Commissioner of Income Tax vs Narendra N. Chauhan

M.S. Shah, J.—In this reference at the instance of the Revenue, the following question is referred for our opinion in respect of the assessment year 1975-76 :

"Whether, in law and on facts, the assessee is entitled to deduction of Rs. 23,000 in the computation of capital gain accrued to him on the transfer of the bungalow ?"

Mr. Narandas J. Chauhan purchased certain agricultural lands for Rs. 9,000 on July 3, 1954. He threw the said property in his Hindu undivided family on January 27, 1958. Thereafter the Hindu undivided family of Mr. Narandas J. Chauhan, the father of the assessee, started construction on a piece of the said land and spent Rs. 42,354. The assessee pressed for a partial partition which was effected on October 15, 1971. At that time, the total property of the Hindu undivided family of Mr. Narandas J. Chauhan was valued at Rs. 2,20,000. One-fifth share of the assessee came to Rs. 44,000. Sub-plot No. 2 admeasuring 1,347 sq. yards including the incompletely constructed bungalow fell to the lot of the assessee, but since the assessee''s share in the Hindu undivided family property at the time of partition had come to only Rs. 44,000, the assessee was required to pay Rs. 23,000 more to the Hindu undivided family of Mr. Narandas J. Chauhan for getting sub-plot No. 2 along with incompletely constructed bungalow which was valued at Rs. 67,000. The assessee accordingly got subplot No. 2 along with the incomplete bungalow. The assessee sold the said property for Rs. 1,42,000 on October 4, 1974. The assessee worked out the capital gain at Rs. 73,591 as per the following calculations :

(Rs.)

(Rs.)

(Rs.)

Less : Cost prices

1,42,000

Land value

1,855

Amount spent by HUF

42,354

44,209

Add : Amount payable to HUF as per release deed

23,000

Add : Amount paid to contractor

1,200

68,409

73,591

The Income Tax Officer allowed the claim of Rs. 1,200 paid to contractor, but rejected the claim for Rs. 1,855 being the proportionate cost of the land. The Income Tax Officer also rejected the claim of deduction of Rs. 23,000 which the assessee had paid as the additional cost over and above the assessee''s share in the Hindu undivided family property at the time of partial partition. In appeal, the Appellate Assistant Commissioner allowed deduction of Rs. 1,855 in the computation of capital gains, but rejected the assessee''s claim for deduction of Rs. 23,000 on the ground that the payment of Rs. 23,000 by the assessee to the Hindu undivided family of Mr. Narandas J. Chauhan was not a permissible deduction in view of the provisions of Section 49(1) of the Act, more particularly as the assessee had not made any improvement to the property which the assessee obtained at the time of partial partition.

The assessee carried the matter in appeal before the Tribunal and contended that the assessee had paid Rs. 23,000 to the Hindu undivided family of Mr. Narandas J. Chauhan in respect of the additional interest in the property so as to become a full owner of the property because at the time of partial partition the value of the property was put at Rs. 67,000 and since the assessee''s share in the property of the larger Hindu undivided family came to Rs. 44,000, the assessee would not have got full ownership right in the property in question without paying the additional amount of Rs. 23,000. The Tribunal accepted the assessee''s contentions and allowed the appeal holding that since the assessee had paid Rs. 23,000 for getting the additional interest in the property over and above the interest which the assessee got at the time of partial partition, that was the cost of acquisition to the assessee for the additional interest in the property. Hence, this reference at the instance of the Revenue.

We have heard Mr. Akil Kureshi, learned counsel for the Revenue and Mr. B. D. Karia, learned counsel for the respondent-assessee.

Mr. Kureshi submitted that since the assessee got the land in question being sub-plot No. 2 with incomplete construction thereon at the time of partial partition and ultimately sold the said property without making any improvement thereto, only the provision of Section 49(1)(i) was applicable which provides that where the capital asset became the property of the assessee on any distribution of assets on the total or partial partition of a Hindu undivided family, the cost of 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. Mr. Kureshi submitted that the said provision read with the Explanation thereto clearly provides that for the purpose of working out the capital gain earned by the assessee, the cost of acquisition of the land and the incompletely constructed bungalow to the Hindu undivided family of Mr. Narandas J. Chauhan was required to be taken as the cost of acquisition which was only Rs. 1,885 being the value of one-fifth of the land along with Rs. 42,354 being the amount spent by the larger Hindu undivided family of Mr. Narandas J. Chauhan and, therefore, Rs. 44,209 was the only cost of acquisition which was required to be considered while computing the capital gain made by the assessee at the time of selling the property in the year 1974. Mr. Kureshi, therefore, submitted that the entire amount of Rs. 23,000 allowed by the Tribunal was required to be disallowed as not a single rupee out of that amount could be considered as cost of acquisition in the hands of the Hindu undivided family of Mr. Naran-das J. Chauhan.

