B.N. Vyas (Guardian of Minor, B.B. Vyas) vs Commissioner of Income Tax

B.K. Mehta, J.—At the instance of the assessee, the following two questions are referred to us for our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in order to attract the provisions of section 49

of the Act, it was not necessary that the capital asset which was sold had to be capital asset as defined in section 2(14) of the Act at the time when

it was acquired ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition of the capital asset sold

was not to be computed on the basis of the market value on the date of the gift ?

A few relevant facts need be noticed in order to appreciate the contentions urged on behalf of the assessee in support of this reference. The

assessment years under reference are 1971-72 and 1972-73, the corresponding previous years being the years which ended on March 31, 1971,

and March 31, 1972, respectively. The assessee had sold certain lands during the assessment years under reference and, therefore, one of the

questions which arose for consideration of the Income Tax Officer in the assessment proceedings for the said years was with regard to the

inclusion of capital gains in the assessee''s total income. The lands which the assessee sold were acquired by him as gift from the previous owner,

one Shri N. N. Vyas, who was the father of the assessee, in July, 1966. These lands were acquired by the previous owner in 1961 and were

converted into non-agricultural use as permitted by the Collector u/s 65 of the Land Revenue Code on March 12, 1962. The assessee, while

computing the capital gains, adopted the cost of the acquisition of the lands at Rs. 9 per sq. yard which was the market value as on the date of the

gift, that is, in July, 1966. The capital gains thus computed were to the tune of Rs. 8,875 for the assessment year 1971-72 and Rs. 20,499 for the

assessment year 1972-73.

The Income Tax Officer accepted this computation made by the assessee and accordingly assessed him to tax. The Commissioner of Income

Tax, Ahmedabad, on examining the records of the assessment proceedings for the said two years was of the view that the Income Tax Officer had

erred in accepting the computation made by the assessee and accepting the cost of acquisition at Rs 9 per sq. yard instead of adopting the actual

cost of acquisition of the agricultural lands in the hands of the previous owner, the said Shri N. N. Vyas. The Commissioner had further found that

there was an additional error in the computation of the capital gains for the year 1972-73, since the Income Tax Officer had allowed deduction u/s

80T of the Act at 45% instead of 35% of the amount by which the capital gains exceeded Rs. 5,000. The Commissioner, therefore, issued a

show-cause notice to the assessee as to why the order of the Income Tax Officer be not revised u/s 263 of the Income Tax Act, 1961.

In response to the show cause notice, the assessee''s contention was that the provisions of section 49 of the Act had no application to the facts

of the present case, inasmuch as when his predecessor Shri N. N. Vyas, purchased the lands, they were al1 agricultural lands and, therefore, they

could not be treated as capital assets as defined u/s 2(14) of the said Act, and they could be treated as capital assets only when they were

permitted to be put to non-agricultural use on March 12, 1962. It was, therefore, urged that the cost of acquisition of the asset at the time of

acquisition cannot be taken into consideration for purposes of the computation of the capital gains. In the submission of the assessee, section 49

could be attracted only in a case where the asset was a capital asset at the time of its acquisition by the previous owner. He, therefore, urged that

since section 49 had no application, the cost of acquisition should be treated as the market value of the lands as on the date of the gift which the

assessee had put at Rs. 9 per sq. yard, and which cost was rightly accepted by the Income Tax Officer. The assessee, however, did not dispute

another infirmity which was pointed out by the Commissioner, namely, the irregular deduction u/s 80T at 45% instead of 35%. The Commissioner,

however, by his order of July 25, 1975, was not impressed by the contentions of the assessee, and held that the cost of acquisition of the lands

was to be deducted as provided in section 49(1) of the Act and, therefore, the Income Tax Officer was clearly in error in computing the cost of the

lands at Rs. 9 per sq. yard. The Commissioner further directed the Income Tax Officer to allow the proper deduction as admissible u/s 80T in

respect of the assessment year 1972-73.

The assessee being aggrieved by the said order of the Commissioner, carried the matter in appeal before the Tribunal which by its order of July

9, 1976, held that section 49 was applicable to the facts of the case, and the cost of acquisition would be the cost at which the previous owner had

acquired the lands, and such cost only could be deducted for computation of the capital gains. The Tribunal, therefore, rejected the contention of

the assessee that the cost should be taken as equivalent to the market value of the lands as on the date of the gift. On the alternative contention of

the assessee that the cost of acquisition should be taken as the value of the land as on the date when it was allowed to be put to non-agricultural

use, that is, March 12, 1962, the Tribunal found that it was prima facie supported by instruction No. 88 dated August 1, 1969, issued by the

Central Board of Direct Taxes to all Commissioners of Income Tax. Even then the Tribunal did not consider it advisable to accept this alternative

contention of the assessee which rested on the instructions contained in the circular. However, while dismissing the appeal of the assessee, the

Tribunal directed the Income Tax Officer to take the circular into consideration while considering the cost of acquisition hy the previous owner.

It is on the above facts and circumstances that the two (questions set out above have been referred to us for our opinion.

