Commissioner of Income Tax vs S. Hoshnak Singh (Huf)

The following question of law has been referred for the opinion of this court by the Income Tax Appellate Tribunal, Amritsar Branch, Amritsar (hereinafter referred to as, "the Tribunal"), arising out of its order dated 8-7-1992, in I. T. A. No. 428(ASR/1987), in respect of the assessment year 1972-73 :

Whether, on the facts and in the circumstances of the case, the Tribunal has been in error in upholding the Commissioner (Appeals)''s decision that the capital gains of Rs. 6,27,614 and related interest of Rs. 27,649 arising out of the acquisition of the agricultural lands situated within the municipal limits of Pathankot did not give rise to any capital gain taxable under the Income Tax Act, 1961

The assessee owned land which was allotted to him in lieu of land left in 2 Pakistan. The said land was acquired by the Government, which was sought to be taxed for capital gains on transfer of land. The Commissioner (Appeals) accepted the claim of the assessee on the ground that the assessee had not incurred any cost of acquisition and this view was upheld by the Tribunal, relying upon the judgment of the Hon''ble Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, .

In Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , the Hon''ble Supreme 3 court held that for charging tax under the head "Capital gains", the transaction must fall within the computation provisions of Section 48 of the Act. Otherwise, the transaction must be regarded as never intended to be subject to charge. In that case, the question was whether a firm was liable to pay capital gains on sale of its goodwill. It was held that consideration received for such a sale could not be subjected to capital gains as the cost of acquisition of goodwill was incapable of being determined.

In the present case, the question is whether income from capital gains 4 was not liable to be subjected to tax on the same principle. As far as goodwill is concerned, the same is built up over a period of time while the cost of land is not incapable of being ascertained. It cannot be held that there is no cost of acquisition.

Agricultural land is a capital asset u/s 2(14) of the Act. Its 5 acquisition is transfer of a capital asset and is liable to tax.

The judgment in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, was distinguished by the Hon''ble Supreme Court in A.R. Krishnamurthy and Another Vs. Commissioner of Income Tax, Madras, , it was observed (page 421) :

The value of leasehold rights in the cost of acquisition of landbeing determinable, the computation provisions under the Act areapplicable and Section 45 would be attracted. In Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , the question was whether thetransfer of the goodwill of a newly commenced business can give riseto a capital gain taxable u/s 45 of the Act. This courtanswered the question in the negative. Referring to the charging section and the computation provisions under the Act, this court heldthat none of those provisions suggest the inclusion of an asset underthe head ''Capital gain'', in the acquisition of which no cost at all canbe conceived. Goodwill generated in an individual''s business washeld to be an asset in which no cost element can be identified orenvisaged. It was also held that the date of acquisition of the asset is amaterial factor in applying the computation provisions pertaining tocapital gains and in the case of self-generated goodwill, it is notpossible to determine the same. The third reason for holding that thegoodwill generated in a newly commenced business cannot bedescribed as an ''asset'' within the terms of Section 45 of the Act wasthat it is impossible to determine its cost of acquisition. None of thethree reasons given by this court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, are applicable in the present case. We have held that thecost of acquisition of leasehold rights can be determined. The date ofacquisition of the right to grant lease has to be the same as the date ofacquiring the freehold rights. The ratio of Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, is thus not attracted to the question involvedin the present case....

The same view was taken by the Hon''ble Supreme Court in Commissioner of Income Tax, Mumbai Vs. D.P. Sandu Bros. Chembur (P) Ltd., . It was observed (page 6) :

In A.R. Krishnamurthy and Another Vs. Commissioner of Income Tax, Madras, this court held that it cannot be said conceptually that there is no cost of acquisition of grant of the lease. It held that the cost of acquisition of leasehold rights can be determined. In the present case however, the department''s stand before the High Court was that the cost of acquisition of the tenancy was incapable of being ascertained. In view of the stand taken by the department before the High Court, we uphold the decision of the High Court on this issue.

Were it not for the inability to compute the cost of acquisition u/s 48, there is, as we have said, no doubt that a monthly tenancy or leasehold right is a capital asset and that the amount of receipt on its surrender was a capital receipt. But because we have held that Section 45 cannot be applied, it is not open to the department to impose tax on such capital receipt by the assessee under any other section....

In the present case, the plea of the assessee was that the cost of acquisition of land was nil and not that the cost of land could not computed. On this ground alone, it could not be held that capital gain was not liable to be taxed.

However, from a perusal of the order of assessment, we find that the 9 assessee was allotted the land in question before 1-3-1970, i.e., the date on which agricultural land situated within the municipal limits was declared to be a capital asset. We have already considered a similar issue as far as the valuation of the capital assets in case the same is owned prior to 1-3-1970, in the case of CIT v. Gurcharan Singh (2007) 292 ITR 387, I. T. R. Nos. 34 and 35 of 1990, decided on 4-7-2006.

Accordingly, for the reasons stated therein, though it is held that capital 10 gain arising out of acquisition of land in the present case would be exigible to capital gain tax under the Act, however, for the purpose of calculation of capital gain tax, the cost has to be determined as on 1-3-1970.

Reference is disposed of accordingly.