IT: Relinquishment of right over property in case of a family settlement falls under definition of 'transfer' and exigible to capital gains tax
IT: Cost of acquisition in case of property received as gift has to be reckoned with reference to cost to previous owner
IT: Cost of improvement to property by previous owner should be included in cost of acquisition
IT: Period for which asset was held by previous owner has to be added to period of holding of assessee
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[2013] 35 taxmann.com 371 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'A'
Mrs. Lalitha Rathnam
v.
Income-tax Officer*
H.L. KARWA, VICE-PRESIDENT
AND T.R. SOOD, ACCOUNTANT MEMBER
AND T.R. SOOD, ACCOUNTANT MEMBER
IT APPEAL NO. 1308 (CHD.) OF 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
AUGUST 29, 2012
I. Section 2(47) of the Income-tax Act, 1961 - Capital gains - Transfer [Relinquishment, in case of family settlement] - Assessment year 2007-08 - Whether release/relinquishment of right over family property against receipt of a sum would be covered by definition of 'transfer' in section 2(47)(i) and where share in property is released against receipt of cash, instrument of release cannot be called a family settlement and would be covered by term 'transfer' and exigible to capital gains tax - Held, yes [Para 8] [In favour of revenue]
Words and phrase : 'Transfer' as defined in section 2(47) of the Income-tax Act, 1961
II. Section 49, read with section 48, of the Income-tax Act, 1961 - Capital gains - Cost with reference to certain modes of acquisition [Gift] - Assessment year 2007-08 - Whether cost of acquisition in case of property received as gift has to be reckoned with reference to cost to previous owner and valuation can be adopted on basis of valuation report in absence of any other material on record - Held, yes [Para 9] [In favour of assessee]
III. Section 48 of the Income-tax Act, 1961 - Capital gains - Computation of [Cost of improvement] - Assessment year 2007-08 - Whether cost of improvement to property by previous owner is to be included and indexation benefit has to be allowed on such cost of improvement from year of improvement - Held, yes [Para 10] [In favour of assessee]
IV. Section 2(42A) of the Income-tax Act, 1961 - Capital gains - Short-term capital assets/gains [Period of holding] - Assessment year 2007-08 - Whether period for which asset was held by previous owner has to be added to period of holding of assessee and once period of holding of previous owner is added and period of holding becomes more than three years, then asset has to be treated as long term capital asset - Held, yes [Para 11] [In favour of revenue]
Harry Ricky for the Appellant. N.K. Saini for the Respondent.
ORDER
T.R. Sood, Accountant Member - In this appeal the assessee has raised various grounds out of which ground No. 5 was not pressed and the same is dismissed as not pressed. Other grounds of appeal are as under :
| "1. | That the order of the learned CIT(A). Shimla is defective both in law and facts of the case. | |
| 2. | That the learned CIT(A), Shimla is not justified in upholding the addition of Rs. 29,30,000 made by the AO on account of short-term capital gains as the appellant had received this amount as part of a family settlement which is not taxable. This addition is uncalled for and deserves to be deleted. | |
| 3. | That the learned CIT(A), Shimla is not justified in upholding the order of the AO on account of not allowing the benefit of indexed cost of acquisition and construction as the appellant had duly submitted the valuation report of a Government approved registered valuer in support of her claim which was rejected by the AO without any strong basis and she is not a technical person. | |
| 4. | That the learned CIT(A), Shimla is not justified in upholding the order of the AO on account of period of holding and treating the transaction as short-term capital gains. The said transaction is a long-term capital gains as per ss. 2(42A), 47, 48, 49, 55 and the other provisions of the IT Act, 1961 as the period of holding was much more than three years." |
