No indexation for inherited tenancy rights under Income Tax Act

Dive into the details by reading the original court order's judgement here.

Case Name:

Dharmakumar C. Kapadia & Anr. Vs Assistant Commissioner of Income Tax & Anr.(High Court of Bombay)

Income Tax Appeal No.239 of 2016

Key Takeaways:

1. Inherited tenancy rights fall under Section 55(2)(a) of the Income Tax Act, not Section 55(2)(b).

2. Indexation benefits available under Section 55(2)(b) don't apply to tenancy rights.

3. The cost of acquisition for inherited tenancy rights isn't necessarily nil; it should be determined based on the previous owner's cost or fair market value.

Issue:

Whether the provisions of Section 55(2)(b)(ii) of the Income Tax Act apply to the transfer of inherited tenancy rights acquired before April 1, 1981, allowing the substitution of fair market value as on April 1, 1981, as the cost of acquisition?

Facts:

- Two brothers (the appellants) sold their tenancy rights in a property at 210, Walkeshwar Road, Bombay for Rs.3.17 Crores.

- They inherited these rights from their father, who acquired them before April 1, 1981.

- When calculating capital gains, they tried to use indexation based on the fair market value as of April 1, 1981.

- The Assessing Officer denied this benefit and treated the cost of acquisition as 'Nil'.

- The case went through appeals at the CIT(A) and the Income Tax Appellate Tribunal before reaching the High Court.

Arguments:

Appellants:

1. Section 55(2)(b)(ii) should apply to inherited tenancy rights acquired before April 1, 1981.

2. They should be allowed to use the fair market value as of April 1, 1981, as the cost of acquisition.

3. Alternatively, if the cost can't be determined, no capital gains should be charged.

Tax Authorities:

1. Section 55(2)(a) specifically deals with tenancy rights and should apply here.

2. The cost of acquisition should be treated as 'Nil' as per this section.

Key Legal Precedents:

1. CIT v/s. Tata Chemicals 256 ITR 395 - The court cited this case to state that issues not raised before the Tribunal cannot be brought up for the first time in the High Court.

Judgement:

1. The High Court dismissed both appeals

2. It held that Section 55(2)(a) applies to tenancy rights, not Section 55(2)(b).

3. The indexation benefit available under Section 55(2)(b) doesn't apply to tenancy rights.

4. However, the court agreed with the Tribunal that the cost of acquisition isn't necessarily nil for inherited tenancy rights.

5. The case was sent back to the Assessing Officer to determine the cost of acquisition based on Section 55(3) of the Act.

FAQs:

Q1 What's the main difference between Section 55(2)(a) and 55(2)(b) in this context?

A1: Section 55(2)(a) specifically deals with assets like tenancy rights, while 55(2)(b) is a residuary clause for other capital assets.

Q2: Does this mean the cost of acquisition for inherited tenancy rights is always nil?

A2: No, the court clarified that the cost should be determined based on the previous owner's cost or fair market value when they acquired it.

Q3: Can the appellants still challenge the Assessing Officer's new calculation? A3: Yes, the court mentioned that the appellants can challenge the new order before the appropriate Appellate Authorities.

Q4: What's the significance of April 1, 1981, in this case?

A4: It's a key date in the Income Tax Act for determining the fair market value of certain assets for indexation purposes, but the court ruled it doesn't apply to tenancy rights in this case.

1. These two Appeals under Section 260­A of the Income Tax Act, 1961 (the Act), challenge the common order dated 30th June, 2015 passed by the Income Tax Appellate Tribunal (the Tribunal). The common impugned order dated 30th June, 2015 is in respect of Assessment Year 2007­-08. The Appellants are brothers.

2. The Appellants in both the appeals urge the following identical questions of law, for our consideration:

“(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal ought to have held that the provisions of section 55(2)(b)(ii) applied to the transfer of tenancy rights inherited by the Appellant which were acquired by his father prior to April 01, 1981 and hence he was entitled to substitute the fair market value of the said asset as on April 01, 1981 as its cost of acquisition?

(b) In the alternative and without prejudice to the above, whether the Tribunal ought to have held that in the absence of ascertainable cost of acquisition of the tenancy rights in the said property, as section 55(2) had no application, no capital gains could be charged to tax in respect of transfer of the same?”

3. During the subject Assessment Year, the Appellants had sold their tenancy rights in respect of the property at 210, Walkeshwar Road, Bombay for Rs.3.17 Crores. The Appellants while offering their share of income on sale of their tenancy rights under the head 'capital gains', sought indexation of the cost of acquisition i.e. the fair market value of the property as on 1st April, 1981. The Assessing Officer denied the benefit of indexation in view of Section 55(2) (a) of the Act and treated the cost of acquisition of tenancy rights as 'Nil', while computing capital gains in case of both the Appellants .

4. Being aggrieved, both the Appellants carried the issue in Appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the CIT(A) by two separate orders dated 21st January, 2011 dismissed both the appeals. This, by upholding the Assessment Orders whilst holding Section 55(2)(b) of the Act as sought to be invoked by the Appellants, will not have any application in respect of sale of tenancy rights.

