2015 (2) TMI 715 - HC - Income Tax

Revision u/s 263 - computation of capital gains arising on transfer of a capital asset acquired succession - benefit of indexation from April 1, 1981 as per AO or from April 23, 2000 as per CIT(A) - assessees are the legal heirs of one Mr. C. B. Devaiah who owned the property which had been acquired by him prior to April 1, 1981 - Held that - When an asset is acquired by way of inheritance, the cost of acquisition of the asset should be calculated on the basis of the cost of acquisition by the previous owner and the said cost of acquisition of the previous owner has to be calculated on the basis of the indexed cost of acquisition as provided in Explanation (iii) to section 48. Though in the definition of indexed cost of acquisition , the words used are, in which the asset was held by the assessee , a harmonious reading of sections 48 and 49 makes it clear 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. Tribunal was correct 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. See CIT v. Manjula J. Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
- Interpretation of section 48 and 49 of the Income-tax Act, 1961 regarding indexed cost of acquisition in the case of capital gains arising from the transfer of a capital asset acquired through succession.
- Jurisdiction of the Commissioner of Income-tax under section 263 of the Act to revise an order passed by the assessing authority.
- Applicability of a judgment of the Bombay High Court regarding the computation of capital gains in cases of property acquired through succession.

Analysis:

1. Interpretation of Section 48 and 49 regarding Indexed Cost of Acquisition:
The case involved three appeals by the Revenue against the Tribunal's order setting aside the Commissioner of Income-tax's decision under section 263 of the Income-tax Act. The issue revolved around the computation of capital gains on the sale of a property acquired through succession by legal heirs. The assessees claimed indexation on the fair market value as on April 1, 1981, while the Commissioner argued that indexation should start from the date the legal heirs held the property after the death of the previous owner. The High Court held that for the indexed cost of acquisition, it should be based on the year in which the previous owner first held the property, as per a judgment of the Bombay High Court. Therefore, the Tribunal's decision to follow the Bombay High Court's ruling was upheld, and the appeals were dismissed.

2. Jurisdiction of the Commissioner under Section 263:
The Commissioner exercised power under section 263 to revise the assessing authority's order, contending that allowing indexation from April 1, 1981, was erroneous. However, the Tribunal, relying on the Bombay High Court's judgment, found the assessing authority's decision to be correct. The High Court agreed with the Tribunal's reasoning, emphasizing that the Commissioner was not justified in interfering with the assessing authority's order. The Tribunal's decision was upheld, and the appeals were dismissed.

3. Applicability of Bombay High Court Judgment:
The Tribunal relied on a judgment of the Bombay High Court regarding the computation of capital gains in cases of property acquired through succession. The High Court concurred with the Tribunal's decision, stating that the Bombay High Court's ruling applied with greater force when property devolves by succession. The High Court found that the assessing authority's approach was correct, and the Commissioner's intervention under section 263 was unwarranted. Consequently, the Tribunal's decision to set aside the Commissioner's order and restore the order of assessment was upheld.

In conclusion, the High Court's detailed analysis of the issues surrounding the interpretation of relevant sections of the Income-tax Act, the jurisdiction of the Commissioner under section 263, and the applicability of the Bombay High Court's judgment provided clarity on the computation of capital gains in cases of property acquired through succession. The decision reaffirmed the importance of following legal precedents and upheld the Tribunal's ruling in favor of the assessees while dismissing the Revenue's appeals.