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B.N Vyas (Guardian Of Minor, B.B Vyas) v. Commissioner Of Income-Tax
Structured Summary of the Opinion
Factual and Procedural Background
The assessee sold certain lands in the assessment years 1971-72 and 1972-73 (previous years ending March 31, 1971 and March 31, 1972). The lands were received by the assessee as a gift from his father, Shri N. N. Vyas, in July 1966. The previous owner had acquired the lands in 1961 and they were permitted to be put to non-agricultural use by the Collector under section 65 of the Land Revenue Code on March 12, 1962. For computing capital gains the assessee adopted Rs. 9 per sq. yard as the cost of acquisition (being the market value on the date of the gift). Using that basis, the assessee computed capital gains of Rs. 8,875 for 1971-72 and Rs. 20,499 for 1972-73.
The Income-tax Officer accepted the assessee's computation. The Commissioner of Income-tax disagreed, holding that the Income-tax Officer should have adopted the actual cost of acquisition in the hands of the previous owner (Shri N. N. Vyas) and also pointing out an incorrect deduction under section 80T (allowed at 45% instead of 35% for 1972-73). The Commissioner issued a show-cause notice under section 263 of the Income-tax Act and, by order dated July 25, 1975, directed revision: he held that the cost of acquisition must be determined under section 49(1) and directed correction of the section 80T deduction.
The assessee appealed to the Income Tax Appellate Tribunal (the Tribunal). By its order dated July 9, 1976, the Tribunal held that section 49 applied and that the cost of acquisition was the cost at which the previous owner had acquired the lands (thus rejecting the assessee's contention that the market value at the date of gift should be used). The Tribunal did note the assessee's alternative contention that the cost should be taken as the market value on the date when the land was permitted to be used for non-agricultural purposes (March 12, 1962), and observed that this alternative contention was prima facie supported by Central Board of Direct Taxes Instruction No. 88 dated August 1, 1969; however the Tribunal did not accept the alternative contention and dismissed the appeal, directing the Income-tax Officer to consider the circular in determining the previous owner's cost.
Two questions were referred to the court for its opinion by the assessee (as set out below).
Legal Issues Presented
- 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 a 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?
Arguments of the Parties
Assessee's Arguments
- Section 49 did not apply because, when the previous owner purchased the lands, they were agricultural lands and thus not "capital assets" as defined in section 2(14); they became capital assets only when permitted to be put to non-agricultural use on March 12, 1962. Therefore, the cost of acquisition for computing capital gains should not be the original cost in the hands of the previous owner but the market value on the date of the gift (July 1966), which the assessee had taken as Rs. 9 per sq. yard (and which the Income-tax Officer accepted).
- The decision in Ranchhodbhai Bhaijibhai Patel v. CIT ([1971] 81 ITR 446) was, according to the assessee's counsel (Mr. Patel), not applicable because that decision concerned conversion of use by the same assessee and not computation in a case of special mode of acquisition (i.e., acquisition by gift from a previous owner).
- Alternatively, relying on Instruction No. 88 dated August 1, 1969 (CBDT circular), the assessee contended that the cost of acquisition should be taken as on the date when the land was allowed non-agricultural use (March 12, 1962), and argued the Tribunal should have accepted this alternative contention.
Revenue/Commissioner's Arguments
- The Income-tax Officer had erred in accepting the assessee's market-value-on-gift basis; the cost of acquisition should be the actual cost at which the previous owner acquired the lands (i.e., the cost in the hands of Shri N. N. Vyas), pursuant to section 49(1).
- There was an additional error in the assessment for 1972-73 in allowing a deduction under section 80T at 45% instead of 35%, which needed correction.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 | Interpretation of cost of acquisition where agricultural land is subsequently converted to non-agricultural use; that cost of acquisition refers to the cost when the property was acquired and does not permit treating the property as having two separate acquisitions for non-capital and capital character. | The court held that the Ranchhodbhai Patel decision was applicable and relied on its reasoning to reject the assessee's contention that section 49 could not apply because the land was not a capital asset at the time the previous owner acquired it. The court quoted the Division Bench's reasoning and used it to sustain the Tribunal's approach that cost is to be taken as the previous owner's cost. |
Court's Reasoning and Analysis
The court examined the assessee's primary contention that section 49 does not apply because the land was not a capital asset at the time of acquisition by the previous owner. The court found this contention unsustainable.
The court observed that the Division Bench decision in Ranchhodbhai Patel's case, though decided in the context of conversion of use by the same assessee, had referred to section 49 as part of the integrated scheme for computation of capital gains. The Division Bench's reasoning, quoted in the opinion, emphasized these points:
- The property is acquired only once by a given assessee; its character may change (from non-capital to capital) but it cannot be treated as having been acquired twice at different times for the same assessee.
- To treat the cost of acquisition as differing based on a later change of character (i.e., to equate cost to market value on date of conversion or a different date) would introduce an unwarranted legal fiction and would do violence to the language of the statutory provisions (section 48 and section 55(2)(i) as discussed in Ranchhodbhai Patel).
- The legislature uses varied phrases such as "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" (in sections 49, 51 and 55(3)) to denote the same idea: reference to the cost of acquisition of the property regardless of whether it was a capital asset at the date of acquisition.
Applying that reasoning, the court concluded that section 49 applies even where the asset was not a capital asset at the time the previous owner acquired it; the cost for computation of capital gains is the cost at which the previous owner acquired the property.
Regarding the assessee's alternative contention (that cost should be market value on the date of permission for non-agricultural use, supported by CBDT Instruction No. 88 of August 1, 1969), the court stated that it could not examine this alternative contention because no question on that specific point had been referred to the court for opinion, despite the Tribunal having directed the Income-tax Officer to consider the circular. Thus the alternative contention was held to be not capable of being examined by the court in this reference.
Holding and Implications
Holding: Both questions referred were answered in the affirmative — in favour of the Revenue and against the assessee.
Direct Effects and Implications:
- The court affirmed that section 49 applies in the facts of this case and that the cost of acquisition for computing capital gains is the cost at which the previous owner acquired the lands (i.e., the previous owner's cost must be used rather than the market value on the date of the gift).
- The court did not decide the assessee's alternative contention based on CBDT Instruction No. 88 (market value as on the date when permission to convert use was granted) because that issue was not referred to the court for opinion; the Tribunal had only directed the Income-tax Officer to consider the circular.
- There was no order as to costs in the reference.
The opinion does not discuss any broader precedent-setting implications beyond applying and endorsing the reasoning in the earlier Ranchhodbhai Patel decision.
1. At the instance of the assessee, the following two questions are referred to us for our opinion :
1. 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 ?
2. 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 ?"
2. 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 under section 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.
3. 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 under section 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 under section 263 of the Income-tax Act, 1961.
4. 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 under section 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 under section 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 under section 80T in respect of the assessment year 1972-73.
5. 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.
6. It is on the above facts and circumstances that the two (questions set out above have been referred to us for our opinion.
7. 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 under section 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 v. ClT [1971] 81 ITR 446, 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.
8. We are afraid that the contention of the learned advocate for the assessee that the decision of this court in Ranchhodbhai Patel's case [1971] 81 ITR 446, 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, Patel's case [1971] 81 ITR 446, 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."
9. We do not think, therefore, that the first contention urged by Mr. Patel can be sustained.
10. 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.
11. 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.
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