2015 (6) TMI 31 - AT - Income Tax

Computation of capital gain - property in question was acquired by way of gift/will - the indexed cost of acquisition has to be taken from the date on which it was held by the previous owner and not from the date from which the asset was first held by the assesse as held by AO - CIT(A) deleted the addition - Held that - The benefit of indexed cost of inflation is given to ensure the taxpayer pays capital gains tax on real or actual gain and not on increase in capital value of property due to inflation. While computing capital gains arising on transfer of capital assets, acquired by the assessee under a gift, indexed cost of acquisition has to be computed with reference to the year in which previous owner, first held the asset and not the year in which assessee became the owner of the asset. Explanation (iii) provides index cost of acquisition means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year, in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 1981. The property in question was gifted on 01/02/2003 and the assessee sold the flat on 30/06/2003 for ₹ 1.10 crores. Applying the decision of the Hon ble jurisdictional High Court pronounced in the case of Manjula J. Shah (2011 (10) TMI 406 - BOMBAY HIGH COURT), the capital gains liability has to be computed by considering that the assessee held the asset from the date it was held by the previous owner and the same analogue has to be applied in determining the indexed cost of acquisition. Since the property in question was acquired by way of gift/will by the assessee, the index cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset, consequently, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). - Decided in favour of assesse.

Issues Involved:
1. Computation of indexed cost of acquisition for capital gains tax purposes.
2. Applicability of the indexed cost of acquisition from the date the previous owner held the asset versus the date the assessee became the owner.

Issue-wise Detailed Analysis:

1. Computation of Indexed Cost of Acquisition for Capital Gains Tax Purposes:

The primary issue in this case revolves around the computation of the indexed cost of acquisition for the purpose of calculating long-term capital gains (LTCG) tax. The Revenue contested the decision of the Commissioner of Income Tax (Appeals), who deleted the addition made by the Assessing Officer (AO) based on the computation of the indexed cost of acquisition. The AO had calculated the indexed cost from the date the assessee received the asset, whereas the Commissioner of Income Tax (Appeals) held that the indexed cost should be computed from the date the previous owner first held the asset.

2. Applicability of Indexed Cost of Acquisition from the Date the Previous Owner Held the Asset versus the Date the Assessee Became the Owner:

During the hearing, the Revenue's representative argued that the indexed cost of acquisition should be calculated from the date the assessee became the owner of the asset. However, the Tribunal referred to the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Income-tax, Mumbai vs. Manjula J Shah, which held that for computing capital gains on a capital asset acquired under a gift, the indexed cost of acquisition must be determined with reference to the year in which the previous owner first held the asset.

The Tribunal noted that the Hon'ble Bombay High Court had examined various provisions related to the taxability of capital gains and concluded that the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset. This is based on the deeming fiction contained in Section 49(1)(ii) of the Income Tax Act, which provides that the cost of acquisition of an asset acquired under a gift or will is deemed to be the cost for which the previous owner acquired it, increased by any cost of improvement incurred by the previous owner or the assessee.

The Tribunal further cited the Hon'ble High Court's reasoning that the expression "held by the assessee," as used in Section 48 of the Income Tax Act, should be understood as defined under Section 2 of the Act. Specifically, Explanation 1(i)(b) to Section 2(42A) provides that in determining the period for which an asset is held by an assessee under a gift, the period for which the asset was held by the previous owner shall be included. Therefore, the indexed cost of acquisition must be computed based on the period the previous owner held the asset.

The Tribunal reiterated the High Court's conclusion that for an assessee covered under Section 49(1) of the Act, the capital gains liability must be computed by considering that the assessee held the asset from the date it was held by the previous owner. This same principle applies to determining the indexed cost of acquisition.

In the present case, the assessee had acquired the property by way of gift, and the previous owner first held the asset prior to 1981-82. However, for a portion of the property gifted on 30/05/1995, the indexed cost of acquisition should be computed with reference to the year 1995-96. For the remaining portion, the indexed cost should be computed with reference to the year 1981-82.

Conclusion:

The Tribunal affirmed the decision of the Commissioner of Income Tax (Appeals) and concluded that the indexed cost of acquisition must be computed with reference to the year the previous owner first held the asset. The appeal filed by the Revenue was dismissed, and the Tribunal upheld the computation of long-term capital gains as determined by the Commissioner of Income Tax (Appeals).

Final Judgment:

The appeal of the Revenue is dismissed. This Order was pronounced in the open court in the presence of the ld. DR at the conclusion of the hearing on 01/04/2015.

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