In the alternative, Mr. Kureshi submitted that even if the assessee''s contentions were to be accepted that he had paid Rs. 23,000 for getting the additional interest in the property over and above his share which the assessee obtained at the time of partial partition, the Tribunal erred in not considering that the assessee was entitled to have only proportionate cost of acquisition in the hands of the larger Hindu undivided family as the cost of acquisition for that portion of the property which the assessee obtained at the time of partial partition. To explain the same, learned counsel submitted that when the larger Hindu undivided family offered to the assessee the property in question valued at Rs. 67,000 against the assessee''s share worked out at Rs. 44,000 plus Rs. 23,000 as consideration for the additional interest in the property, what the larger Hindu undivided family really did was to give only two-thirds of the property in question to the assessee by way of the assessee''s share in the property of the larger Hindu undivided family and the assessee purchased the remaining one-third interest in the said property by paying Rs. 23,000. In the context of the provisions of Section 49(1)(i), the cost of acquisition of the said two-thirds property to the larger Hindu undivided family was two-thirds of Rs. 44,000, i.e., approximately Rs. 29,800 and, therefore, even if the assessee''s contentions were to be accepted, it would only mean that the assessee is entitled to take as the cost of acquisition in the hands of the larger Hindu undivided family Rs. 29,800 for the two-thirds share in the property (under Section 49(1)(i)) plus Rs. 23,000 as the cost of acquisition of the remaining one-third interest in the property (under Section 48 of the Act).

Mr. Kureshi, therefore, submitted that the cost of acquisition for the purpose of computing the capital gain in the hands of the assessee would have to be worked out on the aforesaid basis and the assessee cannot get deduction of the entire amount of Rs. 23,000.

On the other hand, Mr. B.D. Karia, learned counsel for the respondent-assessee, has submitted that the Tribunal has rightly allowed the entire claim of Rs. 23,000 as the cost of acquisition of the additional interest in the property over and above the interest which the assessee got by way of the assessee''s share in the property of the larger Hindu undivided family at the time of partial partition. It is submitted that the Appellate Assistant Commissioner had held that the value of the property allotted to the assessee at the time of partial partition was Rs. 44,209. There never was any dispute about the said cost of acquisition in the hands of the larger Hindu undivided family. The only substantial dispute raised by the Income Tax Officer was about the amount of Rs. 23,000 which the assessee had admittedly paid for acquiring the additional interest in the property in question over and above the property allotted to the assessee at the time of partial partition. It is further submitted that the question referred to this court for opinion is only in respect of the said amount of Rs. 23,000.

Moreover, against the order of the Income Tax Officer allowing deduction to the tune of Rs. 43,554 as the cost of acquisition of the asset allotted to the assessee at the time of partial partition, the Revenue had not made any grievance about the same at the hearing of the appeal before the Appellate Assistant Commissioner or before the Tribunal. Hence, it is not open to the Revenue now to contend that in the hands of the larger Hindu undivided family the cost of acquisition in respect of the interest which was allotted to the assessee at the time of partial partition was less than Rs. 44,209.

Having heard learned counsel for the parties, we are of the view that since at the time of partial partition the assessee was not entitled to get the entire property valued at Rs. 67,000 as the assessee''s share in the property of the larger Hindu undivided family and since the entire amount of Rs. 23,000 paid by the assessee to the larger Hindu undivided family pertained to the additional interest in the property, i.e., interest in addition to the interest allottable to the assessee at the time of partial partition quantified at Rs. 44,000, the Tribunal was right in allowing the said amount of Rs. 23,000 as cost of acquisition to the assessee for the additional interest u/s 48 of the Act. Obviously, this additional interest was not obtained by the assessee as a part of his share in the property of the larger Hindu undivided family at the time of partial partition. The provisions of Section 49(1)(i) are applicable to only that portion of the property which the assessee got as the assessee''s share in the property of the larger Hindu undivided family and not in respect of the property or interest which was in excess of such share.

As regards the alternative contention of Mr. Kureshi that if the assessee''s contention is accepted, there could be modification in the cost of acquisition of the property in the hands of the larger Hindu undivided family as the entire amount of Rs. 44,209 cannot be taken as the cost of acquisition in the hands of the larger Hindu undivided family in respect of the interest which was allotted to the assessee at the time of partial partition. Though the argument is interesting, we are not inclined to consider the same as the said submission runs counter to the stand taken by the Revenue at the time of assessment and also in the appeal which was filed by the assessee. In none of those proceedings or even before the Tribunal, the Revenue had contended that the cost of acquisition in the hands of the larger Hindu undivided family in respect of the interest allotted to the assessee at the time of partial partition was required to be calculated at any amount lower than the amount of Rs. 44,209 which was allowed by the authorities in favour of the assessee.

In view of the above discussion, we are of the view that the Tribunal was right in holding that the assessee was entitled to deduction of Rs. 23,000 in the computation of capital gain accrued to him as the cost of acquisition of the additional interest in the property in question over and above the interest which was allotted to the assessee as the assessee''s share in the property of the larger Hindu undivided family of Mr. Narandas J. Chauhan at the time of partial partition on October 15, 1971.

In view of the above, our answer to the question referred is in the affirmative, i.e., in favour of the assessee and against the revenue.

The reference accordingly stands disposed of with no order as to costs.