Bombay HC: Year of Indexation & Cost of Acquisition in case of bequeathed Property
Fact and Issue of the case
Petitioner is a company engaged in the business of development and re-development of various properties in the city of Mumbai. One Mrs. Dolly Jehangir Gazdar held an undivided ½ (one half) share in a piece of land admeasuring about 8071.64 square yards situated at Dr. Ambedkar Road (Sopari Baug Road) with the buildings standing thereon in Parel Sewri Division in BMC F/South Ward, Mumbai from the year 1972. The other ½ (one half) share in the said property belonged to her brother one Mr. Meherwan Nadirshaw.
Mrs. Dolly Jehangir Gazdar expired on 10th June 1982 leaving her last Will and Testament dated 20th June 1979. The Probate of her Will was granted by the Bombay High Court on 5th November 2004. Under the said Will, she had bequeathed her share in the said property to her aunt – Mrs. Rhoda Rustom Framjee and her brother – Mr. Meherwan Nadirshaw in equal shares. Accordingly, the undivided 1/4th share in the said property vested in Mrs. Rhoda Rustom Framjee from the year 1982. Mrs. Rhoda Rustom Framjee expired on 12th May 1992 leaving her last Will dated 3rd June 1977, whereunder she bequeathed all her estate including 1/4th share in the said property to her husband Mr. Rustom Framjee. Mr. Rustom Framjee expired on 17th September 2006 leaving behind two sons as his legal heirs namely, Mr. Sohrab Rustom Framjee and Mr. Pesh Rustom Framjee. As per the Will of Mr. Rustom Framjee dated 19th February 2006, he bequeathed his estate including his 1/4th share in the said property to his two sons in equal shares. Though no probate has been granted in respect of the Wills of Mrs. Rodha Rustom Framjee and Mr. Rustom Framjee, their only sons – Mr. Sohrab Rustom Framjee and Mr. Pesh Rustom Framjee have accepted the said Wills and acted upon the same.
Accordingly, Mr. Pesh Rustom Framjee (hereinafter referred to as “seller”) became owner of 1/8th share in the said property. Petitioner had decided to buy that 1/8th share of seller and since Mr. Pesh Rustom Framjee (seller) was a non-resident in so far as the Income Tax Act, 1961 (the Act) is concerned and he had not filed his return of income for any of the earlier years as there was no taxable income in India in those years in his hands, petitioner filed an application before respondent No.1 under Section 195(2) of the Act requesting him to issue a LOW tax rate Certificate for Deduction of Tax at Source in respect of consideration for purchase of immovable property from seller. By an order dated 21st December 2010, respondent No.1 directed petitioner to deduct tax of Rs.28,74,100/-. It is this order, which is impugned in this petition. Admittedly, petitioner has deposited this amount of Rs.28,74,100/- with the Revenue even though it is petitioner’s case that the amount directed to be deducted as tax at source has been incorrectly calculated and according to petitioner, only a sum of Rs.74,523/- was the tax that had to be deducted.
According to petitioner, under Section 49(1)(ii) of the Act, cost of acquisition of the said property in the hands of seller is deemed to be the cost for which the said property was acquired by late Mrs. Dolly Jehangir Gazdar. It is also petitioner’s case that under clauses (29A) and (42A) of Section 2, the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee are also to be included in the period of holding of seller for ascertaining whether the said property is held by him as a short term capital asset or as a long term capital asset. Therefore, in its application under Section 195(2) of the Act, petitioner annexed a copy of draft computation of long term capital gains of the seller in respect of the transfer of the said property. Petitioner took the benefit of the option provided in the provisions of Section 55(2)(b)(ii) of the Act, which provides that where a capital asset became the property of the assessee by any of the modes specified in Section 49(1) and the capital asset became the property of the previous owner before the 1st day of April 1981, cost of acquisition 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. Based on the scheme of the Act as is provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, petitioner claimed that indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981- 82 Transfer of the property to petitioner had taken place in the financial year 2010-11.
The only point of dispute between petitioner and respondent No.1 on the issue of computation of capital gains is with respect to the year from which benefit of indexation is to be granted. According to petitioner, indexation should be granted from financial year 1981-82 as a previous owner, who had acquired the property by any means other than those specified in Section 49 was late Mrs. Dolly Jehangir Gazdar, who had acquired her share in the said property in the year 1972, i.e., before 1981, while, respondent No.1 has granted such indexation from financial year 1992-93.
