JUDGMENT
N.K. Agrawal, J.
1. The following question relating to the asst. yr. 1972-73 has been referred by the Tribunal, Chandigarh, at the instance of the Department, under s. 256(1) of the IT Act, 1961 (for short, “the Act”) :
“Whether, on the facts and in the circumstances of the case, the Tribunal has been in error in holding that no capital gains arose to Harbhagwan in relation to his individual assessment for the asst. yr. 1972-73 by holding that HUF of Lala Harbhagwan was the last previous owner of the plots at Mall Road, Karnal, in terms of s. 49(1) of the IT Act, 1961, as applicable to the relevant assessment year ?
2. The assessee, in the status of an individual, was assessed for the asst. yr. 1972-73 under s. 143(3) of the Act. Accounting year of the assessee ended on 7th September, 1971. The assessment was, however, set aside by the AAC and the case was remanded to the AO. Thereafter, assessment was reframed by the AO, adding a sum of Rs. 6,623 as capital gains as a protective measure. The aforesaid amount of Rs. 6,623 had also been assessed in the hands of the Hindu undivided family (HUF) of the assessee.
3. The assessee had purchased two plots of land measuring 5616 and 9254 square feet on 4th August, 1962, for a total sum of Rs. 18,065. This property, consisting of the two plots, was thrown by him into the common stock of the HUF on 10th October, 1968. An oral partition of the HUF took place on 22nd October, 1970, and, consequently, the two plots of land ceased to belong to the HUF. Income arising from the two plots of land became assessable in the hands of the assessee as an individual. The assessee sold the two plots of land on 13th September, 1971. The AO determined the capital gain and brought it to tax in the hands of the assessee.
4. Any profit or gain arising from the transfer of a capital asset is chargeable to income-tax under the head “capital gains” under s. 45 of the Act. Such income (capital gains) is to be computed under s. 48 of the Act by deducting from the full value of consideration, the cost of acquisition of the capital asset including the cost of any improvement and also the amount of expenditure incurred wholly and exclusively in connection with the transfer. Cost of acquisition is to be determined under s. 49, keeping in view the mode of acquisition. Since s. 49 is relevant for the purpose of the present case in hand, it would be necessary to examine s. 49 which read as under as the relevant time :
“49 – Cost with reference to certain modes of acquisition
(1) Where the capital asset became the property of the assessee –
(i) on any distribution of assets, on the total or partial partition of an HUF;
(ii) under a gift or will;
(iii)(a) by succession, inheritance or devolution, or
(b) on any distribution of assets on the dissolution of a firm, BOI or other AOPs, or
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in cl. (iv) or cl. (v) or cl. (vi) of s. 47.
the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be :
Explanation. – In this sub-section, the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than referred to in cl. (i) or cl. (ii) or cl. (iii) of this sub-section.
(2) xxx xxx xxx”
5. The assessee’s case before the AO was that the cost of acquisition of the land in the hands of the HUF, after the property was thrown into the common stock of the HUF, was nil and, therefore, no capital gain was required to be assessed to tax. The assessee went in appeal before the AAC who, however, upheld the addition. In further appeal, the Tribunal deleted the addition of Rs. 6,623, taking the view that the cost of acquisition in the hands of the previous owner, namely, the HUF was nil. On an examination of s. 49(1), it would appear that it provided for the basis for determining the cost of capital asset for the purpose of working out the capital gains in a case where the asset became the property of an individual by a mode specified therein. The general principle for computing capital gain is to deduct from the sale price the cost of acquisition to the assessee. To this general rule, certain exceptions are engrafted by s. 49(1) under which the cost to the previous owner is deemed to be the cost of acquisition to the assessee. If an assessee acquired a property on distribution of assets on the partition of a HUF, his case would fall under cl. (i) of s. 49(1) and, in that situation, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner had acquired the property. The cost shall, however, increase by the cost of any improvement of the asset as incurred by the previous owner or the assessee.
