Commissioner of Income Tax vs Theatre Sri Rangaraja

R. Jayasimha Babu, J.—The assessment year is 1976-77. The following question has been referred to us for consideration at the instance of

the Revenue:

Whether, having regard to the Explanation to Section 49(1) of the Income Tax Act, 1961, and the fact that the asset became the property of Shri

Sourirajulu on the distribution of assets on the dissolution of the firm within the meaning of Sub-section (1)(iii)(b) thereof, the Appellate Tribunal is

correct in law in coming to the conclusion that the sum of Rs. 1 lakh paid by the said Sri Sourirajulu at the time of taking over the business as

proprietary business would form part of the cost of acquisition for the purpose of computing the capital gains in this case ?

Theatre Sri Rangaraja, Palani, was originally owned by a firm consisting of twelve partners, of which Sourirajulu was one. On March 30, 1971,

there was a reconstitution of the firm and the number of partners continuing were only two out of the original twelve. One of the continuing partners

retired on October 1, 1972, leaving Sourirajulu to continue the business on his own. While so retiring, the other retiring partner received from

Sourirajulu a sum of Rs. 1 lakh. Subsequently, Sourirajulu entered into a partnership with two of his adult sons on April 1, 1973, and that firm of

Sourirajulu and Sons sold the theatre and derived a capital gain from that sale.

For the purpose of computing the capital gain it was claimed by the firm that the sum of Rs. 1 lakh paid by Sourirajulu to the retiring partner on

October 1, 1972, should also be treated as part of the cost of acquisition, in addition to the cost that had been originally incurred by the earlier firm

for acquiring the theatre.

That claim though rejected by the Assessing Officer as also by the Commissioner (Appeals), having been allowed by the Tribunal, the reference

has been brought before us by the Revenue.

Section 49 of the Act deals with the cost of certain modes of acquisition. The relevant part of the provision which needs to be examined for the

purpose of this case is Section 49(1) and the Explanation thereunder, which reads as follows :

Cost with reference to certain modes of acquisition.---(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 ;

(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 first day of April, 1987, or

(c) on any distribution of assets on the liquidation of a company, or

(d) under a transfer to a revocable or irrevocable trust, or

(e) under any such transfer as is referred to in Clause (iv) or Clause (v) or Clause (vi) or Clause (via) 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 acquisition of the asset shall be deemed to be 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 any 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.

It is evident from the Explanation that where the previous owner of an asset which was sold had himself acquired it by any of the modes set out

in Section 49(1) in its Sub-clauses (i) to (iv) it is the cost incurred by the owner who had owned the asset prior to the previous owner that is

required to be taken into account and not the cost incurred by the previous owner at the time he received the asset in any of the modes set out in

Sub-clauses (i) to (iv) of Section 49(1). In this case, Sourirajulu paid a sum of Rs. 1 lakh to the retiring partner in 1972 at the time the firm was

dissolved. The cost of the acquisition, therefore, is not to be computed by taking that one lakh rupees into account but by only looking to the cost

of the acquisition to the firm which was dissolved. The Tribunal was clearly in error in holding otherwise. The question referred to us is, therefore,

answered in favour of the Revenue and against the assessee.