The cost of acquisition of a capital asset for the purpose of computing capital gains under the Income-tax Act, 1961, is to be determined in accordance with Section 48 read with Section 55(2) of the Act, and not on the basis of the date on which the asset became a capital asset.

( 1 ) IT is a reference under Section 256 (1) of the Income-tax Act, 1961 (for short "the Act" ).

( 2 ) THE assessee is a Hindu undivided family. In the previous years relevant to the assessment years 1975-76 and 1977-78, the assessee had sold certain agricultural lands allotted to its share on the family partition of a bigger Hindu undivided family that was effected by an arbitration award dated September 14, 19g9. Before the Income-tax Officer, the assessee admitted that it was liable to "capital gains lax" as the agricultural lands transferred by it fell within the purview of "capital asset" as defined in Section 2 (14) of the Act after its amendment by the Finance Act, 1970. However, in the computation of " capital gains ", the assessee put forward a claim that it was entitled to deduct from the full value of the consideration received, the market value as on april 1, 1970, of the assets transferred, as cost of acquisition of the assets. The Income-tax officer did not agree with the assessee. He computed the capital gains taking the cost of acquisition of assets transferred as on January 1, 1954. For the view the Income-tax Officer took, he relied upon the provisions contained in Sub-section (2) of Section 55 of the Act.

( 3 ) ON appeal, the claim made by the assessee was accepted by the Appellate Assistant commissioner of Income-tax which also was upheld by the Income-tax Appellate Tribunal while dismissing the second appeal filed by the Revenue. The Income-tax Appellate Tribunal was of the opinion that, as the agricultural land became a capital asset for the first time on April 1, 1970, because of the amendment brought about in Section 2 (14) of the Act, by the Finance Act, 1970, the assessee was entitled to adopt the value of the land as on April 1, 1970, as the cost of acquisition of the asset, inasmuch as the agricultural land held by the assessee prior to April 1, 1970, was not a capital asset. The Income-tax Appellate Tribunal accordingly directed that the cost of acquisition of the capital asset should be the cost as on April 1, 1970, for purposes of computing the capital gains. At the instance of the Commissioner of Income-tax, Lucknow, the income-tax Appellate Tribunal has referred the following two questions of law for the opinion of this court :

" 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate tribunal was legally correct in holding that the agricultural land in question had assumed the character of capital assets for the first time on April 1, 1970, by virtue of the amendment of section 2 (14) (iii) of the Income-tax Act, 1961, by the Finance Act, 1970, with effect from April 1, 1970 ?"

If the answer to the first question is in the affirmative, then" 2. Whether the Income-tax Appellate Tribunal was correct in holding that it was the cost of the asset as on April 1, 1970, which had to be adopted for the computation of capital gains ?"

( 4 ) IN so far as question No. 1 is concerned, it does not pose much of a problem. On the facts found by the Tribunal, the answer is self-evident which could be in the affirmative only. Indeed, from the statement of the case submitted by the Tribunal and from the various orders attached thereto, it is apparent that the parties were never at issue in so far as the controversy involved in the first question is concerned. In our opinion, the question did not merit a reference to this court. Whatever contest existed between the parties, that was in relation to the compulation of capital gains which is the subject matter of the second question. Be that as it may, in order to answer the first question, we may refer to a couple of statutory provisions and the legislative amendments effected thereto as those provisions stood at the relevant time.

( 5 ) WE may first notice Section 45 of the Act. Under this Section, the charge to income-tax under the head " Capital gains" is attracted only in respect of profits or gains arising from th