2018 (2) TMI 1378 - HC - Income Tax

Application of provision of section 48 Explanation (iii) - whether inflation index would apply for the first year when the asset was first held by the assessee - computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift - shares which are the subject matter of capital gains tax were purchased by the father of the assessee on 01.08.1989. They were gifted by him to his son on 15.03.2009. The son i.e. the assessee sold the shares on 19.03.2009 - what would be the relevant date for ascertaining the cost of acquisition of shares for the purpose of indexation. Held that - The issue is no longer res-integra. Division Bench of this Court in case of Commissioner of Income Tax v. Rajesh Vitthalbhai Patel reported in (2013 (7) TMI 413 - GUJARAT HIGH COURT) held that if the interpretation of the counsel for the Revenue was correct, this later reference to the cost of improvement borne by the assessee would not have been necessary since section 48 itself would take care of any improvement on the capital asset to be included for the cost of acquisition. The interpretation sought to be given by the Revenue would be unacceptable because there is no provision under which the cost of acquisition in the hands of the assessee in cases such as gift on the date of acquisition of the property can be made and found in the Act. A Serious roadblock would be created if such property is acquired through Will and would therefore have no reference to its actual cost on the date of operation of the Will. - Decided against revenue.

Summary

Issues:
1. Interpretation of section 48 Explanation (iii) regarding the application of inflation index for computing capital gains.
2. Calculation of indexed cost of acquisition for capital gains tax on a gifted asset.

Issue 1: Interpretation of section 48 Explanation (iii)
The appeal raised questions regarding the application of section 48 Explanation (iii) for computing capital gains tax. The primary concern was whether the inflation index should apply based on the year the asset was first held by the assessee. The case involved shares purchased by the father of the assessee in 1989, gifted to the son in 2009, and sold by the son in the same year. The divergence of opinion between the assessee and the Revenue centered on the relevant date for determining the cost of acquisition for indexation purposes.

Issue 2: Calculation of indexed cost of acquisition for gifted asset
The court referred to a previous Division Bench judgment in a similar case to settle the issue. The judgment clarified that the indexed cost of acquisition should be calculated with reference to April 1, 1981, for assets acquired before that date. The court emphasized the importance of the deeming fiction in section 49, which dictates that the cost of acquisition in the hands of the assessee is the cost at which the previous owner acquired the asset. The court rejected the Revenue's interpretation that the cost of acquisition should be based on the present assessee, highlighting that such an approach would undermine the deeming fiction and create inconsistencies in the law. Additionally, the court noted that the provision for cost of improvement in section 49 further supported the calculation method based on the previous owner's cost of acquisition.

In conclusion, the High Court dismissed the Tax Appeal, affirming the approach to calculate the indexed cost of acquisition for capital gains tax based on the cost at which the previous owner acquired the asset. The judgment provided clarity on the interpretation of section 48 Explanation (iii) and emphasized the significance of the deeming fiction in section 49 for determining the cost of acquisition in such cases.