1992 (4) TMI 25 - HC - Income Tax

Agricultural land deemed 'capital asset' in 1970, but cost computed based on 1954 value.

The court affirmed that the agricultural land in question became a 'capital asset' on April 1, 1970, following an amendment to the Income-tax Act, 1961. ... Capital Gains, Deduction Issues Involved:1. Whether the agricultural land in question assumed the character of 'capital assets' for the first time on April 1, 1970, by virtue of the amendment of section 2(14)(iii) of the Income-tax Act, 1961.2. Whether the cost of the asset as on April 1, 1970, should be adopted for the computation of capital gains.Issue-wise Detailed Analysis:1. Character of Agricultural Land as 'Capital Assets':The court examined whether the agricultural land in question became a 'capital asset' for the first time on April 1, 1970, due to the amendment of section 2(14)(iii) of the Income-tax Act, 1961, by the Finance Act, 1970. The court noted that before April 1, 1970, the definition of 'capital asset' excluded agricultural land in India. The amendment brought by the Finance Act, 1970, included certain types of agricultural land within municipal or cantonment limits or within 8 kilometers of such limits as 'capital assets.' The court found no dispute that the agricultural lands held by the assessee fell within these amended provisions. Therefore, the court affirmed that the agricultural land in question assumed the character of 'capital assets' on April 1, 1970, as per the amendment.2. Computation of Capital Gains:The second issue concerned how to compute capital gains for an asset that was not a capital asset at the time of acquisition but became one subsequently. The Income-tax Appellate Tribunal had held that the cost of acquisition should be the market value as on April 1, 1970, the date the land became a capital asset. The court, however, disagreed with this view.The court emphasized that under section 45 of the Act, capital gains tax is charged on profits or gains from the transfer of a 'capital asset.' The computation of capital gains is governed by section 48 read with section 55 of the Act. Section 48 requires the deduction of the cost of acquisition from the full value of the consideration received. The court noted that the cost of acquisition does not change based on whether the asset was a capital asset at the time of its acquisition. Section 49 specifies that in cases of partition of a Hindu undivided family, the cost of acquisition is the cost to the previous owner, not the market value on the date it became a capital asset.The court referred to the Kerala High Court's decision in CIT v. Smt. M. Subaida Beevi and the Gujarat High Court's decision in Ranchhodbhai Bhaijibhai Patel, which supported the view that the cost of acquisition should be the original cost or the market value as on January 1, 1954, if the asset was acquired before that date. The court also cited the Karnataka High Court's decision in CIT v. M. Ramaiah Reddy, which rejected the idea that the cost of acquisition should be taken as on April 1, 1970.The court concluded that the cost of acquisition should be the cost to the previous owner or the market value as on January 1, 1954, if the asset was acquired before that date. The court rejected the Tribunal's view that the cost of acquisition should be the market value as on April 1, 1970, and held that the computation should be done in accordance with section 48 and section 55(2) of the Act.Conclusion:The court answered the first question in the affirmative, confirming that the agricultural land became a 'capital asset' on April 1, 1970. For the second question, the court answered in the negative, ruling against the assessee and in favor of the Revenue, stating that the cost of acquisition should be the original cost or the market value as on January 1, 1954, not the market value as on April 1, 1970. The Department was entitled to costs assessed at Rs. 300.