Observation of the court
In the affidavit in reply, respondent is of course justifying the action of respondent No.1 in passing the order dated 21st December 2010 impugned in the petition. Respondent is also admitting that a Full Bench of ITAT has taken a view, which is contrary to the view taken by respondent No.1. However, according to respondent, the department is contesting the order of ITAT and the issue has not been settled by the Hon’ble High Court. Time and again, Courts have held that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department or is the subject matter of an appeal cannot be a ground for not following it unless its operation has been suspended by a competent court. This has been reiterated by this Court in its order dated 31st January, 2022 Karanja Terminal & Logistic Private Limited Vs. Principal Commissioner of Income Tax(unreported).
In any case, the contest of the department against the order of ITAT in DCIT Vs. Manjula J. Shah has come to an end by a judgment of this Court in Commissioner of Income Tax Vs. Manjula J. Shah3. This Court confirmed the findings of the Full Bench of ITAT and while dismissing the appeal held, (i) that when the Legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will the capital gains under section 48 have to be computed applying the deemed fiction. Therefore, the fiction contained in Explanation 1(i)(b) to section 2(42A) has to be applied in determining the indexed cost of acquisition under section 48; (ii) that by applying the deeming provision contained in Explanation 1(i)(b) to section 2(42A) the assessee was deemed to have held the asset from January 29, 1993 to June 30, 2003, by including the period for which the asset was held by the previous owner and, accordingly, held liable for long-term capital gains tax. While computing the capital gains, the indexed cost of acquisition had to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset.
Therefore, the cost of acquisition of the said property in the hands of seller is deemed to be the cost for which the said property was acquired by late Mrs. Dolly Jehangir Gazdar and the period of holding of late Mrs. Dolly Jehangir Gazdar, Mrs. Rhoda Rustom Framjee and Mr. Rustom Framjee are also to be included in the period of holding of seller for ascertaining the period for which the property was held by the seller. Based on the Scheme of the Act, as provided in Section 49(1)(ii), clauses (29A) and (42A) of Section 2 and Section 55(2)(b)(ii) of the Act, indexation of the cost of acquisition under the second proviso to Section 48 should be available from the financial year 1981-1982. Therefore, on this ground alone, we will have to grant prayer clause (a) as quoted earlier.
As regards prayer clause (b) quoted earlier i.e., refund of excess tax paid, an affidavit in rejoinder has been filed by petitioner through one Rohan J. Mehta, affirmed on 13th December 2017 to which is annexed a copy of Form 26AS of seller, a copy of the computation of income of seller for Assessment Year 2011-12 and a copy of an assessment order dated 24th February, 2014 in the case of seller for Assessment Year 2011-12 along with notice of demand and computation form. From the documents annexed to the rejoinder, it appears that seller has taken the indexed cost of acquisition at Rs.2,46,15,367/- for the said property and accordingly determined the capital gains at Rs.53,84,633/- (Consideration of Rs.3,00,00,000 – Rs.2,46,15,367). He has not offered to tax any capital gains as he has invested Rs.1,00,00,000/- in investments covered by Section 54EC of the Act. Seller has also not claimed any credit in respect of the TDS of Rs.28,74,100/- paid by petitioner.
In his computation of income, the seller has claimed TDS credit of Rs.31,787/- only, which relates to tax deducted in respect of interest earned by him from bank. From the assessment order annexed to the affidavit in rejoinder, it does appear that the Revenue had selected the return of the seller for scrutiny and an assessment order dated 24th February 2014 under Section 143(3) of the Act has been passed. In the said order, department has accepted the capital gains at Rs.3,85,613/-, and in the absence of any claim of TDS of Rs.28,74,100/-, has not allowed any credit or refund of the same. In fact, the department has raised the demand of Rs.91,360/-as seller’s tax along with interest under Section 234B of the Act. There is no sur-rejoinder filed by department to this affidavit in rejoinder, denying any of the averments in the affidavit though more than four years have passed since rejoinder was filed in the Court on 15th December, 2017 when time was granted on that date to respondents to consider the affidavit in rejoinder. At the same time, it is not clear whether the seller has paid the tax amount of Rs.91,360/- demanded from him pursuant to the assessment order dated 24th February, 2014.
At this point of time, we would, therefore, permit the department to retain this amount (Rs.91,360/-) and return the balance out of Rs.28,74,100/-. The department will also refund the proportionate interest of Rs.43,112/- after recalculating, by taking capital gains that should have been deposited at Rs.3,85,613/- and not Rs.1,39,51,463/-. The next point which has to be given attention to is the interest on refund and the date from which the interest has to be paid. A similar point has been considered by the Apex Court in Union of India Vs. Tata Chemicals Limited. Therefore, interest shall be paid at the rate prescribed under Section 244A(1)(b) for the period from the date of payment of tax, i.e., 7th January, 2011.
The Court disposed the appeal and ruled in favour of the petitioner