IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated: 25/10/2005
Coram
The Hon'ble Mr.Justice P.D.DINAKARAN
and
The Hon'ble Mr.Justice N.KANNADASAN
T.C.(A)No.877 of 2005
Commissioner
of Income-Tax-I,
Tiruchirapalli ... Appellant
-Vs-
H.H.(Late)
Sri Raja Rajagopala Thondaiman
by L.R. Shri Rajagopala thondaiman,
Pudukkottai Palace,
Cantonment,
Trichy - 620 001. ... Respondent
The above T.C.(Appeal) is preferred under Section 260A of the
Income-Tax Act, 1961 against the order of the Income Tax Appellate Tribunal,
Madras 'D' Bench, dated 14.2.2005 made in ITA No.1526/Mds/1 999.
!For Appellant : Mr.N.Muralikumaran
^For Respondent : ---
:J U D G M E N T
(Judgment of the Court was made by P.D.DINAKARAN, J.)
The above tax case appeal is directed against the order of the
Income-tax Appellate Tribunal in ITA.No.1526/Mds/1999, dated 14.2.200 5.
2. The Revenue is the appellant. The assessment year involved is 1
996-1997. The assessee is an ex-ruler of Pudukkottai Samasthanam. The
assessment has been made on Rajagopala Thondaiman as legal representative of
the deceased assessee H.H.Raja Rajagopala Thondaiman.
3. The case of the revenue is that during the year of account,
the assessee had sold his old Palace at Pudukkottai for a consideration of
Rs.17,76,020/- and claimed exemption on the sale proceeds. The Assessing
Officer, on the ground that in the earlier years the claim of the assessee has
not been accepted and that the matter is under appeal at different stages,
brought the sum of Rs.17,76,020/- to assessment as long term capital gains.
4. The assessee, not satisfied with the assessment, preferred an
appeal before the Commissioner of Income Tax (Appeals) contending that he had
become owner of the property under the Merger Agreement with the Indian Union
in the year 1947 and he had not incurred any cost in acquiring the property.
The Commissioner of Income Tax (Appeals) placing reliance on the decision of
Madhya Pradesh High Court, reported in 162 ITR 93 (Commissioner of Income-tax
Vs. H.H.Maharaja Sahib Shri Lokendra Singhji) wherein it is held that in a
case where cost could not be ascertained, the fair market value could not be
taken into consideration since the very basis of capital gains was that at
some point of time, the person who initially acquired the property did so at
some cost in terms of money, deleted the addition on account of capital gains.
5. It is against this decision, the Revenue moved the Income Tax
Appellate Tribunal, Chennai Bench. Before the Tribunal, both the assessee and
the Revenue conceded that similar issue in assessee’s own case for the
assessment year 1984-85 to 1986-87 has been decided in favour of the assessee,
holding that the palace was allotted to the assessee by an order of the
Government and he had not incurred any cost for acquisition of the palace and
hence no capital gain arises for taxation in respect of transfer of such
property. Consequently the appeal preferred by the Revenue was dismissed by
the Tribunal.
6. Aggrieved by the same, the Revenue has preferred the present
appeal raising the following substantial question of law:
“Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that there was no capital gains
assessable in respect of the transfer of the site and palace at Pudukkottai
belonging to the assessee for a consideration of Rs.17,76,020/- on the ground
that there was no cost of acquisition and the capital gains could not be
computed, ignoring the fact that the property in question was obtained in
consideration of his estate at Pudukkottai merging with erstwhile State of
Madras and the cost of acquisition was determinable in accordance with the
provisions of Section 55(b)(2)?”
7. Admittedly in the present case the assessee was an ex-ruler of
Pudukkottai Samasthanam and the palace in question was allotted to the
assessee by an order of the Government, and that, the assessee has not
incurred any cost for acquisition of the palace. In these circumstances, the
sale proceeds of the old palace cannot be brought under capital gains as held
in the decision reported in 162 ITR 93, which is followed by the authorities
below. The Tribunal also followed the decision reported in 128 ITR 294
(Commissioner of Income-tax Vs. B.C. Srinivasa Setty), wherein the Supreme
Court, while dealing with a similar issue regarding capital gains, after
referring to various sections, held as under,
“… None of the provisions pertaining to the head “Capital gains”
suggests that they include an asset in the acquisition of which no cost at all
can be conceived. Yet there are assets which are acquired by way of
production in which no cost element can be identified or envisaged. From what
has gone before, it is apparent that the goodwill generated in a new business
has been so regarded. The elements which create it have already been
detailed. In such a case, when the asset is sold and the consideration is
brought to tax, what is charged is the capital value of the asset and not any
profit or gain.”
8. At this juncture, we also feel it relevant to refer to another
decision of Madhya Pradesh High Court reported in 232 ITR 754 ( Commissioner
of Income-tax Vs. Pushpraj Singh), wherein it is held as under,
“… the tribunal held that no capital gain was exigible on the
transfer of shares and bonds on the ground that the assets in the form of
shares and bonds belonged to the Government of India and subsequently half of
the shares were transferred to the assessee not as a right but only by way of
moral gesture on its part and according to the Tribunal, the assessee did not
become the owner of the assets. The Tribunal held that the cost of
acquisition of shares and securities was nil to the assessee and, therefore,
no capital gains tax could be levied thereon. The Tribunal had approached the
matter and rightly held in the light of decisions in the case of CIT v.
H.H.Maharaja Sahib Lokendra Singhji (1986) 162 ITR 93 and CIT v. Markapakula
Agamma (198 7) 165 ITR 386. No question of law arose from its order as the
question which had been agitated in this reference had already been answered
by the Madhya Pradesh High Court.”
9. In view of the above stated propositions and in the light of the
facts and circumstances of the case, we answer the question in the affirmative
against the revenue and hold that the Tribunal was right in holding that there
was no capital gains assessable in respect of the transfer of the site and
palace at Pudukkottai belonging to the assessee for a consideration of
Rs.17,76,020/- on the ground that there was no cost of acquisition and the
capital gains could not be computed ignoring the fact that the property in
question was obtained in consideration of his estate at Pudukkottai merging
with erstwhile State of Madras and the cost of acquisition was determinable in
accordance with the provisions of section 55(b)(2) of the Income Tax Act.
10. Consequently, we do not see any merit in the appeal and hence
the same is dismissed. No costs.
Index : Yes
Website: Yes
vr.
To
The Commissioner of Income Tax,
Chennai.
