (42A) in
          contravention of the provisions of explanation (iii) to
          Section 48, although explanation 1 (i) (b) to section 2
          (42A) is only for the purpose to distinguish about the
          asset being Short Term or Long Term, whereas
          explanation (vii) to Section 48 specifically provides for
          the manner of computation of capital gains.


2.      The facts are that the assessee acquired a property by way of
will from his father who expired on 3.10.2010. The property had been
acquired by the assessee's father in 1973. The fair market value of the
property as on 1.4.1981 was estimated at ` 6,07,000/-. The assessee
claimed benefit of indexation since 1981 and computed the indexed
cost of acquisition at ` 35,12,630/-, taking the cost of acquisition at `
6,77,000/-, the Cost Inflation Index for Assessment Year 1980-81 at
100,the Cost Inflation Index of F.Y. 2006-07 at 519.           Before the
Assessing Officer, the assessee relied on the Special Bench Tribunal
decision in the case of DCIT vs. Manjula J. Shah 318 ITR 417 (Mum)
(SB).    The Assessing Officer, however, relied on Explanation (iii) to
Section 48 of the IT Act and allowed the benefit of indexation on the
cost of acquisition from the year 2000-01, the said year being the year
in which the property had been inherited by the assessee. The Cost
Inflation Index of the year 2000-01 was 406.         The indexed cost of
acquisition arrived at by the Assessing Officer was, thus, ` 8,65,426/-.
It was, therefore, that the Assessing Officer concluded that the
assessee had claimed excess deduction at ` 26,48,204/- being the
difference between the amount of ` 35,12,630/- and ` 8,65,426/-. The
Assessing Officer also placed reliance on the decision of the Mumbai
Bench of the Tribunal in DCIT vs. Kishore Kanungo 290 ITR 298 (Mum),
                                    3                  ITA No.1110/Del/2012



which was followed by the Delhi Bench of the Tribunal in the case of
Arun Shungloo Trust, ITA No.1136/Del/2005.


3.    By virtue of the impugned order, Ld. CIT (A) deleted the addition
made by the Assessing Officer. Aggrieved, the department is in appeal
before us.


4.    Challenging the impugned order, the Ld. DR contended before us
that the Ld. CIT (A) has erred in holding that the capital gain arising to
the assessee was to be computed by applying the Cost Inflation Index
for the year of acquisition by the previous owner i.e., the father of the
assessee, in violation of the provisions of the Explanation (iii) to
Section 48 of the Act, as per which, "indexed cost of acquisition"
means an amount which bears to the cost of acquisition the same
proportion as the cost inflation indexed for the year in which the asset
is transferred bears to the Cost Inflation Index for the first year in
which the asset was held by the assessee; that the Ld. CIT (A) has
erred in relying on the provisions of Explanation 1 (i)(b) to Section 2
(42A) of the Act in contravention of the provisions of Explanation (iii) to
Section 48, although Explanation 1 (i) (b) to Section 2 (42A) is only for
the purpose of distinguishing the asset as to whether it is a short-term
asset or a long-term asset, whereas Explanation (vii) to Section 48 of
the Act specifically provides for the manner of computation of capital
gains; and that, as such, the order of the ld. Commissioner (Appeals)
being illegal and erroneous, the same be set aside and that of the
Assessing Officer be revived by allowing the appeal filed by the
department.


5.    The ld. Counsel of the assessee, on the other hand, has placed
reliance on the order under appeal, contending that the matter now
                                        4                ITA No.1110/Del/2012



stands decided squarely in favour of the assessee by the decisions in
the following cases:-


     i)       Commissioner of Income-tax-XII vs. Manjula J. Shah 16
              Taxmann.com 42 (Bom) (copy placed on record).
     ii)      DCIT 12 (2) vs. Manjula J. Shah 35 SOT 205 (Mum) (SB).
     iii)     Arun Shungloo Trust vs. Commissioner of Income-tax 18
              Taxmann.Com. 261 (Del).


