2014 (11) TMI 944 - HC - Income Tax

Computation of indexed cost of acquisition on transfer of capital asset - Whether the tribunal is right in concluding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee through succession, 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 actually became the owner of the asset through succession Held that - The Tribunal was rightly of the view that the decision in CIT v. Manjula J. Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT relied upon wherein it has been held that the Commissioner was not justified in not following the decision of the Hon ble Bombay High Court, as the ratio of the decision of the Bombay High Court rendered in the context of acquisition of property by way of gift will apply with greater force when property devolves by succession - though in the definition of indexed cost of acquisition , the word used are, in which the asset was held by the assessee a harmonious reading of Sections 48 and 49 makes it clear that, for the purpose of Indexed Cost of Acquisition , it has to be understood as the first year in which the previous owner held the said property - Otherwise, if the date of inheritance is taken into consideration, then the cost of acquisition of the asset on that date corresponding to the market value is to be taken into consideration - Otherwise, take the cost of acquisition on the day the previous owner acquired it and apply the Indexed Cost of Acquisition and then calculate the capital gains and the tax payable - the CIT was not justified in exercising his jurisdiction u/s 263 Decided against revenue.

Summary

Issues:
1. Interpretation of indexed cost of acquisition for computing capital gains on the transfer of a capital asset acquired through succession.
2. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961.
3. Application of legal principles regarding cost of acquisition and indexation in the context of inheritance of property.

Issue 1: Interpretation of indexed cost of acquisition for computing capital gains on the transfer of a capital asset acquired through succession:

The case involved a dispute over the indexed cost of acquisition for computing capital gains on the transfer of a property acquired through succession. The assessee, a legal heir, claimed indexation from 1.4.1981, the FMV of the property, while the Commissioner of Income Tax contended that indexation should start from the date the assessee held the property after the previous owner's death in 2000. The Bombay High Court judgment in a similar context was cited, emphasizing that the cost of acquisition should be based on the previous owner's acquisition cost with indexation applied from that date. The Tribunal upheld this view, setting aside the Commissioner's order and restoring the assessing authority's decision. The Tribunal's decision was based on a harmonious reading of Sections 48 and 49 of the Income Tax Act, aligning with the Bombay High Court's legal interpretation.

Issue 2: Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961:

The Commissioner of Income Tax invoked Section 263 to revise the assessing authority's decision, deeming it erroneous and prejudicial to the revenue's interest. The Commissioner argued that indexation should start from the date the assessee held the property, as per explanation (iii) to Section 48 of the Act. However, the Tribunal, relying on the Bombay High Court judgment, held that the Commissioner's intervention was unwarranted. The Tribunal emphasized that the assessing authority's decision was legally sound, and the Commissioner had no justification to interfere under Section 263. This issue highlighted the scope and limits of the Commissioner's revisionary powers under the Income Tax Act.

Issue 3: Application of legal principles regarding cost of acquisition and indexation in the context of inheritance of property:

The legal dispute revolved around the application of legal principles governing the cost of acquisition and indexation concerning inherited property. Section 49 of the Act stipulates that the cost of acquisition for inherited assets should be based on the previous owner's acquisition cost, with indexation calculated from that date. The assessee argued that the cost of acquisition as of 1.4.1981 should determine the indexed cost, irrespective of the date of succession. The Tribunal concurred with this interpretation, aligning with the Bombay High Court's precedent, and dismissed the revenue's appeal. This issue underscored the importance of correctly applying legal provisions related to inheritance and capital gains taxation.

This detailed analysis of the judgment highlights the intricate legal arguments and interpretations surrounding the computation of capital gains in cases of inherited property, the jurisdiction of tax authorities, and the application of statutory provisions in resolving disputes related to income tax assessments.