6. The case of the assessee is that, where an asset did not cost anything to the previous owner, sale of such asset would not attract capital gains tax. Since the previous owner, namely, the HUF did not acquire the property by incurring any expenditure, the cost to the previous owner was nil. In the case of the assessee, the plots of land had come in the hands of the HUF when the assessee, in the year 1968, threw the property into the common stock of the family. Thus, it was the assessee’s HUF which was the previous owner of the land in question and acquired it without any cost. Shri Rajesh Garg, learned counsel for the assessee, has argued that the case of the assessee would be covered by cl. (i) of s. 49(1) of the Act inasmuch as the assessee had acquired the property on partition of the HUF. Therefore, the cost of acquisition shall be, as a result of the deeming provision of s. 49(1), the cost at which the previous owner, namely, the HUF, acquired it. Since HUF had acquired the land without any cost when the assessee threw plots of land into the common stock of the family, the cost was rightly treated to be nil by the Tribunal. Shri R. P. Sawhney, learned senior counsel for the Department, has, on the other hand, laid emphasis on the Expln. below s. 49 which contained another deeming provision as to who would be the previous owner of the property owned by an assessee covered under any of the clauses of s. 49(1). Shri Sawhney has argued that, in a situation where a property is acquired on any distribution of assets on a partition of a HUF, it is the cost of acquisition in the hands of the last previous owner which shall be adopted to be the cost of the asset in the hands of the assessee. The said Explanation, in specific terms, lays down the rule to determine the cost as was in the hands of the last previous owner who had acquired the property by any mode of acquisition other than that specified in cls. (i), (ii) and (iii). In the case of the assessee, he was the last previous owner inasmuch as he had purchased the property in the year 1962. The assessee thereafter threw the property into the common stock of the family in the year 1968 and then again acquired it on partition in the year 1970. Thus, there were two previous owners, namely, the HUF and the assessee himself. Since the assessee, as an individual, was the last previous owner, being the purchaser of the property, the cost of the asset in his hands as the last previous owner would be the cost of asset at the time of its sale. The Expln. below s. 49(1) would be applicable where the last previous owner acquired the property by any mode other than a partition of the family or under a gift or will or by succession, inheritance or devolution or on the dissolution of a firm, body of individuals or other AOPs. In the case of the assessee, being the last previous owner, the property in question was acquired by purchase and, thus, the mode of acquisition did not fall under any of the three clauses, namely, cl. (i), cl. (ii) or cl. (iii) of s. 49(1).
7. A new cl. (iv) was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1976, which reads as under :
“(iv) such assessee being an HUF, by the mode referred to in sub-s. (2) of s. 64 at any time after the 31st day of December, 1969”.
It would thus appear that, by virtue of the aforesaid amended provision, in a case where a property is thrown into the common stock of an HUF, the cost of acquisition of the asset shall be deemed to be the cost for which the person, throwing such property into the common stock of the family, had acquired it. Though the aforesaid new cl. (iv) came into force w.e.f. 1st April, 1976, the objection behind the provision is clear that the cost of acquisition being nil in the hands of the HUF, it is the cost of acquisition in the hands of the previous owner which shall be treated to be the cost of acquisition in the hands of the HUF also. The aforesaid clause was not on the statute book in the year 1972-73 with which we are concerned here and, therefore, it is not relevant to the present case. Moreover, cl. (iv), even if it was in force in 1972-73, would not be attracted to the case of the assessee because the said clause refers to an assessee who is an HUF acquiring a property in the event of the property being thrown into the common stock of the family by an individual member of the family. In either way, cl. (iv) would not be attracted to the case of the assessee who is being assessed in the status of an individual.
