2012 (8) TMI 352 - AT - Income Tax

Computation of indexed cost of acquisition for of computation of LTCG - property sold got from inheritance from ancestors - Held that - As in case capital asset been inherited by the assessee and previous owner had acquired the property prior to 1.4.1981 the cost of acquisition to the assessee will be the cost of acquisition to the previous owner or FMV of the property as on 1.4.1981 at the option of the assessee - As in this case, the assessee had opted for FMV as on 1.4.1981 as the cost of acquisition no dispute that the previous owner had acquired the property prior to 1.4.1981 and thus while computing indexed cost of acquisition of the property, the cost inflation index of 100 (as on 1.4.1980) and cost inflation index of the year in which the property was sold by the assessee has to be taken into account and not the cost inflation index of the year in which the assessee first held the property - in favour of assessee.

Summary

Issues:
Computation of indexed cost of acquisition of property inherited by the assessee for the purpose of long term capital gains.

Analysis:
The case involved a dispute regarding the computation of the indexed cost of acquisition of a property inherited by the assessee from ancestors for the assessment year 2007-08. The property in question was a 25% interest in a plot in New Delhi, which had been inherited by the assessee through a series of inheritances from various family members. The key contention was whether the indexed cost of acquisition should be based on the year in which the assessee first held the property or the year in which the previous owner had acquired it.

The Assessing Officer (AO) did not accept the assessee's computation method and used the cost inflation index of the year in which the property was actually held by the assessee. However, the assessee argued that the cost of acquisition should be based on the fair market value (FMV) of the property as on 1.4.1981, as the property had been acquired by the previous owners before that date. The assessee applied the cost inflation index of the financial year 2006-07 and indexation as of 1.4.1981 for computing the indexed cost of acquisition.

The dispute was resolved by interpreting relevant provisions of the Income Tax Act. It was established that when a capital asset is inherited, the cost of acquisition is deemed to be the cost for which the previous owner acquired it. Specifically, under section 55(2)(b)(ii), if the capital asset became the property of the assessee by way of inheritance and the previous owner acquired the asset before 1.4.1981, the cost of acquisition to the assessee would be the cost to the previous owner or the FMV of the asset as on 1.4.1981. Therefore, the cost of acquisition for the assessee in this case was correctly determined based on the FMV as on 1.4.1981.

The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) in favor of the assessee, citing the precedent set by the Special Bench in the case of DCIT vs. Manjula Shah. The Tribunal found no fault in the CIT(A)'s order, as the indexed cost of acquisition should indeed be computed based on the year in which the previous owner acquired the asset, not the year in which the assessee first held it. Consequently, the appeal by the revenue was dismissed, and the order of the CIT(A) was upheld.

In conclusion, the judgment clarified the correct method for computing the indexed cost of acquisition of inherited property for the purpose of determining long term capital gains, emphasizing the importance of considering the year in which the previous owner acquired the asset when applying cost inflation index for indexation purposes.