6.          Relying on the aforementioned decisions, the ld. Counsel for the
assessee has submitted that in view of these decisions, it now stands
settled that Clause (iv) of the Explanation to Section 48 does not refer
to the date on which the asset was held by the assessee; that the cost
of improvement would include the cost of improvement made by the
previous owner; that the benefit of indexed cost of improvement would
be available even if the asset is acquired by the assessee under, inter
alia, a will, as in the present case.


7.          We have heard the parties and have perused the material
available on the record. The Assessing Officer, as noted above, relied
on Kishore Kanungo (supra) and Arun Shungloo Trust (supra).            Now,
Kishore Kanungo, it is seen, was specifically overruled by the Special
Bench of the Tribunal in Manjula J. Shah (supra). Manjula J. Shah (SB)
(supra), in turn, was aggrieved with the jurisdictional High Court
decision in        Arun Shungloo Trust (supra).    Manjula J. Shah Division
Bench decision has been upheld by the Hon'ble High Court of Bombay
in Manjula J. Shah (supra), vide order dated 11.10.2011.          Then, the
ITAT Division Bench order in Arun Shungloo Trust (supra) has been
overruled by the Hon'ble Delhi High Court in Arun Shungloo Trust
(supra), vide order dated 13.02.2012.
                                      5                  ITA No.1110/Del/2012



8.    In Manjula J. Shah, the Hon'ble jurisdictional High Court has held,
inter alia, as follows:-

      "Section 48 uses two expressions "cost of acquisition" and "cost
      of any improvement". The second proviso states that the said
      expressions will mean "indexed cost of acquisition" and "indexed
      cost of any improvement" in all cases of long term capital gains
      except in case of sale of shares, debentures, etc. by a non-
      resident. As far as "indexed cost of improvement" is concerned, it
      is stipulated in clause (iv) to the Explanation that the cost of
      improvement would be in the same proportion, as to the cost
      inflation index for the year in which the capital asset was
      transferred bears to the cost inflation index for the year in which
      the improvement of the capital asset took place. Clause (iv) of the
      Explanation to Section 48 does not refer to the date on which the
      asset was held by the assessee. On reading of Clause (iv) of
      Explanation to Section 48 of the Act, it is apparent that the term
      "cost of improvement would include the cost of improvement(s)
      made by the previous owner. The benefit of indexed cost of
      improvement would be available even if the capital asset is
      acquired by the assessee under any gift, will or succession, trust
      etc. and improvement was made by the previous owner. [Para
      13].


      If the contention of the Revenue is accepted, then benefit of
      indexed cost of acquisition, will not available to an assessee in a
      case covered by Section 49 from the date on which the asset was
      held by the previous owner but only from the date the capital
      asset was transferred to the assessee. This will lead to a
      disconnect and contradiction between "indexed cost of
      acquisition" and "indexed cost of improvement" in the case of
      capital assets where Section 49 applies. This cannot be the
      intention behind the enactment of Section 49 and its Explanation
      to Section 48. There is no reason or ground why the legislative
      would want to deny or deprive an assessee benefit/advantage of
      the previous holding for computing "indexed cost of acquisition"
      while allowing the said benefit for computing "indexed cost of
      improvement". [Para 14]


      In the present case, as noticed above, the construction placed by
      the Revenue will lead to inconsistency and incongruities, when we
      refer to Section 49 and clause (iv) to Explanation (1) to Section
      48. This will result in absurdities because the holding of
      predecessor has to be accounted for the purpose of computing
      the cost of acquisition, cost of improvement and indexed cost of
      improvement but as per the Revenue not for the purpose of
      indexed cost of acquisition. As noticed below, even for the
      purpose of deciding whether the transaction is a short term
                                 6                   ITA No.1110/Del/2012



capital gain or long term capital gain, the holding by the
predecessor is to be taken into consideration. [Para 15]


Benefit of indexed cost of inflation is given to ensure that the
taxpayer pays capital gain tax on the "real" or actual "gain and
not on the increase in the capital value of the property due to
inflation. This is the object or purpose in allowing benefit of
indexed cost of improvement, even if the improvement was by
the previous owner in cases covered by Section 49. Accordingly
there is no justification or reason to not allow the benefit of
indexation to the cost of acquisition in cases covered by Section
49. This is not the legislative intent behind clause (iii) to
Explanation to Section 48 of the Act. [Para 16]


