2012 (9) TMI 582 - AT - Income Tax

Capital gain Asset inherited to assessee Computation of Index cost of acquisition Whether the year in which the previous owner first held the asset or the year in which the asset inherited to assessee used for indexation Held that - Following the decision of BOMBAY HIGH COURT in case of Manjula J. Shah (2011 (10) TMI 406) that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift/inheritance, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. Appeal decides in favour of assessee

Issues Involved:

1. Computation of capital gains by applying Cost Inflation Index (CII) for the year of acquisition by the previous owner.
2. Reliance on Explanation 1(i)(b) to Section 2(42A) versus Explanation (iii) to Section 48 for determining the indexed cost of acquisition.

Issue-wise Detailed Analysis:

1. Computation of Capital Gains by Applying Cost Inflation Index (CII) for the Year of Acquisition by the Previous Owner:

The primary issue revolves around whether the capital gains should be computed by applying the Cost Inflation Index (CII) for the year of acquisition by the previous owner or by the assessee. The assessee inherited a property from his father, who had acquired it in 1973. The assessee claimed the benefit of indexation since 1981, computing the indexed cost of acquisition at Rs. 35,12,630/-. The Assessing Officer (AO) allowed the benefit of indexation from the year 2000-01, the year the property was inherited by the assessee, resulting in an indexed cost of acquisition of Rs. 8,65,426/-. Consequently, the AO concluded that the assessee had claimed an excess deduction of Rs. 26,48,204/-.

The CIT (A) deleted the addition made by the AO, holding that the capital gain arising to the assessee was to be computed by applying the CII for the year of acquisition by the previous owner, i.e., the father of the assessee. The Revenue challenged this decision, contending that the CIT (A) erred in holding that the capital gain should be computed by applying the CII for the year of acquisition by the previous owner, which they argued violated Explanation (iii) to Section 48 of the IT Act.

2. Reliance on Explanation 1(i)(b) to Section 2(42A) versus Explanation (iii) to Section 48 for Determining the Indexed Cost of Acquisition:

The Revenue argued that Explanation 1(i)(b) to Section 2(42A) is only for distinguishing whether the asset is a short-term or long-term asset, whereas Explanation (iii) to Section 48 specifically provides for the manner of computation of capital gains. The CIT (A)'s reliance on Explanation 1(i)(b) to Section 2(42A) was contended to be in contravention of the provisions of Explanation (iii) to Section 48.

The assessee's counsel argued that the matter was settled in favor of the assessee by the decisions in Commissioner of Income-tax-XII vs. Manjula J. Shah (Bom), DCIT vs. Manjula J. Shah (SB), and Arun Shungloo Trust vs. Commissioner of Income-tax (Del). These decisions established that Clause (iv) of the Explanation to Section 48 does not refer to the date on which the asset was held by the assessee and that the benefit of indexed cost of improvement would be available even if the asset is acquired under a will.

Judgment Analysis:

The Tribunal observed that the AO relied on Kishore Kanungo and Arun Shungloo Trust, which were overruled by the Special Bench in Manjula J. Shah. The jurisdictional High Court in Arun Shungloo Trust and Manjula J. Shah upheld the Division Bench decisions, establishing that the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset.

The Tribunal cited the Bombay High Court's decision in Manjula J. Shah, which clarified that the indexed cost of acquisition should be determined with reference to the cost inflation index for the first year in which the capital asset was held by the previous owner. The Court emphasized that the benefit of indexed cost of improvement and acquisition should be available even if the asset is acquired under a gift, will, or succession.

The Tribunal concluded that the CIT (A) correctly followed the Special Bench decision in Manjula J. Shah and did not commit any error. The appeal filed by the Department was dismissed, and the order pronounced in the open court on 06.07.2012.

Conclusion:

The Tribunal upheld the CIT (A)'s decision to compute the capital gains by applying the Cost Inflation Index for the year of acquisition by the previous owner. The Tribunal emphasized the consistency and legislative intent behind Sections 48 and 49, ensuring that the taxpayer pays capital gains tax on the real gain, considering the period the asset was held by the previous owner. The appeal filed by the Department was dismissed.

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