2013 (1) TMI 1061 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the indexed cost of acquisition for inherited property.
2. Interpretation of relevant sections of the Income Tax Act, including sections 2(42A), 48, 49, and 55.
3. Application of judicial precedents and conflicting judgments.

Issue-wise Detailed Analysis:

1. Determination of the Indexed Cost of Acquisition for Inherited Property:

The primary issue was whether, for calculating the indexed cost of acquisition of an inherited property, the period during which the previous owner held the asset should be included. The Assessing Officer (AO) argued that the indexation should start from the financial year 2000-01, when the assessee inherited the property from her mother. The AO relied on Explanation 3 of section 48 of the Income Tax Act, which defines "Indexed cost of acquisition" as the cost inflation index for the year in which the asset is transferred relative to the cost inflation index for the first year in which the asset was held by the assessee.

The assessee contended that the period during which the previous owner held the asset should be included in determining the indexed cost of acquisition, citing Explanation 1(b) to section 2(42A) and section 49 of the Income Tax Act. The assessee argued that the cost of acquisition should be deemed to be the cost for which the previous owner acquired it, and the indexation should be applied from the year 1981-82, when the previous owner (the mother) held the property.

2. Interpretation of Relevant Sections of the Income Tax Act:

The assessee's interpretation was supported by a coherent reading of sections 2(42A), 48, 49, and 55 of the Income Tax Act, which collectively suggest that the period of holding by the previous owner should be included for the purpose of determining the indexed cost of acquisition. The assessee argued that the legislative intent was to treat the date and cost of acquisition of the previous owner as the date and cost of acquisition for the assessee.

The AO, however, contended that the language of Explanation (iii) to section 48 was different from sections 2(42A), 55(1)(b)(ii), and 55(2)(b)(ii), and did not refer to the previous owner. The AO relied on the case of DCIT vs Kishore Kanungo, where it was held that the period of holding by the previous owner is considered for determining whether the asset is a long-term or short-term capital asset, but not for indexation purposes.

3. Application of Judicial Precedents and Conflicting Judgments:

The CIT(A) sided with the assessee, relying on the decision of the Special Bench in the case of DCIT vs. Manjula J. Shah, which overruled the Kishore Kanungo judgment. The Special Bench held that for computing long-term capital gains on inherited property, the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset. This interpretation was based on a schematic reading of the relevant provisions to produce the desired effect, aligning with the legislative intent.

The revenue, dissatisfied with the CIT(A)'s decision, appealed to the Tribunal. The revenue's representative argued that the indexation should begin from the year the assessee became the owner, as per Explanation (iii) to section 48, and cited the case of Ravi Kumar Narula vs CIT, where the Delhi High Court decided in favor of the revenue. However, the assessee's representative countered that the Ravi Kumar Narula case dealt with the nature of capital gains (long-term or short-term) and not indexation.

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, agreeing with the Special Bench's interpretation in the Manjula J. Shah case. The Tribunal found that the assessee became the owner of the property by virtue of a will in FY 2000-01, while the mother held the property before 01.04.1981. Therefore, for the purpose of calculating the indexed cost of acquisition, the period during which the previous owner held the asset should be included. The Tribunal dismissed the revenue's appeal, affirming that the CIT(A) had rightly deleted the addition made by the AO.

Conclusion:

The Tribunal concluded that for inherited property, the indexed cost of acquisition should be computed by including the period during which the previous owner held the asset. This decision aligns with the legislative intent and the Special Bench's interpretation in the Manjula J. Shah case. The revenue's appeal was dismissed, and the CIT(A)'s order was upheld.