There is no reason and justification to hold that clause (iii) of the
Explanation intends to reduce or restrict the "indexed cost of
acquisition" to the period during which the assessee has held the
property and not the period during which the property was held
by the previous owner. The interpretation relied by the assessee
is reasonable and in consonance with the object and purpose
behind Sections 48 and 49 of the Act. [Para 17]


The expression "held by the assessee" used in Explanation (iii) to
Section 48 has to be understood in the context and harmoniously
with other Sections. The cost of acquisition stipulated in Section
49 means the cost for which the previous owner had acquired the
property. The term "held by the assessee" should be interpreted
to include the period during which the property was held by the
previous owner. [Para 18]


The term "held by the assessee" has been defined in Explanation
1(i)(b) to Section 2(42A) of the Act. Section 2(42A) defines the
expression "short term capital gains". [Para 19]


Clause (iii) to Explanation to Section 48 is applicable when the
transfer is a long term capital gain and not a short term capital
gains. The legislature was conscious of definition of the
expression "held by the assessee" in Explanation 1(i)(b) of
Section 2(42A) and, therefore, has used the same expression in
Explanation (iii) to Section 48 of the Act. [Para 20].


Resultantly, the question of law is to be decided in favour of the
assessee."
                                       7                   ITA No.1110/Del/2012



9.    In Manjula J. Shah (supra), the Hon'ble Bombay High Court has
held, inter alia, as follows:-


      "Section 45 provides that any profits or gains arising from the
      transfer of a capital in the previous year shall be chargeable to
      income tax under the head 'capital gains'. Where the gains arise
      on transfer of a short term capital asset as defined under Section
      2(42A) of the Act, the gains are taxed as short term capital gains.
      Where the gains arise on transfer of long term capital asset, as
      defined under Section 2(29A) of the Act, the said gains are taxed
      as long term capital gains. Section 47(iii) of the Act provides that
      where a capital asset is transferred under a gift or will, then, such
      transaction shall not be regarded as transfer and in such a case
      the liability to pay capital gains tax would not arise. Liability to
      pay capital gains tax, however, would arise when the assessee
      transfers the capital asset acquired under a gift or will for
      valuable consideration. [Para 10].


      The mode and the manner of computing the capital gains is
      provided under Section 48 of the Act. As per Section 48, the
      income chargeable under the head "capital gains" is liable to be
      computed by deducting from the full value of the consideration
      received on transfer of the capital asset, the amount of
      expenditure incurred wholly and exclusively in connection with
      such transfer and the cost of acquisition of the asset and the cost
      of any improvement thereto. Where the assessee acquires any
      capital asset under a gift or will without incurring any cost of
      acquisition, there would be no capital gains liability. However,
      Section 49(1)(ii) of the Act provides that in the case of an
      assessee acquiring an asset under a gift or will, 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. Thus, on
      account of the deeming fiction contained in Section 49(1)(ii) of
      the Act, gains arising on transfer of a capital asset acquired by
      the assessee under a gift or will would arise. In such a case, the
      capital gains under Section 48 of the Act would have to be
      determined by deducting from the total consideration received by
      the assessee, inter alia the deemed cost of acquisition. [Para 11].


      Where the gains are long term capital gains (other than long term
      capital gains arising to a non resident from the transfer of shares
      in, debentures of an Indian Company), then, as per the second
      proviso to Section 48 of the Act, the capital gains have to be
      computed by deducting from the full value of consideration the
      'indexed cost of acquisition' and the 'indexed cost of any
                                8                   ITA No.1110/Del/2012






improvement' instead of deducting the 'cost of acquisition' and
'cost of improvement'. [Para 12].

