Case Note & Summary
This reference under Section 256(1) of the Income Tax Act, 1961, arises from a question of law referred by the Income Tax Appellate Tribunal. The assessee, Shri Nusli N. Wadia, acquired a life interest in the Neville Wadia Trust No. 2 after his father, Neville Wadia, relinquished his life interest in the trust on 30th March 1957. The trust was created by Sir Ness Wadia in 1947 for the benefit of his son Neville and his children. During the assessment year 1984-85, the assessee sold his life interest to M/s. Kapadia Trading Co. Ltd. for Rs. 21.70 lakhs. The assessee contended that the cost of acquisition of the life interest was nil, relying on the Supreme Court decision in CIT v. B.C. Shrinivas Shetty, and thus no capital gains arose. The Tribunal, however, held that the release of life interest by Neville Wadia in favor of the assessee amounted to a gift, and therefore, under Section 49(1)(ii) of the Act, the cost of acquisition is deemed to be the cost to the original settlor, Sir Ness Wadia. The High Court upheld the Tribunal's view, answering the question in the affirmative, i.e., in favor of the Revenue. The court reasoned that the release of life interest by the previous holder is a gift, and the assessee acquired the asset under that gift, making Section 49(1)(ii) applicable. Consequently, the cost of acquisition is not nil but the cost to the original settlor, and capital gains tax is payable on the sale proceeds.
Headnote
A) Income Tax - Capital Gains - Cost of Acquisition - Section 49(1)(ii) of the Income Tax Act, 1961 - Life Interest - The assessee acquired a life interest in trust property upon the release of the previous life interest holder, which was held to be a gift. The court held that the cost of acquisition of the life interest is deemed to be the cost to the original settlor under Section 49(1)(ii), as the release of life interest by the previous holder constitutes a gift. (Paras 1-10)
B) Income Tax - Capital Gains - Transfer - Section 2(47) of the Income Tax Act, 1961 - Life Interest - The sale of life interest by the assessee to a third party for consideration is a transfer of a capital asset, and capital gains tax is applicable. The cost of acquisition is not nil but is determined under Section 49(1)(ii) as the cost to the original settlor. (Paras 1-10)
Issue of Consideration
Whether the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset coming within the purview of Section 49(1)(ii) of the Income Tax Act, 1961 as it was acquired on the release executed by the previous life interest holder which amounted to a gift, and therefore, the cost of acquisition of the asset would be deemed to be the cost of the original settlor.
Final Decision
The court answered the question of law in the affirmative, i.e., in favor of the Revenue, holding that the life interest was acquired on a gift, and the cost of acquisition is deemed to be the cost to the original settlor under Section 49(1)(ii) of the Income Tax Act, 1961.
Law Points
- Cost of acquisition of life interest acquired on release by previous life interest holder is deemed to be cost to the original settlor under Section 49(1)(ii) of the Income Tax Act
- 1961
- Release of life interest amounts to a gift
- Capital gains computation requires cost of acquisition to be determined as per Section 49(1)(ii) when asset is acquired by gift
Case Details
2017 LawText (BOM) (03) 43
INCOME TAX REFERENCE NO. 55 OF 2000
M.S. Sanklecha, A.K. Menon
Mr. Madhur Agarwal a/w. Mr. Atul Jasani for the Applicant, Mr. Suresh Kumar for the Respondent
The Commissioner of Income Tax, Central II, Bombay
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Nature of Litigation
Income Tax Reference under Section 256(1) of the Income Tax Act, 1961, seeking opinion on a question of law regarding the cost of acquisition of a life interest in a trust.
Remedy Sought
The Revenue sought a ruling that the cost of acquisition of the life interest is not nil but is deemed to be the cost to the original settlor under Section 49(1)(ii) of the Act.
Filing Reason
The assessee sold his life interest and claimed nil cost of acquisition, leading to a dispute over capital gains tax liability.
Previous Decisions
The Tribunal held that the release of life interest by the previous holder amounted to a gift, and thus Section 49(1)(ii) applied. The High Court in an earlier reference (CIT v. Neville Ness Wadia, 90 ITR 155) had held that surrendering life interest does not amount to transfer under Section 16(3)(a)(iii) of the 1922 Act.
Issues
Whether the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset coming within the purview of Section 49(1)(ii) of the Income Tax Act, 1961 as it was acquired on the release executed by the previous life interest holder which amounted to a gift.
Whether the cost of acquisition of the life interest would be deemed to be the cost of the original settlor under Section 49(1)(ii).
Submissions/Arguments
The assessee argued that the cost of acquisition of the life interest was nil, relying on CIT v. B.C. Shrinivas Shetty, and thus no capital gains arose on sale.
The Revenue argued that the release of life interest by the previous holder constituted a gift, and under Section 49(1)(ii), the cost of acquisition is the cost to the original settlor, not nil.
Ratio Decidendi
The release of a life interest by the previous holder in favor of the assessee amounts to a gift, and therefore, the asset is acquired by the assessee under a gift. Consequently, under Section 49(1)(ii) of the Income Tax Act, 1961, the cost of acquisition of the asset is deemed to be the cost to the original settlor, not nil. This principle applies for computing capital gains on subsequent sale of the life interest.
Judgment Excerpts
This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal) seeks our opinion on the following question of law : - '(i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset coming within the purview of Sec. 49(1)(ii) as it was acquired on the release executed by the previous life interest holder which amounted to a gift and therefore, the cost of the acquisition of asset would be deemed to be the cost of the original settlor ?'
Procedural History
The Income Tax Appellate Tribunal referred the question of law to the High Court under Section 256(1) of the Income Tax Act, 1961. The High Court heard the reference and delivered judgment on 10th March 2017.
Acts & Sections
- Income Tax Act, 1961: Section 49(1)(ii), Section 256(1), Section 2(47)
- Indian Income Tax Act, 1922: Section 16(3)(a)(iii)
