2012 (2) TMI 259 - HC - Income Tax

Long term capital gains period of holding property sold was transferred to trust on 05.01.1996 acquired by previous owner prior to 01.04.1981 Revenue contending indexed cost of acquisition from 05.01.1996 Held that - The expression held by the assessee used in Explanation (iii) to Section 48 has to be understood in the context and harmoniously with other Sections. The cost of acquisition stipulated in Section 49 means the cost for which the previous owner had acquired the property. The term held by the assessee should be interpreted to include the period during which the property was held by the previous owner. See CIT v. Manjula J.Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT Decided against the Revenue.

Summary

Issues Involved:
1. Interpretation of Explanation (iii) to Section 48 of the Income Tax Act.
2. Relationship between Section 48, Section 49(1) Explanation, and Explanation 1(i)(b) of Section 2(42A) regarding computation of capital gains.
3. Determination of indexed cost of acquisition for assets acquired through gift, will, or trust.

Issue-wise Detailed Analysis:

1. Interpretation of Explanation (iii) to Section 48 of the Income Tax Act:

The core issue revolves around whether Explanation (iii) to Section 48 can be interpreted without considering the effects of Section 49(1) Explanation and Explanation 1(i)(b) of Section 2(42A). The court examined the statutory provisions, focusing on the computation of capital gains and the period of holding of the asset by the assessee.

2. Relationship between Section 48, Section 49(1) Explanation, and Explanation 1(i)(b) of Section 2(42A) regarding computation of capital gains:

The court analyzed Sections 45, 48, and 49 of the Income Tax Act, 1961. Section 45 is the charging section for capital gains tax. Section 48 prescribes the mode of computation and includes the terms "cost of acquisition" and "cost of any improvement," which are to be indexed in the case of long-term capital gains. Section 49 deals with the cost of acquisition in cases where the asset is acquired through gift, will, or trust, and stipulates that the cost of acquisition should be deemed as that of the previous owner.

3. Determination of indexed cost of acquisition for assets acquired through gift, will, or trust:

The court addressed the Revenue's contention that the indexed cost of acquisition should be computed from the first year the asset was held by the assessee, not the previous owner. The court found this interpretation inconsistent with the legislative intent and the purpose behind Sections 48 and 49. It emphasized that the term "held by the assessee" should include the period during which the property was held by the previous owner, as per Explanation 1(i)(b) to Section 2(42A).

Detailed Analysis:

Literal Rule of Construction and Legislative Intent:

The court emphasized the need for a harmonious interpretation of Sections 48 and 49 to avoid absurdities and inconsistencies. It noted that the literal rule of construction should not lead to contradictions or stultification of the statutory objective. The court highlighted that the benefit of indexed cost of acquisition should extend to the period the asset was held by the previous owner, aligning with the legislative intent to tax "real" gains and not just inflationary increases.

Case Law Reference:

The judgment referred to the Bombay High Court's decision in CIT v. Manjula J. Shah, which supported the view that the period held by the previous owner should be included for computing the indexed cost of acquisition. The court agreed with this precedent, reinforcing the interpretation that the term "held by the assessee" includes the period held by the previous owner.

Conclusion:

The court concluded that the interpretation relied upon by the assessee was reasonable and in consonance with the object and purpose behind Sections 48 and 49. It held that the expression "held by the assessee" in Explanation (iii) to Section 48 should include the period during which the property was held by the previous owner. Consequently, the question of law was answered in favor of the appellant-assessee, and the court ruled against the Revenue's interpretation, ensuring the assessee could benefit from the indexed cost of acquisition from the date the previous owner acquired the property.