COMMISSIONER OF INCOME TAX Vs. INDIRA V

JUDGEMENT

(1.) IN this reference under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as "the Act", the Tribunal has referred the following question :

(2.) BY a settlement deed dated May 28, 1967, a house property bearing Nos. 2 and 3, Lakshmipuram Street, was gifted to the assessee by her father. In the document of gift, the property was valued at Rs. 6,000. During the financial year ended March 31, 1971, the assessee sold the said property for a sum of Rs. 30,000. In the income-tax assessment for the year 1971-72, the question arose whether there was any capital gains arising out of the sale of the property. The ITO took the cost of the acquisition of the property at Rs. 6,000 as shown in the gift deed and computed the capital gains accordingly. In the appeal before the AAC, the assessee claimed that the cost of the property was not only Rs. 6,000 but included another sum of Rs. 6,943 paid to one Appakannu Mudaliar under the following circumstances. There was a suit filed by the said Appakannu Mudaliar claiming title with reference to 1 ground and 744 sq. ft. In O.S.A. No. 69/62 and 9 of 1963, arising out of that suit, there was a compromise as a result of which the assessee paid a sum of Rs. 6,943 to the said Appakannu Mudaliar in relation to this property. Though a larger amount was, in other words, paid to him in the compromise, as far as this property was concerned, it is not in dispute that the sum paid to him is Rs. 6,943. The claim of the assessee was that this represented the cost of improvement to the property which would be deductible under Section 49(1) read with Section 55(1)(b) of the Act. The AAC held that capital expenditure in making any additions or alterations to the property could alone be added to the original cost of the property and that, in the instant case, there was no such addition or alteration. He was, therefore, of the view that the ITO was justified in not deducting the sum of Rs. 6,943 in computing the capital gain. The assessee appealed to the Tribunal. The Tribunal, after going into the facts, came to the conclusion that the assessee, by paying the amount under the compromise decree, had perfected her title by removing the cloud cast on it by a rival claimant and that this involved both addition and improvement to the title to the capital asset. It was considered that the amount so paid would constitute cost of acquisition within the meaning of Section 49(1) and that, therefore, the assessee would be eligible for deduction of Rs. 6,943. It is this order that has been challenged by the revenue by causing this reference to be made on the question already referred to.

(3.) SECTION 55(2)(ii) defines the "cost of acquisition" in relation to capital asset for the purposes of SECTIONs 48 and 49, where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of SECTION 49, and where the capital asset became the property of the previous owner before the 1st day of January, 1954, the cost of acquisition means the cost of the capital asset to the previous owner or the fair market value of the asset as on the 1st day of January, 1954. The assessee can choose one of the two, amounts, as it may suit him. This choice is not available if the property was acquired by the previous owner on or after January 1, 1954. It is not clear whether the previous owner acquired this property prior to January 1, 1954. Having regard to this aspect also the sum of Rs. 6,000 given as deduction may not be a proper one.