2. Ground No. 1 is of general nature and does not require any Separate adjudication.
3. Ground Nos. 2, 3 and 4 : Brief facts of the case are that the assessee's grandfather had acquired property in financial year 1977-78. This property came to assessee's father by way of partition between his father and brother vide partition deed dt. 8th Dec, 1983 which was duly registered as document No. 2385 of 1983-84 at pp. 58 to 68 involving 2890 of book No. 1 in the office of Senior Sub-Registrar, Central Records, Shivajinagar, Bangalore. Assessee's father gifted this property to his son and daughter in the ratio of 60 per cent and 40 per cent on 2nd Dec. 2006. Since it was not possible to share the property to 60:40, therefore, family arrangement was entered on 14th Feb., 2007 by which the assessee released her share in favour of her brother by receiving lump sum payment of Rs. 30 lakhs. The receipt of this sum was declared exempt by the assessee because the same was on account of family settlement. The AO did not accept this as family settlement because from the affidavit of Kumar Jahgirdar, brother of the assessee, it transpired that the assessee has not received a sum of Rs. 30 lakhs as gift as claimed by the assessee but it was on account of consideration for release of 40 per cent of share of immovable property wherein No. 36 (old No. 8/4), Osborne Road, Bangalore-560 042 being a three-storyed house and the land appurtenant thereto measuring 2,500 sq. ft. (for short "said property"). The AO observed that surrender of right in the property in lieu of monetary consideration amount received from such transaction even if the transaction could be termed as gift and the same has to be treated as transfer of the right for the property which will be subject to capital gain tax. Therefore, the assessee was asked to furnish the cost of acquisition. The assessee furnished the valuation report dt. 22nd Dec, 2009 showing the valuation report as on 1st April, 1981 and further amounts were claimed towards construction because originally it was a single storey house and further construction was done in the year 1987. The AO observed that the valuation report was made on the basis of information supplied by the assessee and there was no evidence regarding the year of construction. Therefore, the same was not accepted. Ultimately the cost of acquisition was treated at Rs. 1,50,000 in 1983. He further observed that since the property was acquired on 2nd Dec, 2006 and was sold on 19th Feb., 2007. therefore, the same was to be treated as short-term capital gains and cost of acquisition was treated at only Rs. 1,50,000 and capital gain was computed as under :
| Cost of acquisition in 1983 of her father | 1,50,000 |
| Indexed cost of acquisition in 2006 | 1,50,000/519*519 = 1,50,000 |
| 40% share of the assessee | 70,000 |
| Sale consideration | 30,00,000 |
| Capital gains | 30,00,000 - 70,000 = 29,30,000 |
4. On appeal before the learned CIT(A), it was contended that in view of the provisions of s. 49(1) of the Act, fair market value of the property has to be considered as on 1st April, 1981 as against cost of acquisition and thereafter indexation is required to be applied. Further since the property acquired by the father of the assessee was only a single storey building, improvement cost incurred in the form of further construction and cost of construction has also to be considered.
5. The learned CIT{A) agreed that the cost of acquisition has to be considered as fair market value as on 1st April, 1981 and thereafter the AO was directed to work out the cost of acquisition. However, he maintained the findings of AO that the same has to be considered as short-term capital gains.
6. Before us, the learned counsel of the assessee made detailed submissions which could be summarized as under :
| (1) | The assessee got 40 per cent of the said property from her father through gift deed dt. 2nd Dec, 2006. He referred to the gift deed and pointed out what was given by her father is in a particular share of the property i.e. 40 per cent share in the overall property. Thus this property could not have been divided to receive share because her younger brother had received 60 per cent of the share of the said property, through same gift deed. Therefore, the assessee had released her share in favour of her brother through deed dt. 14th Feb., 2007 which should be construed as family settlement and cannot be called a transfer and therefore, money received in the family settlement has to be treated as exempt. | |
| (2) | In the alternative he contended that since this property was originally acquired by the grandfather of the assessee in the year 1977, the cost of acquisition has to be considered as per cost in the hands of the previous owner. In this regard he referred to provisions of s. 49 wherein it is clearly provided that wherever the property has been received through gift, the cost has to be taken as cost of acquisition to the previous owner of the property and the Explanation makes it clear that the previous owner would mean last owner of the property. In this regard he also relied on the decision of Special Bench of the Tribunal in case of Dy. CIT v. Manjula J. Shah [2010] 35 SOT 105(Mum.). Since the property was acquired in 1977 therefore, the assessee has right to adopt the fair market value as on 1st April, 1981 and the property has been valued on 1st April, 1981 at Rs. 3,57,694. | |
| (3) | The assessee's father received this property by way of partition deed in 1983 when it was only a single storey house and thereafter made further construction in the year 1987 and constructed two more storeys with cost of construction in form of two storeys to be considered as cost of improvement and indexation has to be allowed on such cost of improvement before computing the capital gain in the hands of the assessee. | |
| (4) | He also contended that capital gain computed by the assessing authority has been wrongly treated as short-term capital gains. In this regard he referred to s. 2(42A), Expln. 1, cl. (b) which clearly provides that period of holding by previous owner has to be added to the period of holding of the present owner. |
7. On the other hand, the learned Departmental Representative for the Revenue submitted that the AO has clearly given a finding that the assessee's brother had given an affidavit through which it has been stated that he has paid a sum of Rs. 30 lakhs as full and final settlement for the said property. Therefore, it is clear case, of transfer of right to property and not case of family settlement. In case of family settlement the assessee would have got alternative property or some other right and not simple cash. In respect of other issues he strongly relied on the orders of AO and the learned CIT(A).
