Whether
Explanation (iii) to Section 48 of the Act can be interpreted without
considering the effect of Section 49(1) Explanation and Explanation 1(i)(b) of
Section 2 (42A), when all three sections relate to the same subject matter of
computation of capital gains on the sale of a capital asset, description of the
previous owner and the period of holding of the asset by the assessee.
Mr.Arun
Shungloo transferred the property to the trust managed by the appellant, i.e.,
Arun Shungloo Trust. The said asset was later sold by the appellant in AY
2001-02, issue which aroused from Revenue is whether to include the period of
holding of previous owner while calculating Capital Gains or not.
Held
by the Court, that there is no reason and justification 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.
________________________________________________________________________
IN
THE HIGH COURT OF DELHI AT NEW DELHI
ITA
No.116/2011
Date
of Decision : 13th
February, 2012.
ARUN SHUNGLOO TRUST ........................................ Appellant
Through: Mr.S.Krishanan, Advocate
versus
CIT ............................................................................ Respondent
Through: Mr.Kamal Sawhney,Advocate
CORAM:
HON'BLE
MR. JUSTICE SANJIV KHANNA
HON'BLE
MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
By the order dated 2nd August,
2011, the following substantial question of law was framed.
"Whether Explanation (iii) to Section 48
of the Act can be interpreted without considering the effect of Section 49(1)
Explanation and Explanation 1(i)(b) of Section 2 (42A), when all three sections
relate to the same subject matter of computation of capital gains on the sale
of a capital asset, description of the previous owner and the period of holding
of the asset by the assessee."
2.
We
have heard the counsel for the parties and thus, proceed to pronounce our
decision on the aforesaid substantial question of law.
3.
Facts
are undisputed and may be noticed.
4.
One
Mr.Arun Shungloo acquired property No.D-11, Maharani Bagh, New Delhi, sometime
before 1st April, 1981. On 5th January, 1996, Mr.Arun
Shungloo transferred the property to the trust managed by the appellant, i.e.,
Arun Shungloo Trust.
5.
During
the period relevant to the assessment year 2001-02, the appellant Trust sold
and transferred the acquired property to a third party. The substantial
question of law mentioned above relates to the computation of long term capital
gains. The contention of the Revenue which has been accepted by the Tribunal is
that appellant is entitled to indexed cost of acquisition for the period on or
after 5th January, 1996, i.e., the date on which the appellant-Trust
had acquired the property upto the date of sale. The contention of the
appellant assessee is that it is entitled to the benefit of indexed cost of
acquisition from 1.4.1981, i.e. for the period during which Mr. Arun Shungloo
also held the property before it was transferred to the appellant-Trust on
5.1.1996.
6.
In
order to appreciate the controversy, the provisions of Section 45,
48
and 49 of the Income Tax Act, 1961 ('Act', for short) may be noticed.
The relevant portions of the said sections
read as under:-
"Section 45:(1)
Any profits or gains arising from the transfer of a capital asset effected in
the previous year shall, save as otherwise provided in sections 54, 54B, 54D,
54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head
"Capital gains", and shall be deemed to be the income of the previous
year in which the transfer took place.
Section 48: The income chargeable under the head
"Capital gains" shall 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 amounts, namely :-
(i)
Expenditure
incurred wholly and exclusively in connection with such transfer;
(ii) The cost of acquisition of the asset and the
cost of any improvement thereto:
Provided that in the case of an assessee, who is a
non-resident, capital gains arising from the transfer of a capital asset being
shares in, or debentures of, an Indian company shall be computed by converting
the cost of acquisition, expenditure incurred wholly and exclusively in
connection with such transfer and the full value of the consideration received
or accruing as a result of the transfer of the capital asset into the same
foreign currency as was initially utilised in the purchase of the shares or
debentures, and the capital gains so computed in such foreign currency shall be
reconverted into Indian currency, so however, that the aforesaid manner of
computation of capital gains shall be applicable in respect of capital gains
accruing or arising from every reinvestment thereafter in, and sale of, shares
in, or debentures of, an Indian company;
Provided further that where long-term capital gain arises from
the transfer of a long-term capital asset, other than capital gain arising to a
non-resident from the transfer of shares in, or debentures of, an Indian
company referred to in the first proviso, the provisions of clause (ii) shall
have effect as if for the words "cost of acquisition" and "cost
of any improvement", the words "indexed cost of acquisition" and
"indexed cost of any improvement" had respectively been substituted.
Explanation : For the purposes of this section, --
(i).............. ;
(iii)
"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 Inflation Index for the first year
in which the asset was held by the assessee or for the year beginning on the
1st day of April, 1981, whichever is later;
(iv)
"Indexed
cost of any improvement" means an amount which bears to the cost of
improvement the same proportion as Cost Inflation Index for the year in which
the asset is transferred bears to the Cost Inflation Index for the year in
which the improvement to the asset took place;
(v)..............
xxxx xxxx
xxxx
Section 49 (1) Where the capital asset became the
property of the assessee - (i) On any distribution of assets on the total or
partial partition of a Hindu undivided family;
(ii) Under a gift or will;
(iii) (a) By succession, inheritance or devolution,
or
(b)
On
any distribution of assets on the dissolution of a firm, body of individuals,
or other association of persons, where such dissolution had taken place at any
time before the 1st day of April, 1987,
(c)
On
any distribution of assets on the liquidation of a company, or
(d)
Under
a transfer to a revocable or an irrevocable trust, or
(e) Under any such transfer as is referred to in
clause (iv) [or clause (v)] [or clause (vi)] [or clause (via)] [or clause
(viaa)] [or caluse (vica)] or [clause (vicb)] or clause (xiiib) of section 47];
[ (iv) Such assessee being a Hindu undivided
family, by the mode referred to in sub-section (2) of section 64 at any time
after the 31st day of December, 1969,]
the cost of the acquisition
of the assets 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
assets incurred or borne by the previous owner or the assessee, as the case may
be.