It is the contention of the revenue that since the indexed cost of
acquisition as per clause (iii) of the Explanation to Section 48 of
the Act has to be determined with reference to the Cost Inflation
Index for the first year in which the asset was held by the
assessee and in the present case, as the assessee held the asset
with effect from 1/2/2003, the first year of holding the asset would
be FY 2002-03 and accordingly, the cost inflation index for 2002-
03 would be applicable in determining the indexed cost of
acquisition. [Para 16].

There is no merit in the above contention. As rightly contended by
the assessee, the indexed cost of acquisition has to be
determined with reference to the cost inflation index for the first
year in which the capital asset was 'held by the assessee'. Since
the expression 'held by the assessee' is not defined under Section
48 of the Act, that expression has to be understood as defined
under Section 2 of the Act. Explanation 1(i)(b) to Section 2(42A)
of the Act provides that in determining the period for which an
asset is held by an assessee under a gift, the period for which the
said asset was held by the previous owner shall be included. As
the previous owner held the capital asset from 29/1/1993, as per
Explanation 1(i)(b) to Section 2(42A) of the Act, the assessee is
deemed to have held the capital asset from 29/1/1993. By reason
of the deemed holding of the asset from 29/1/1993, the assessee
is deemed to have held the asset as a long term capital asset. If
the long term capital gains liability has to be computed under
Section 48 of the Act by treating that the assessee held the
capital asset from 29/1/1993, then, naturally in determining the
indexed cost of acquisition under Section 48 of the Act, the
assessee must be treated to have held the asset from 29/1/1993
and accordingly the cost inflation index for 1992-93 would be
applicable in determining the indexed cost of acquisition. [Para
17].


If the argument of the revenue that the deeming fiction contained
in Explanation 1(i)(b) to Section 2(42A) cannot be applied in
computing the capital gains under Section 48 of the Act is
accepted, then, the assessee would not be liable for long term
capital gains tax, because, it is only by applying the deemed
fiction contained in Explanation 1(i)(b) to Section 2(42A) and
Section 49(1)(ii) of the Act, the assessee is deemed to have held
the asset from 29/1/1993 and deemed to have incurred the cost
of acquisition and accordingly made liable for the long term
capital gains tax. Therefore, when the legislature by introducing
the deeming fiction seeks to tax the gains arising on transfer of a
capital asset acquired under a gift or will and the capital gains
under Section 48 of the Act has to be computed by applying the
                                 9                    ITA No.1110/Del/2012



deemed fiction, it is not possible to accept the contention of
revenue that the fiction contained in Explanation 1(i)(b) to Section
2(42A) cannot be applied in determining the indexed cost of
acquisition under Section 48. [Para 18].


It is true that the words of a statute are to be understood in their
natural and ordinary sense unless the object of the statute
suggests to the contrary. Thus, in construing the words 'asset was
held by the assessee' in clause (iii) of Explanation to Section 48 of
the Act, one has to see the object with which the said words are
used in the statute. If one reads Explanation 1(i)(b) to Section
2(42A) together with Section 48 and 49 of the Act, it becomes
absolutely clear that the object of the statute is not merely to tax
the capital gains arising on transfer of a capital asset acquired by
an assessee by incurring the cost of acquisition, but also to tax
the gains arising on transfer of a capital asset inter alia acquired
by an assessee under a gift or will as provided under Section 49
of the Act where the assessee is deemed to have incurred the
cost of acquisition. Therefore, if the object of the legislature is to
tax the gains arising on transfer of a capital acquired under a gift
or will by including the period for which the said asset was held
by the previous owner in determining the period for which the
said asset was held by the assessee, then that object cannot be
defeated by excluding the period for which the said asset was
held by the previous owner while determining the indexed cost of
acquisition of that asset to the assessee. In other words, in the
absence of any indication in clause (iii) of the Explanation to
Section 48 of the Act that the words 'asset was held by the
assessee' has to be construed differently, the said words should
be construed in accordance with the object of the statute, that is,
in the manner set out in Explanation 1(i)(b) to section 2(42A).
[Para 19].