8. We have heard the rival submissions carefully and do not find any force in the submissions with regard to ground No. 2 i.e. the amount received by the assessee on account of gift from her brother. The fact remains that the assessee got 40 per cent share of the property by way of gift from her father and remaining 60 per cent of the share of the said property has gone to her brother though the property was not divisible and the assessee preferred to release/transfer her right loner brother in lieu of the consideration of Rs. 30 lakhs. First of all (even the case of release/relinquishment of right would be covered by the definition of transfer given in s. 2(47)(i) which reads as under :
'2(47) "transfer", in relation to a capital asset, includes,-
| (i) | the sale, exchange or relinquishmentof the asset; or | |
| (ii) | the extinguishment of any rights therein; or' |
Even otherwise in case of family settlement when various properties are involved a member may get lesser share or such share for consideration of release of share but in case before us only the property involved was share in the said property which has been released against the receipt of cash and therefore, instrument of release cannot be called a family settlement.
9. As far as other issues are concerned, we find force in the submissions of the learned counsel of the assessee. Sec 49 is clear that cost of acquisition-in case of property received under gift has to be reckoned with reference to the cost of previous owner and the previous owner has been defined in the Explanation to s. 49 as the last owner. In any case the learned CIT(A) has already accepted this position and directed the AO to consider the cost of acquisition as on 1st April, 1981 and the Revenue has not filed any appeal against this finding. Since the property has been acquired before 1981 therefore, the assessee has a right to adopt the fair market value as on 1st April, 1981. There is no evidence available regarding the valuation as on 1st April, 1981, therefore valuation can be adopted on the basis of valuation report in the absence of any other material on record. In this regard Special Bench in case of Dy. CJT v. Manjula J. Shah (supra) has already decided that the cost of acquisition has to be taken on the basis of indexed cost of property. The headnote reads as under :
"Capital gains.—Cost of acquisition-Indexed cost of property received through gift-For the purpose of computing long-term capital gain arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Expln. (iii) to s. 48 after taking into account the period for which the said capital asset was held by the previous owner-In that view of the matter, the indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held the asset-Legislative intention behind enacting the provisions is very clear to treat the date as well as cost of acquisition of capital asset of the previous owner to be the date and cost of acquisition of the assessee for the purpose of computing capital gain in terms of s. 48-If Expln. (iii) to s. 48 is interpreted in the way sought by the Departmental Representative by taking the date on which the capital asset received by the assessee under a gift becoming his property for the purpose of working out the indexed cost of acquisition, it will certainly not be in consonance with the scheme of the Act and will also defeat the very purpose of introducing the concept of 'indexed cost of acquisition'."
Therefore, we direct the AO to allow the assessee to adopt fair market value as on 1st April, 1981 as cost of acquisition and is further directed to give indexation benefit.
10. We also find force in the submissions that if assessee's father has made further construction then even the amount of such construction has to be treated as cost of improvement and indexation benefit has to be allowed on such cost of improvement from the year of improvement. Therefore, we set aside the order of learned CIT(A) and direct the AO to consider even the cost of improvement in the form the construction of two storeys in the year 1987 before computing capital gain.
11. We also find force in the submissions that the capital gain has to be treated as long-term capital gains in view of definition of s. 2(42A). Expln. (l)(b) which reads as under :
'(42A) "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :
| (2)** | ** | ** |
Explanation 1.—(i) In determining the period for which any capital asset is held by the assessee—
| (a) | in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation; | |
| (b) | in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-s. (1) of s. 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section; | |
| (c) | in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in cl. (vii).' |
Thus, this Explanation clearly shows that (period for which the-asset was held by the previous owner has to be added to the period of holding of the assessee. Therefore, once the period of holding of the previous owner is added, period of holding becomes more than three year thus this asset has to be treated as long-term capital asset Therefore, we set aside the order of learned CIT(A) and direct the AO to treat the capital gain as long term capital gains and assess the same accordingly.
12. In the result, appeal filed by the assessee is partly allowed.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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