2013 (7) TMI 413 - HC - Income Tax

Computation of capital gain - Mode of computation u/s 48 - cost of acquisition versus CII - receipt of property under gift or will - Whether on the facts and in the circumstances of the case, the Tribunal has erred substantially in law in not recognizing that the cost of acquisition of an asset and cost inflation index are two different legal concepts and are mutually exclusive Whether the Appellate Tribunal erred in law in not applying the provisions of section 48, Explanation(iii) which clearly states that inflation index would apply for the first year when the asset was first held by the assesse. Held that - Tribunal was right when stating that the indexed cost of acquisition shall have to be worked out with reference to 1.4.1981 - in the present case the asset was acquired by the previous owner of the property - an asset acquired prior to 1.4.1981 the indexed cost of acquisition would be the cost of acquisition multiplied by the ratio of the Cost Inflation Index in the year in which assessee s asset is transferred to the Cost of Inflation Index for the year beginning on 1.4.1981 - by virtue of a deeming fiction provided in sub-section(1) of section 49, cost of acquisition in hands of the assessee would be the cost for which the previous owner of the property acquired it - It is for this purpose that we need to fall back on computation provision of section 48 - When we do so, we work out the cost of acquisition of the asset in the hands of previous owner. While doing so, we cannot transpose the assessee in explanation (iii) of section 48 - Doing so, would amount to falling short of giving full effect to the deeming fiction contained in sub-section(1) of section 49. 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 road-block 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 the department.

Summary

Issues:
1. Computation of capital gain - Indexed cost of acquisition based on gift date or previous owner's acquisition date.
2. Interpretation of sections 48 and 49 of the Income Tax Act, 1961.

Analysis:
1. The case involved a dispute regarding the computation of capital gains for the assessment year 2005-2006. The assessee had declared long-term capital gains upon selling a property received as a gift. The Assessing Officer calculated the indexed cost of acquisition based on the date of the gift, while the CIT(Appeals) directed the re-calculation based on the cost as on 1.4.1981. The Tribunal upheld the CIT(Appeals) decision, emphasizing that as per section 49 of the IT Act, the cost of acquisition should be considered as per the previous owner's acquisition cost, not the gift date. The Tribunal's decision was based on the statutory provisions of the IT Act, confirming that the indexed cost of acquisition should be determined as on 1.4.1981, dismissing the Revenue's appeal.

2. The court analyzed sections 48 and 49 of the Act to resolve the issue. Section 49 provides a deeming provision for computing the cost of acquisition in cases of gift or will. It states that the cost of acquisition shall be deemed to be the total cost for which the previous owner acquired the property, increased by the cost of any improvements. The court highlighted that in cases of gift, there is no actual cost of acquisition for the assessee, and the deeming provision under section 49 determines the cost based on the previous owner's acquisition cost. The court further explained that section 48 outlines the mode of computation for capital gains, including the indexed cost of acquisition. The indexed cost of acquisition is calculated based on the ratio of the Cost Inflation Index for the transfer year to the index for the first year the asset was held by the assessee or from 1.4.1981. The court emphasized that the deeming fiction in section 49 must be given full effect, and the interpretation provided by the Revenue, which transposed the assessee in explanation (iii) of section 48, would not align with the statutory provisions.

3. The court rejected the Revenue's interpretation, noting that the provision in section 49 regarding the cost of improvements by the previous owner or the assessee would be redundant if the Revenue's interpretation was correct. Additionally, the court highlighted that there was no provision in the Act to determine the cost of acquisition in cases of gift based on the date of acquisition by the assessee. The court found no basis for the Assessing Officer's adopted cost of acquisition and dismissed the Tax Appeal, affirming the Tribunal's interpretation as correct.