5. Being aggrieved, both the Appellants filed further appeals to the Tribunal. The Tribunal by the common impugned order held that the cost of acquisition of the tenancy rights which had been acquired prior to 1st April, 1981, cannot be extended the benefit of indexation as on 1st April, 1981, available under Section 55(2)(b) of the Act. However, it held that even in case of tenancy rights, the cost of acquisition to its previous owner has to be determined in terms of Section 55(3) of the Act. Thus, for the limited purposes of determining the cost of acquisition of the tenancy to the previous owners from whom the Appellants had acquired rights in the tenancy by inheritance from their father, the issue was restored to the Assessing Officer.

6. Before dealing with the question proposed for our consideration, it would be appropriate to reproduce the relevant provisions which have a bearing on this appeal.

“Mode of computation:­

48:­ The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:­

(i) expenditure incurred wholly and exclusively in connection with such transfer,

(ii) the cost of acquisition of the asset and the cost of any improvement thereto.”

“Cost with reference to certain modes of acquisition. 49(1) where the capital asset became the property of the assessee­ (iii) (a) by succession, inheritance or devolution or the cost of acquisition of the asset 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.

Explanation .... ... “ Meaning of adjusted” “cost of improvement” and “cost of acquisition

(2) For the purposes of sections 48 and 49, cost of acquisition:­ (a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business ] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business[or profession], tenancy rights, stage carriage permits or loom hours, ­

(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

(ii) in any other case [not being a case falling under sub­clauses (i) to (iv) of sub­section (1) of section 49], shall be taken to be nil.”

(b) in relation to any other capital asset ­

(ii) where the capital asset became the proper of the assessee by any of the modes specified in [sub­section (1)of ] section 49, and the capital asset became the property of the previous owner before the [1st day of April, [1981]], means the cost of the capital asset to the previous owner or the fair market value of the asset on the [1st day of April [1981]], at the option of the assessee;

(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.”

7 Re Question (a):­

(i) In terms of Section 48 of the Act, the income taxable under the head 'capital gains' is to be computed after deducting from the full value of consideration received on sale of capital asset, the cost of acquisition and improvement of the asset. Section 49 of the Act provides the manner of computing the cost of capital asset obtained by certain modes of acquisition. In this case, both the Appellant­ Assessee have acquired the capital asset i.e. tenancy rights by inheritance i.e. from their father. Thus, the cost of acquisition of an asset is to be computed in terms of Section 49(1) (iii) (a) of the Act. It provides that the cost of acquisition, would be deemed to be the cost for which the previous owner of the property acquired as increased by the cost of improvement.

(ii) Section 55(2) (a) of the Act, deals with a capital assets, being in the nature of tenancy rights as in this case. It provides that the cost of acquisition would be either the cost of purchase price by assessee or in any other case, it would be taken as nil, excluding capital assets such as tenancy which has been acquired by succession or inheritance.

(iii) Section 55 (2)(b) of the Act is a residuary clause dealing with the cost of acquisition of the capital assets which are not covered by Section 55(2)(a) of the Act. Thus, capital asset in this case being tenancy rights is covered by Section 55(2)(a) of the Act. Therefore, the Appellant cannot avail of Section 55(2)(b) of the Act. It is in the abovecontext that the impugned order holds that the indexation by substituting cost of capital assets to the previous owners who acquired the property before 1st April, 1981 by the market value as on 1st April, 1981 which is specifically referred to in Section 55 (2)(b) (ii) of the Act, would have no application to determine the cost of acquisition of tenancy rights which was a subject matter of sale.

(iv) This view of the Tribunal, is a self evident position on plain reading of the provisions. Therefore, this question would not give rise to any substantial question of law. Thus, not entertained.

8 Re Question (b):­

(i) It is an accepted position before us that no submissions has been urged by the Appellant­Assessee before the Tribunal on the issue raised in this question. In the absence of issue being urged before the Tribunal, as has been held by our Court in CIT v/s. Tata Chemicals 256 ITR 395, it is not open to urge this issue for the first time before this Court.

(ii) In the above view, question (b) does not give rise to any substantial question of law. Thus, not entertained.

9. It is to be noted that the Tribunal after holding that the cost of acquisition of tenancy, cannot be substituted by the fair market value as on 1st April, 1981, restored the issue to the Assessing Officer for the limited purposes to determine the cost of acquisition. This, in terms of Section 55(3) of the Act i.e. cost of acquisition to the previous owners or the market value on the date on which the capital asset become the property of the previous owner for the purposes of determining the income chargeable under the head 'capital gain' in respect of the sale of tenancy rights.

10 Mr. Joshi, learned Counsel for the Respondent in support of the Appeal, states that an order giving effect to the impugned order has been passed by the Assessing Officer in one case and is likely to be passed soon even in the other case. The Appellants seek liberty to challenge the same before the Appellate Authorities under the Act. We see no impediment in the Appellants challenging the order passed by the Assessing Officer, before the Appellate Authorities, consequent to the remand by the impugned order of the Tribunal under the Act and in accordance with law. No liberty for the same is required.

11 Accordingly, both the Appeals are dismissed. No order as to costs.

(SANDEEP K. SHINDE,J.) (M.S.SANKLECHA,J.)