The central legal point established is that the determination of capital gains assessable on a property transfer is influenced by the nature of property acquisition and the presence or absence of cost of acquisition.

(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/1999.)

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 14.2.2005.

2. The Revenue is the appellant. The assessment year involved is 1996-1997. 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 p