The cost of acquisition of a capital asset acquired as a gift is to be determined in the manner provided under section 49(1) of the Income-tax Act, 1961.

JUDGMENT :

B.K. Mehta, J.

At the instance of the assessee, the following two questions are referred to us for our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in order to attract the provisions of section 49 of the Act, it was not necessary that the capital asset which was sold had to be capital asset as defined in section 2(14) of the Act at the time when it was acquired ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition of the capital asset sold was not to be computed on the basis of the market value on the date of the gift ?"

2. A few relevant facts need be noticed in order to appreciate the contentions urged on behalf of the assessee in support of this reference. The assessment years under reference are 1971-72 and 1972-73, the corresponding previous years being the years which ended on March 31, 1971, and March 31, 1972, respectively. The assessee had sold certain lands during the assessment years under reference and, therefore, one of the questions which arose for consideration of the Income-tax Officer in the assessment proceedings for the said years was with regard to the inclusion of capital gains in the assessee's total income. The lands which the assessee sold were acquired by him as gift from the previous owner, one Shri N.N. Vyas, who was the father of the assessee, in July, 1966. These lands were acquired by the previous owner in 1961 and were converted into non- agricultural use as permitted by the Collector under section 65 of the Land Revenue Code on March 12, 1962. The assessee, while computing the capital gains, adopted the cost of the acquisition of the lands at Rs. 9 per sq. yard which was the market value as on the date of the gift, that is, in July, 1966. The capital gains thus computed were to the tune of Rs. 8,875 for the assessment year 1971-72 and Rs. 20,499 for the assessment year 1972-73.

3. The Income-tax Officer accepted this computation made by the assessee and accordingly assessed him to tax. The Commissioner of Income-tax, Ahmedabad, on examining the records of the assessment proceedings for the said two years was of the view that the Income-tax Officer had erred in accepting the computation made by the assessee and accepting the cost of acquisition at Rs 9 per sq. yard instead of adopting the actual cost of acquisition of the agricultural lands in the hands of the previous owner, the said Shri N.N. Vyas. The Commissioner had further found that there was an additional error in the computation of the capital gains for the year 1972-73, since the Income-tax Officer had allowed deduction under section 80T of the Act at 45% instead of 35% of the amount by which the capital gains exceeded Rs. 5,000. The Commissioner, therefore, issued a show-cause notice to the assessee as to why the order of the Income-tax Officer be not revised under section 263 of the Income-tax Act, 1961.

4. In response to the show-cause notice, the assessee's contention was that the provisions of section 49 of the Act had no application to the facts of the present case, inasmuch as when his predecessor, Shri N.N. Vyas, purchased the lands, they were all agricultural lands and, therefore, they could not be treated as capital assets as defined under section 2(14) of the said Act, and they could be treated as capital assets only when they were permitted to be put to non-agricultural use on March 12, 1962. It was, therefore, urged that the cost of acquisition of the asset at the time of acquisition cannot be taken into consideration for purposes of the computation of the capital gains. In the submission of the assessee, section 49 could be attracted only in a case where the asset was a capital asset at the time of its acquisition by the previous owner. He, therefore, urged that since section 49 had no application, the cost of acquisition should be treated as the market value of the lands as on the d