Capital Asset Acquired by Operation of Law and its taxability
Q: Whether the Capital Gain tax is payable if the Asset if acquired by operation of Law( without paying anything) and not by way of Purchase or inheritance?
The rights of ownership of the land were, thus, acquired by the assessee by operation of law, namely, section 3 of the Punjab Occupancy Tenants (Vesting of Proprietary Rights) Act, 1952 and not by purchase or inheritance and, therefore, the assessee was not liable to pay any capital gains for the said land.
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax, Patiala
Rakesh Kumar Garg, J. – The Income-tax Appellate Tribunal, Chandigarh, vide order dated 30-4-1984 passed in RA No. 141 of 1983 arising out of ITA No. 760 of 1981 for the assessment year 1974-75 has referred the following question to this Court for its opinion:—
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that the assessee was not liable to pay capital gains tax?”
- The brief facts, out of which the present reference has arisen, are as under:—
The assessee-respondent filed a return declaring taxable income of Rs. 6,110 on 13-12-1977. In response to the notice under section 143(2), the assessee through his counsel attended the assessment proceedings. It is the case of the assessee that the assessee acquired the land through Court Decree dated 12-1-1972 and claimed that he got this land under the provisions of Punjab Occupancy Tenants Act, 1952 and no amount was paid in lieu of the acquisition of land. It was contended that the rights of ownership of the land were, thus, acquired by the assessee by operation of law, namely, section 3 of the Punjab Occupancy Tenants (Vesting of Proprietary Rights) Act, 1952 and not by purchase or inheritance and, therefore, the assessee was not liable to pay any capital gains for the said land. However, the ITO did not agree with the assessee and the amount received by the assessee from the acquisition of the said land was added to the income of the assessee. The said order for assessment was made under section 143(3) of the Income-tax Act on 30-6-1978.
- The assessee carried an appeal under section 250(6) of the Income-tax Act before the Commissioner of Appeals who vide his order dated 1-9-1981 allowed the appeal of the assessee holding that no taxable capital gains arise in this case because the capital assets did not cost anything to the assessee in terms of money but had been acquired merely by operation of law. The appeal filed by the revenue before the Income-tax Appellate Tribunal, Chandigarh was also dismissed vide order dated 30-7-1983. The appeal of the revenue was dismissed by the Tribunal relying upon its own decision in the case of Baldev Singh [IT Appeal Nos. 462 and 694 (ASR.) of 1979, dated 29-4-1981].
- It is relevant to mention here that Baldev Singh’s case (supra) was on identical facts and he had also acquired the land on the basis of same Court decree dated 31-1-1972 vide which the present appellant had acquired land.
- The revenue filed a reference application under section 256(1) of the Income-tax Act with a prayer for referring the questions mentioned in the application, said to be a question of law and arising out of Tribunal’s order dated 1-9-1981.
- It has been contended by the counsel for the revenue that the profits or gains arising from the acquisition of the assesses’s land is assessable under the head ‘Capital gains’. Counsel for the revenue has relied upon the judgment of the Gujarat High Court in the case of CIT v.Mohanbhai Pamabhai  91 ITR 393 and the Calcutta High Court judgment in the case of K.N. Daftary v. CIT  106 ITR 998 .
- We have heard learned counsel for the applicant and perused the record.
- It is useful to reproduce section 45 of the Income-tax Act, 1961 as it existed at the relevant time :
“Capital gains.—(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head ‘Capital gains’; and shall be deemed to be the income of the previous year in which the transfer took place.”
- After perusing the record and considering the various submissions made by the counsel for the revenue, this Court is unable to accept the argument raised by the counsel for the applicant-revenue. We find that the Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty 128 ITR 2941 has held with regard to capital gains that the charging section and the computation provision together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all it is evident that such a case was not entitled to fall within the charging section. It is further held that all the transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost. It must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head ‘Capital gains’ suggests that they include an asset in the acquisition of which no cost at all can be conceived.
- This Court has also followed the above ratio of law in the case of CIT v. New Suraj Transport Co. (P.) Ltd.  194 ITR 458 .
- A perusal of the facts of the present case would show that the assessee entered into an agreement with Sh. Surjan Singh vide agreement dated 14-2-1970 recognising him to be the occupancy Tenant in respect of certain land. A declaratory decree was subsequently passed by the Court on 31-1-1972 whereby agreement dated 14-2-1970 was given the Court’s sanction in terms of section 3 of the Punjab Occupancy Tenant’s (Vesting of Proprietary Rights) Act, 1952 in the following words :—
“In the terms of the statement of the parties and counsel for the parties present, decree for declaration declaring the plaintiff Nos. 1 to 4 to be the owners of land measuring 196 kanals 1 marla to the extent of ½ share jointly while plaintiff Nos. 5 to 6 to be the owners of the remaining half share more fully described in the heading of the plaintiff situated at Village Jamalpur Awana, Tehsil & Distt. Ludhiana is passed in favour of the plaintiff and against the defendant.”
Thus, the assessee became the owner of the land in respect of which he had earlier acquired only the tenancy rights. Thus, the assessee had acquired the ownership rights in the land by operation of law and not by purchase or inheritance. It is also useful to refer to the order of the Tribunal passed in ITA No. 462/ASR./1979 filed by Baldev Singh and ITA No. 694/ASR./1979 filed by the revenue against said Sh. Baldev Singh :—
“The case before us is one of a promise never to eject in view of the written agreement dated 14-2-1970. This agreement got approval of the Court of Senior Sub-Judge, Ludhiana as per order dated 31-1-1972 which we have abstracted supra. The historical background of the acquisition of the land by Sh. Surjan Singh also shows that there is no record of any payment made for the acquisition of the land. In any case, the assessee acquired the land in view of the right of occupancy etc. under section 8 of the Punjab Tenancy Act read with section 3 of the Punjab Occupancy Tenants (Vesting of Proprietary Rights) Act, 1952 without payment of anything. In other words, the cost of the acquisition of the land to the assessee was nil. When such a situation arises and an asset acquired by the assessee is sold, our view is that no capital gains is assessable to tax under the Act arising out of such a transaction.”
- From the above facts, it is clearly established that there is no record of any payment made for the acquisition of the land in question either by the assessee or his predecessor-in-interest. Therefore, the cost of acquisition in this case has been rightly taken as Nil. Even otherwise, the revenue has never taken stand to say that the cost of acquisition of the land at the hands of the assessee or his predecessor-in-interest was notNil and they had made any payment of compensation/price for the acquisition of the said land. Thus, the cost of the land as Nil at the hands of the assessee has been taken correctly by the Tribunal. Thus, in view of the authoritative pronouncements of the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty (supra), the Tribunal was right while dismissing the appeal of the revenue in the case of the assessee holding that the assessee was not liable to pay any capital gains tax.
- In view of the above, the question of law is answered in the negative and against the revenue. Thus, the reference is answered accordingly.