2009 (10) TMI 646 - AT - Income Tax

Computation of capital gains - acquired the asset transferred under gift - whether indexed cost of acquisition was to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset - HELD THAT - In the case where capital asset has become a property of the assessee under a gift prior to the cut-off date of 1-4-1981 but the same is transferred by him only after 1-4-1981; say in financial year 1987-88, the year to be adopted for indexation as per the contention of the learned D.R., would be financial year 1987-88. However, the cost of acquisition of capital asset in such case would be taken as Fair Market Value of 1-4-1981 being the cut-off date embedded in the indexation scheme as agreed even by the learned D.R. The situation will thus arise where the cost of acquisition of capital asset would be taken as of 1-4-1981 whereas the cost inflation index for the year 1987-88 would be applied to the said cost to work out the indexed cost of acquisition. Such a working will not stand to any reasonability or logic and will certainly defeat the very purpose of indexation scheme as explained in the aforesaid Circular No. 636, dated 31-8-1990. Considering the facts of the case and relevant material on record, We are of the view that for the purpose of computing long-term capital gain arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Explanation (iii) to section 48 after taking into account the period for which the said capital asset was held by the previous owner. In that view of the matter, we hold that the indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held the asset. Accordingly, we answer the question referred to us in favour of the assessee and uphold the impugned order of the learned CIT(A) on this issue. In the result the appeal of the revenue is dismissed.

Issues Involved:
1. Determination of indexed cost of acquisition for capital gains computation when an asset is acquired through a gift.
2. Interpretation of relevant provisions of the Income-tax Act, 1961, including sections 2(42A), 48, and 49.

Detailed Analysis:

Issue 1: Determination of Indexed Cost of Acquisition
The central issue revolves around whether the indexed cost of acquisition for computing capital gains should be calculated based on the year the previous owner first held the asset or the year the assessee received the asset through a gift.

Facts of the Case:
The assessee, an individual, declared long-term capital gains from the sale of a residential flat received as a gift from her daughter. The flat was originally purchased by the daughter in 1993. The assessee computed the indexed cost of acquisition from 1993, the year the previous owner (her daughter) acquired the asset. The Assessing Officer, however, contended that the indexed cost of acquisition should be computed from 2003, the year the assessee received the asset as a gift.

Assessing Officer's View:
The Assessing Officer argued that the cost inflation index applicable to the year the assessee first held the asset (2002-03) should be used, as per Explanation (iii) to section 48 of the Income-tax Act, 1961. This resulted in a higher taxable capital gain.

CIT(A)'s Decision:
The CIT(A) accepted the assessee's contention, holding that the period for which the asset was held by the previous owner should be included for determining the indexed cost of acquisition, as per Explanation 1(b) to section 2(42A). Consequently, the CIT(A) directed the Assessing Officer to re-compute the long-term capital gain by allowing indexation from 1993.

Issue 2: Interpretation of Relevant Provisions
The Revenue appealed against the CIT(A)'s decision, arguing that Explanation 1(b) to section 2(42A) is applicable only for determining whether an asset is a short-term or long-term capital asset, and not for computing the indexed cost of acquisition.

Revenue's Argument:
The Revenue contended that the term "first year in which the asset was held by the assessee" in Explanation (iii) to section 48 should be interpreted literally, meaning the year the assessee received the asset as a gift. They argued that the provisions of section 2(42A) should not extend to the computation of indexed cost of acquisition.

Assessee's Argument:
The assessee argued that the definitions in section 2 are applicable to the entire Act, and the period of holding by the previous owner should be included in determining the indexed cost of acquisition. The assessee cited various judicial precedents and CBDT Circular No. 636 to support the argument that indexation should reflect the period of holding by the previous owner to avoid absurd and unjust results.

Tribunal's Analysis and Conclusion:
The Tribunal examined the legislative intent and the scheme of the Act, noting that the purpose of indexation is to provide relief for inflation based on the period of holding. The Tribunal emphasized that the cost and date of acquisition of the previous owner should be adopted as the cost and date of acquisition of the assessee for computing capital gains, in line with the scheme of the Act.

Key Points:
1. Legislative Intent: The Tribunal highlighted that the legislative intent behind the provisions is to provide relief for inflation based on the actual period of holding, including the period held by the previous owner.
2. Avoiding Absurd Results: The Tribunal noted that a literal interpretation, as suggested by the Revenue, would lead to absurd and unjust results, defeating the purpose of indexation.
3. Harmonious Interpretation: The Tribunal adopted a schematic interpretation, harmonizing the provisions of sections 2(42A), 48, and 49 to reflect the legislative intent and avoid conflicts within the statute.

Final Judgment:
The Tribunal upheld the CIT(A)'s decision, holding that the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset. The appeal of the Revenue was dismissed, and the question was answered in favor of the assessee.

Conclusion:
The Tribunal's judgment clarifies that for computing long-term capital gains on an asset acquired through a gift, the indexed cost of acquisition should be determined based on the year the previous owner first held the asset. This interpretation aligns with the legislative intent and avoids unjust and absurd outcomes.

← Previous Next →