AMBAT ECHUKUTTY MENON Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The Income Tax Appellate Tribunal, Cochin Bench, has referred to this Court under S.256(1) of the Income tax Act, 1961, hereinafter called the Act, the following questions of law:

(2.) The relevant facts which have given rise to the aforesaid questions fall within a short compass. One Shri. A. Padmanabha Menon purchased an item of immovable property for Rs. 48,500 on 10-12-1953. He had to incur an additional expenditure of Rs. 1,420 by way of stamp duty and registration expenses in respect of that transaction of sale. Padmanabha Menon died in 1957. Before his death, he had hypothecated the property and it was only subject to the sail mortgage that the property devolved on his heirs. The assessee has inherited a 1/5th share in the property. The assessee along with his other coheirs discharged the mortgage created by deceased Padmanabha Menon by payment of Rs. 58,643/- to the mortgagee. Subsequently, the property was acquired by the State Government under the Land Acquisition Act on 8-1-1971 and a total compensation of Rs. 3,39,473 was paid to the assessee and the other four coowners.

(3.) In respect of the 1/5th share of the property belonging to the assessee he declared a capital gain of Rs. 16,925. The mode of computation of income chargeable under the head capital gains adopted by the assessee was to deduct from the compensation received from the Government, the expenses incurred in the purchase of the property inclusive of stamp duty etc. amounting in all to Rs. 49,920 and also the further sum of Rs. 58,643 spent by the assessee and his coheirs for clearing off the encumbrance created by deceased Padmanabha Menon. The assessee had also purported to make some other deductions, but subsequently he gave up the claim in respect of them and hence it is unnecessary to deal with them here. The Income Tax Officer proceeded on the basis that the capital asset became the property of the assessee after 1-1-1954 by virtue of succession to the previous owner who died in 1957 and he treated the cost of acquisition as Rs.58,643 which was the amount paid by the assessee and the coheirs for clearing off the encumbrance. By adopting the said method the Income Tax Officer held that the 1/5th share of the income chargeable to capital gains at the hands of the assessee was Rs. 30,341/-and the assessment was accordingly completed. As appeal was filed by the assessee before the Appellate Assistant Commissioner of Income Tax. Trichur, contending that the amount of Rs.58,643/- expended on discharging the mortgage 'ought to have been treated as the cost incurred by the assessee in effecting an improvement to the capital asset and that hence a deduction ought to have been allowed in respect of the said amount in addition to the actual cost incurred by the previous owner for the purchase of the property, namely, Rs. 49,920/-. This contention was rejected by the Appellate Assistant Commissioner who confirmed the assessment made by the Income Tax Officer. On the matter being carried by the assessee in Second. Appeal before the Income Tax Appellate Tribunal, the Tribunal agreed with the view taken by the Appellate Assistant Commissioner that the amount spent by the assessee in clearing off the encumbrance created by the previous owner could not be treated as cost of improvements. The assessee had put forward an alternative contention before the Tribunal that since the property had devolved on the assessee by inheritance only subject to the burden of the mortgage the amount expended by the assessee for clearing off the said mortgage and for perfecting the title to the property must also be treated as part of the cost of acquisition. This contention was rejected by the Tribunal on the ground that in cases where a capital asset which had been acquired by the previous owner before the 1st day of January, 1954 becomes the property of the assessee by one of the modes specified in sub-s.(1) of S.49, only the cost for which the previous owner had acquired the capital asset or the fair market value of the asset on the 1st day of January 1954, at the option of the assessee, is to be regarded as 'cost of acquisition'. In as much as the Income Tax Officer had already allowed a deduction in respect of Rs. 58,643/, the Tribunal held that the assessee was not entitled to have the cost of acquisition fixed at any higher figure and the appeal was accordingly dismissed. Thereafter at the instance of the assessee the Tribunal has drawn up a statement of the case and referred the aforementioned questions to this Court.