2014 (8) TMI 111 - AT - Income Tax

Indexed cost of acquisition - Property inheritance as per Explanation-(iii) to section-48 Held that - The cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of assets incurred or borne by previous owner or the assessee as the case may be Following the decision in DCIT vs. Manjula J. Shah 2009 (10) TMI 646 - ITAT MUMBAI - when the Legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will and the capital gains under section 48 of the Act has to be computed by applying the deemed fiction, it is not possible to accept the contention of Revenue that the fiction contained in Explanation 1(i)(b) to section 2(42A) of the Act cannot be applied in determining the indexed cost of acquisition under section 48 of the Act Decided against Revenue.

Summary

Issues:
Indexed cost of acquisition of property through inheritance as per Explanation-(iii) to section-48 of the Income tax Act.

Analysis:
The appeal by the revenue challenges the order of CIT(A) for the assessment year 2009-10, specifically regarding the indexed cost of acquisition of property inherited in 1999. The revenue argues that the cost inflation index should be adopted from the year 1999 when the assessee acquired the property after her mother's death, not from 1981-82 when the property was first held by the previous owner. The CIT(A) allowed the claim of the assessee based on the decision of the Special Bench in the case of Manjula J. Shah, which was upheld by the Hon'ble Jurisdictional High Court. The key issue revolves around whether the indexation should start from the year of inheritance or the year the property was first held by the previous owner.

The Tribunal considered the provisions of the Income Tax Act and the Special Bench's decision in the case of Manjula J. Shah. It was noted that as per section 49 of the Act, the cost of acquisition of an inherited asset is deemed to be the cost for which the previous owner acquired it. The Tribunal highlighted that the indexed cost of acquisition should be determined based on the first year the capital asset was "held by the assessee." The Tribunal referred to Explanation 1(i)(b) to section 2(42A) of the Act, which includes the period the asset was held by the previous owner in the assessee's holding period. The decision emphasized that the deeming fiction under the Act must be applied to compute long-term capital gains tax accurately.

Ultimately, the Tribunal upheld the decision of the CIT(A) in favor of the assessee, following the precedent set by the Special Bench and the Jurisdictional High Court. The Tribunal dismissed the revenue's appeal, affirming that the indexed cost of acquisition should be calculated from the year the property was first held by the previous owner, not just from the year of inheritance. The order was pronounced on 23rd July 2014, concluding the matter in favor of the assessee.