[
Explanation : 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 (iii) [or clause (iv)] of
this [sub-section].]
8.
Section
45 of the Act stipulates that profits and gains arising from transfer of a
capital asset affected in the previous year is chargeable to income tax under
the heading "Capital gains" and shall be deemed to be the income of
the previous year in which the said transfer took place. This is the charging
section. Sections 48 and 49 prescribe the mode of computation and cost of
acquisition, improvement normally and with reference to certain modes of
acquisition and indexation of the cost of acquisition/ improvement.
9.
Section
48 of the Act stipulates that while computing capital gains, the cost of acquisition
of an asset and the cost of improvement thereto, has to be deducted from the
full value of the consideration received or accruing as a result of the
transfer of the capital asset. The second proviso to Section 48 stipulates that
the expression "cost of acquisition" and "cost of
improvement" shall mean "indexed cost of acquisition" and
"indexed cost of improvement" in case of long term capital gains
(except in case of sale of shares, etc. by a non-resident).
10.
Section
49 of the Act stipulates that in case of acquisition of a capital asset under
gift or will, by succession, inheritance or devolution, creation of trust,
etc., the cost of acquisition shall be deemed to be the cost at
which the previous owner of the property has acquired the capital asset as
increased by the cost of improvement, if any, of the assets, as may be incurred
or borne by the previous owner or the assessee, as the case may be. Thus, as
per Section 49, the cost of acquisition in the hands of an assessee is treated
as the cost of acquisition by the previous owner. Similar benefit/ advantage is
given in respect of cost of improvement. Sections 48 and 49 have to be read
harmoniously to give full effect to the legislative intent.
11.
This
brings us to the Explanation to Section 48 which defines, for the purpose of
the said Section, the "indexed cost of acquisition" and "indexed
of any improvement".
12.
Learned
counsel for the Revenue has emphasized and submitted that in Clause (iii) of
Explanation to Section 48, indexed cost of acquisition has to be computed from
the first year in which the capital asset was held by the assessee. He states
and submits that the scope of the term "income" has been widened to
bring capital gains to tax. It is, accordingly, submitted that the
word/expression "held by the assessee" used in Clause (iii) of
Explanation refers to the "first year in which the asset was held by the
assessee" and not the date on which the previous owner had acquired the capital
asset. The legislature has deliberately withheld benefit/ advantage mentioned
in Section 49. He submits that Section 49 has a limited application, as it only
makes reference to the computation of cost of acquisition and the same cannot
be taken into account for computing "indexed cost of acquisition", a
specific expression
defined and used in Section 48.
13.
We
find it difficult to accept the said contention. 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 clasue (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.
14.
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". 15. Normally literal rule of construction is applied
and the words of the statute are to be understood in their ordinary and popular
sense, but this is subject to the rider that this should not lead to absurdity,
contradiction or stultification of the statutory objective. Literal
construction should be avoided, if it leads to unwarranted repugnances or
inconsistencies. In such circumstances the expression/words can be interpreted
by the courts to avoid absurdities and inconsistencies between the provisions.
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 capital gain or long term capital gain, the holding
by the predecessor is to be taken into consideration.
16.
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.
17.
There
is no reason and justification to hold that clause (iii) of the Explanation
intents 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.
18.
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.
19.
We
may notice that 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". The said
Explanation provides as under:-
"[Explanation]].—
(i) In determining the period for which any capital asset is held by the
assessee—
(a) ......
(b) in the case of a capital asset which becomes
the
property of the assessee in the circumstances
mentioned in [sub-section(1) ] of section 49, there
shall be included the period for which the asset was
held by the previous owner referred to in the said
section."
property of the assessee in the circumstances
mentioned in [sub-section(1) ] of section 49, there
shall be included the period for which the asset was
held by the previous owner referred to in the said
section."
20. 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. The aforesaid Explanation to Section 2(42A) was referred
to by the Bombay High Court in CIT v. Manjula J.Shah (Mumbai), (2011) 16 Taxman 42 (Bom), wherein a similar controversy/question was
examined and it was held as under:
"17.
We see no merit in the above contention. As rightly contended by Mr. Rai,
learned counsel for 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.
18.
If the argument of the revenue that the deeming fiction contained in
Explanation 1(i)(b) to Section 2(42A) of the Act 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 deemd 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 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) of the Act cannot be applied in determining the indexed cost of
acquisition under Section 48 of the Act.
19.
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 assessee, then that object cannot be defeated by excluding 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) of the Act.
20.
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 of the Act 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 of the Act. In Section 48 of the Act, 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 of the revenue which runs counter to
the legislative intent cannot be accepted."
21.
We
are entirely in agreement with the findings/ ratio recorded by the Bombay High
Court in the case of Manjula
J. Shah (supra).
22.
In
view of the aforesaid discussion, the question of law is hereby answered in
negative and in favour of the appellant-assessee and against the
respondent-Revenue. No costs.
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