To accept the contention of the revenue that the words used in
clause (iii) of the Explanation to Section 48 of the Act has to be
read by ignoring the provisions contained in Section 2 runs
counter to the entire scheme of the Act. Section 2 of the Act
expressly provides that unless the context otherwise requires, the
provisions of the Act have to be construed as provided under
Section 2. In Section 48, the expression 'asset held by the
assessee' is not defined and, therefore, in the absence of any
intention to the contrary the expression 'asset held by the
assessee' in clause (iii) of the Explanation to Section 48 of the Act
has to be construed in consonance with the meaning given in
Section 2(42A) of the Act. If the meaning given in Section 2(42A)
is not adopted in construing the words used in Section 48 of the
Act, then the gains arising on transfer of a capital asset acquired
under a gift or will be outside the purview of the capital gains tax
which is not intended by the legislature. Therefore, the argument
                                 10                   ITA No.1110/Del/2012



of the revenue which runs counter to the legislative intent cannot
be accepted. [Para 20].


Apart from the above, Section 55(1)(b)(2)(ii) of the Act provides
that where the capital asset became the property of the assessee
by any of the modes specified under Section 49(1) of the Act, not
only the cost of improvement incurred by the assessee but also
the cost of improvement incurred by the previous owner shall be
deducted from the total consideration received by the assessee
while computing the capital gains under Section 48 of the Act.
The question of deducting the cost of improvement incurred by
the previous owner in the case of an assessee covered under
Section 49(1) of the Act would arise only if the period for which
the asset was held by the previous owner is included in
determining the period for which the asset was held by the
assessee. Therefore, it is reasonable to hold that in the case of an
assessee covered under Section 49(1) of the Act, the capital gains
liability has to be computed by considering that the assessee held
the said asset from the date it was held by the previous owner
and the same analogy has also to be applied in determining the
indexed cost of acquisition. [Para 21].


The object of giving relief to an assessee by allowing indexation is
with a view to offset the effect of inflation. As per the CBDT
Circular No.636 dated 31/8/1992 a fair method of allowing relief
by way of indexation is to link it to the period of holding the asset.
The said circular further provides that the cost of acquisition and
the cost of improvement have to be inflated to arrive at .the
indexed cost of acquisition and the indexed cost of improvement
and then deduct the same from the sale consideration to arrive at
the long term capital gains. If indexation is linked to the period of
holding the asset and in the case of an assessee covered under
Section 49(1) of the Act, the period of holding the asset has to be
determined by including the period for which the said asset was
held by the previous owner, then obviously in arriving at the
indexation, the first year in which the said asset was held by the
previous owner would be the first year for which the said asset
was held by the assessee. [Para 22].


Since the assessee in the present case is held liable for long term
capital gains tax by treating the period for which the capital asset
in question was held by the previous owner as the period for
which the said asset was held by the assessee, the indexed cost
of acquisition has also to be determined on the very same basis.
[Para 23].


In the result, that the Tribunal was justified in holding that while
computing the capital gains arising on transfer of a capital asset
                                    11                  ITA No.1110/Del/2012



      acquired by the assessee under a gift, the indexed cost of
      acquisition has to be computed with reference to the year in
      which the previous owner first held the asset and not the year in
      which the assessee became the owner of the asset. [Para 24].


10.   From the above, evidently, the issue stands decided in favour of
the assessee and against the department.        As such, the Ld. CIT (A),
having followed the Special Bench of the Tribunal in `Manjula J. Shah',
cannot be said to have committed any error. Therefore, the grievance
sought to be made out by the department does not carry any fore and
it is rejected as such.


11.   In the result, the appeal filed by the Department is dismissed.

      The order pronounced in the open court on 06.07.2012.


                   Sd/-                                 Sd/-
         [G.D. AGRAWAL]                           [A.D. JAIN]
         VICE PRESIDENT                        JUDICIAL MEMBER

Dated, 06.07.2012.

dk


Copy forwarded to: -

1.    Appellant
2.    Respondent
3.    CIT
4.    CIT(A)
5.    DR, ITAT

                               TRUE COPY

                                                                 By Order,


                                                        Deputy Registrar,
                                                      ITAT, Delhi Benches
 
 
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