8. A case relating to capital gains in the case of HUF acquired an asset after it was thrown into the common stock of the HUF, has been examined by the Patna High Court in CIT vs. Ashok Kumar Jalan (1993) 204 ITR 16 (Pat) : TC 21R.517. In that case, the assessee was an HUF and one of the coparceners of the family, after purchasing certain shares of a company, threw the entire shares into the common stock of the assessee-family. Out of the total shares acquired by the HUF, some shares were sold. The ITO computed the capital gains in the hands of the assessee-HUF by taking the cost of the shares to the assessee to be the same for which those shares had been acquired by the coparcener. The Tribunal, however, held that throwing of all the shares by the coparceners of the family into its common stock did not amount to gift and, therefore, s. 49(1) of the Act had no application. Thereafter, the Tribunal took the view that the cost of the shares to the assessee-HUF should be taken to be the market value of the shares on the date on which the shares were thrown into the common stock. The High Court did not agree with the Tribunal’s view and held that the cost of shares ought to have been taken to be nil because the HUF had not incurred any cost. The High Court, however, did not go into the question as to whether the cost of acquisition shall be deemed to be the cost for which the previous owner had acquired it. The primary question before the Court was whether it is the market value of the shares which shall be treated to be the cost of acquisition by the HUF. Since the assessee-HUF had not acquired the shares by purchase, the question of determining the market value of the shares did not arise. Moreover, cl. (iv) was not in operation during the years of assessment and, therefore, s. 49(1) was held to be not applicable.
9. A question of capital gains was examined by the Bombay High Court in CIT vs. Kanubhai R. Shah (HUF) (1993) 201 ITR 1050 (Bom) : TC 22R.643. The facts in that case were similar to those which are in the case in hand before us. There, the assessee was an HUF and the assessment year involved was 1972-73. Four brothers, including the Karta of the assessee an HUF purchased certain land in the year 1961. All the brothers impressed their respective shares in the said land with the character of HUF property in the year 1970, by throwing the same into the common stock of the bigger HUF comprising of the four brothers. After three months, there was a partial partition of the bigger HUF and all the brothers, including the assessee-HUF, got their respective shares in the land. The land in question was acquired by the Government of Gujarat and the award was made by the Land Acquisition Officer in the year 1971. Compensation was paid to the assessee-HUF in respect of the land falling to its shares. The question, therefore, arose about the computation of capital gains on the transfer of the shares of the land falling to the shares of the assessee-HUF. The assessee computed the capital gains by taking the cost of acquisition of the land as the fair market value as on the date on which the previous owner, i.e., the bigger HUF, acquired the property when the coparceners threw the same into the common stock of the bigger HUF. The assessee had adopted the fair market value by taking resort to s. 55(3) of the Act. The ITO did not accept the computation of the capital gains as made by the assessee as, according to him, s. 55(3) of the Act had no application to the facts of the assessee’s case. According to him, the cost of the land to the assessee-HUF was nil because of the fact that the cost of the previous owner, i.e., the bigger HUF, from which the assessee had received the same on partition, was also nil. The ITO treated the total amount received by the assessee from the Land Acquisition Officer as a short-term capital gain. The assessee went in appeal where his contention was accepted. The Tribunal also accepted the assessee’s contention that the cost of the land had to be taken to be the market value on the date of acquisition by the bigger HUF. The High Court, however, did not accept the assessee’s plea on the ground that s. 55(3) had no application to the facts of the case inasmuch as s. 55(3) applied only to cases where the cost, for which the previous owner acquired the property, could not be ascertained. This was not the case where the cost in the hands of the previous owner could not be ascertained. It was held that the cost in the hands of the previous owner was nil and, therefore, there was no scope for taking resort to sub-s. (3) of s. 55 of the Act. There is, however, no discussion on the Expln. below s. 49(1), which contains a deeming provision that it is the cost of the asset in the hands of the last previous owner which shall be deemed to be the cost of acquisition of the asset to the assessee.
10. It is the actual cost of acquisition of the capital asset that has to be taken into account for computing the capital gains. However, the actual cost of acquisition shall not be looked into where the case would fall under s. 49 of the Act. The said section provides that the cost of acquisition of the capital asset shall be deemed to be the cost at which the previous owner acquired it. The legal fiction created by s. 49 would apply only to the situations specified therein. If the situation did not exist in terms of s. 49 or s. 55, the actual cost of acquisition alone shall be taken into account.
