2014 (10) TMI 101 - HC - Income Tax

Computation of indexed cost of acquisition capital gain on transfer of capital asset acquired through succession - Whether the tribunal is right in concluding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee through succession, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee actually became the owner of the asset through succession Held that - Though in the definition of 'indexed cost of acquisition', the word used are, in which the asset was held by the assessee , a harmonious reading of Sections 48 and 49 makes it clear for the purpose of 'Indexed Cost of Acquisition', it has to be understood as the first year in which the previous owner held the said property - Otherwise, if the date of inheritance is taken into consideration, then the cost of acquisition of the asset on that date corresponding to the market value is to be taken into consideration - Otherwise, take the cost of acquisition on the day the previous owner acquired it and apply the Indexed Cost of Acquisition and then calculate the capital gains and the tax payable the Tribunal rightly followed Commissioner of Income-tax Versus Manjula J. Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT and the order is upheld Decided against revenue.

Summary

Issues:
1. Interpretation of Section 48 and Section 49 of the Income Tax Act, 1961 regarding indexed cost of acquisition in the case of capital gains arising from the transfer of a property acquired through succession.

Analysis:
The case involved two appeals by individuals who were legal heirs of a deceased property owner. The legal heirs sold the property and declared capital gains based on the fair market value (FMV) of the property as on 1.4.1981. The assessing authority allowed indexation on FMV from 1.4.1981. However, the Commissioner of Income Tax under Section 263 found this treatment erroneous as per explanation (iii) to Sec.48, stating that indexation should start from the date the legal heirs held the property, i.e., after the death of the previous owner. The tribunal, relying on a Bombay High Court judgment, held that the Commissioner's order was unjustified, and the assessing authority's decision was correct. The tribunal set aside the Commissioner's order and restored the order of assessment.

The revenue appealed against the tribunal's decision, arguing that indexed cost of acquisition should be calculated from the date the legal heirs held the property, as per explanation (iii) to Section 48. The revenue highlighted a pending Special Leave Petition against the Bombay High Court judgment. On the other hand, the legal heirs contended that if the cost of acquisition as on 1.4.1981 is considered, then indexed cost of acquisition should be calculated from that date, not from the date of succession. They referred to Section 49, stating that the cost of acquisition should be based on the previous owner's cost, as per the Bombay High Court judgment. The appeals were admitted to consider the substantial question of law regarding the computation of capital gains in such cases.

The judgment delved into the provisions of Section 45, Section 48, and Section 49 of the Income Tax Act. It explained that indexed cost of acquisition should be calculated based on the year in which the previous owner held the asset, as per a harmonious reading of Sections 48 and 49. The judgment emphasized that in cases of inheritance, the cost of acquisition should be determined based on the previous owner's cost, with indexation applied accordingly. The tribunal's decision to follow the Bombay High Court judgment was deemed correct, and the substantial question of law was answered in favor of the legal heirs. The appeals were dismissed with no costs incurred.