On behalf of the assessee, it was urged that section 48 of the Income Tax Act, 1961, which prescribes the mode of computation and deductions

is not applicable since the case would be governed if at all by section 49 of the said Act inasmuch as the assessee has acquired this asset in

question under a gift from his father and, therefore, the cost of capital asset has to be determined in the manner provided u/s 49(1) of the said Act.

In the submission of the learned advocate for the assessee, therefore, the cost of acquisition of the capital asset in the hands of the previous owner

would be the cost for purposes of the computation of the capital gains. Mr. Patel, learned advocate for the assessee, was at great pains to impress

upon us that the decision of this court in Ranchhodbhai Bhaijibhai Patel Vs. Commissioner of Income Tax, Gujarat II, Ahmedabad, , would not be

applicable in the facts of the present case since that decision was rendered in the context of the question of computation of capital gains in case of

subsequent conversion of the user of the agricultural land by putting it to non-agricultural purpose by the assessee himself, and was not one where

computation to be made in case of special mode of acquisition. In the alternative, the learned advocate for the assessee submitted that the Tribunal

could not have dismissed the appeal of the assessee which would virtually amount to affirmation of the order of the Appellate Assistant

Commissioner who had held that the cost of acquisition of the capital asset should be as on the date of the original acquisition by the previous

owner of the lands since the instructions contained in the circular issued by the Central Board of Direct Taxes, bearing No. 88 of August 1, 1969,

were found by the Tribunal as supporting the alternative contention urged on behalf of the assessee before the Tribunal.

We are afraid that the contention of the learned advocate for the assessee that the decision of this court in Ranchhodbhai Bhaijibhai Patel Vs.

Commissioner of Income Tax, Gujarat II, Ahmedabad, , is not applicable to the facts of the present case is too specious a contention since the

Division Bench has, though speaking in the context of the question of computation of capital gains in case of subsequent conversion of the user of

the agricultural lands to non-agricultural use in the hands of the same assessee, referred to section 49 also since the provisions contained therein is

part of the integrated scheme of the computation of the capital gains. It would be advisable to refer to what the Division Bench, speaking through

Bhagwati J., observed in this behalf. The Division Bench found unable to persuade itself to accept the contention urged on behalf of the assessee in

Ranchhodbhai Bhaijibhai Patel Vs. Commissioner of Income Tax, Gujarat II, Ahmedabad, , that in case of subsequent conversion of the

agricultural land to non-agricultural use, the cost of acquisition would be equivalent to the market value as on the date of the permission to put to

non-agricultural use since that would tantamount to saying that there will be two different classes of property - one as a non-capital asset and other

as a capital asset. The reason which weighed with the Division Bench in rejecting the contention urged on behalf of the assessee was that the

property which is acquired by a given assessee would be acquired only once and its character merely changes in the sense that whereas originally it

was a non-capital asset, it becomes a capital asset on permission for conversion of the use, and to accept the contention urged on behalf of the

assessee would be doing violence to the language of section 48, clause (ii), to read the words ""the cost of acquisition of the capital asset"", in the

manner suggested on behalf of the assessee, and there was no conceivable reason for introducing such an unwarranted fiction. In pursuance to this

reasoning, the Division Bench observed as under (p. 458) :

... But this is a wholly erroneous approach in construing a statutory provision. The intention of the legislature must be gathered from the words

used; it is well settled that what is unexpressed by the legislature must be taken as unintended. We cannot presume a certain intention on the part of

the legislature and then bend the language of the section with a view to making it accord with such presumed intention. The contention of the

assessee also stands refuted by the language of section 55(2), clause (i). The property which is transferred could become the property of the

assessee only at one point of time. It could not become the property of the assessee as non-capital asset at one point of time and as capital asset at

another point of time. The argument of the assessee would require us to introduce a legal fiction also in section 55(2), clause (i). We could have to

assume that when property which was non-capital asset becomes capital asset, it is deemed to become the property of the assessee for the

purpose of section 55(2), clause (i). Such a construction would do violence to the language of section 55(2), clause (i), and would be clearly

impermissible on any recognised canon of construction. Then again it is apparent from sections 49, 51 and 55(3), that the words ''the cost of

acquisition of the capital asset'', ''the cost for which the asset was acquired'' and ''the cost for which the previous owner of the property acquired it''

are variously used by the legislature to denote the same idea and the reference is intended to be made only to the cost of acquisition of the property

regardless of the question whether it was capital asset or non-capital asset at the date of acquisition.

We do not think, therefore, that the first contention urged by Mr. Patel can be sustained.

As regards the alternative contention, we find ourselves unable to go into the question since no question has been referred to us though the

Tribunal, while dismissing the appeal, has directed the Income Tax officer to consider the benevolent circular issued by the Central Board of Direct

Taxes. The alternative contention urged before us, therefore, is not capable of being examined here.

The result, therefore, is that we answer both the questions in the affirmative, that is, in favour of the Revenue and against the assessee. There

would be no order as to costs in this reference.