11. The Madras High Court in CIT vs. S. Krishnamurthy (1985) 152 ITR 669 (Mad) : TC 21R.507, examined the question of a Karta of an HUF purchasing a house property and then throwing the same into the joint family hotch-potch and thereafter the family selling the property. It was held that the act of throwing the individual property into the family hotch-potch could be considered to be an act of devolution within the meaning of s. 49(1)(iii)(a) of the Act. Since it was a case covered under cl. (iii), the cost to the Karta, when he purchased the property and made improvements, should be taken to be the cost to the family for the computation of capital gains. Thus, it was a case in which, under the special provisions of s. 49(1) of the Act, the cost to the previous owner was to be regarded as the cost to the assessee for the purpose of computing the capital gains, though the family got the property without any cost.
12. The Bombay High Court in CIT vs. Trikamlal Maneklal (HUF) (1987) 168 ITR 733 (Bom) : TC 21R.499, has, however, taken a different view on the mode where a coparcener’s property is thrown into the joint family hotch-potch. Such an act has been held to be not an act of devolution within the meaning of s. 49 of the Act. It has been held that, where a coparcener threw a capital asset into the hotch-potch of the HUF, the actual cost of such asset, in the hands of the family, would be nil because the case would not fall under s. 49 of the Act. It is the actual cost of acquisition which would alone be taken into account. If the actual cost is nil, it is that nil figure that must be taken into account.
13. In a case where certain property, purchased by husband and wife jointly, was thrown into the common stock of the HUF, the question about the cost of acquisition of the property in the hands of the HUF for the purpose of computing the capital gains came up for examination before the Delhi High Court in Deena Nath & Sons vs. CIT (1984) 149 ITR 96 (Del): TC 21R.515. The assessee had claimed that the cost of acquisition of the property in the hands of the HUF was its value as on the date of conversion, the date on which the property was thrown into the common stock of the HUF. The Department claimed that the cost of acquisition was nil for the HUF. It was held by the Court that the cost of acquisition of the property in the hands of the HUF was neither nil nor the value of property as on the date on which the property was thrown into the hotch-potch of the HUF, but the cost of acquisition in the hands of the individuals, namely, the husband and wife, would be the cost at which the property was jointly purchased by them. Thus, it was the cost of acquisition in the hands of the previous owner which was treated to be the cost for the purpose of computation of capital gains. In the case in hand before us, the assessee is being assessed in the status of an individual. He acquired the property on partition of the HUF in which he was a coparcener. In the light of the Expln. below s. 49(1), it is the last previous owner, who is none else than the assessee himself, who is to be found for arriving at the cost of acquisition of the asset. Admittedly, the assessee had acquired the property for consideration. By virtue of the Expln. below s. 49(1), the cost of the asset, as incurred by the assessee as the last previous owner, shall be the cost for the purpose of working out the capital gains. The assessee, being the last previous owner, did not acquire the property by any of the modes specified in cls. (i), (ii) and (iii) of s. 49(1) and, thus, the Explanation is held to be applicable to the assessee.
14. We are, with respect, unable to agree with the view taken by the Bombay High Court in Kanubhai R. Shah’s case (supra). In that case, the effect of the Expln. below s. 49(1) and the question of finding the cost in the hands of the last previous owner, were not considered. As stated earlier, the Expln. below s. 49(1) would be attracted where the last previous owner acquired the property by any of the modes other than those referred to in cls. (i), (ii) and (iii) of s. 49(1) of the Act.
15. In the result, the question is answered in the affirmative, i.e., in favour of the Department and against the assessee. It is held that the cost of acquisition of the property shall be deemed to be the cost, for which the property was acquired by purchase by the last previous owner, i.e., the assessee.