2015 (10) TMI 1074 - AT - Income Tax

Date of index cost of acquisition for computation of capital gain - whether should be the year in which the previous owner acquired the property and not the year in which the assessee became the owner of such property? - Held that - Construing the words asset was held by the assessee in cl. (iii) of Expln.to s. 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Expln. 1(i)(b) to s. 2(42A) together with ss. 48 and 49 of the Act, it becomes absolutely clear that the object of the statute is not merely to tax the capital gains arising on transfer of a capital asset acquired by an assessee by incurring the cost of acquisition, but also to tax the gains arising on transfer of a capital asset inter alia acquired by an assessee as provided under s. 49 of the Act where the assessee is deemed to have incurred the cost of acquisition. Therefore, if the object of the legislature is to tax the gains arising on transfer of a capital asset acquired under a gift or will or inheritance by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. Apart from the above, s. 55(1)(b)(2)(ii) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under s. 49(1) of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital gains under s. 48 of the Act. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under s. 49(1) of the Act would arise only if the period for which the asset was held by the previous owner is included in determining the period for which the asset was held by the assessee Therefore, it is reasonable to hold that in the case of an assessee covered under s. 49(1) of the Act, the capital gains liability has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquisition. For determining the capital gain, the cost of acquisition of capital asset is crucial. Thus, keeping in view, the totality of facts, we hold that the long terms capital gains has to be from the date from which the capital asset in question was held by the previous owner and the indexed cost of acquisition also has to be determined on the very same basis, consequently, 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 became the owner of such asset. See Commissioner of Income-tax Versus Manjula J. Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of the date for the index cost of acquisition for computation of capital gains.
2. Interpretation of relevant provisions of the Income Tax Act concerning the computation of long-term capital gains.

Detailed Analysis:

1. Determination of the Date for the Index Cost of Acquisition for Computation of Capital Gains:

The primary issue in this case revolves around whether the date for the index cost of acquisition should be the year in which the previous owner acquired the property or the year in which the assessee became the owner of the property. The Revenue contended that the cost inflation index should be applied from the year the assessee became the owner. In contrast, the assessee argued, relying on the decision from the Hon'ble jurisdictional High Court in the case of CIT vs Manjula J. Shah, that the indexation should be from the year the previous owner acquired the property.

The Tribunal considered the rival submissions and the material on record. The property in question was originally purchased by a partnership firm in 1975, and the assessee's father, a partner in the firm, passed away in 1976. The assessee computed the long-term capital gain taking the cost of the property as on 01/04/1981. The Assessing Officer, however, estimated the value of the property for LTCG computation at Rs. 4,64,250, which was 1/8th of Rs. 45,14,000, and computed the LTCG in the hands of the assessee at Rs. 21,03,705.

On appeal, the First Appellate Authority directed the Assessing Officer to adopt the cost inflation index as on 01/04/2008, following the decision in Manjula J. Shah. The Tribunal upheld this decision, affirming that the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset.

2. Interpretation of Relevant Provisions of the Income Tax Act:

The Tribunal referred to several provisions of the Income Tax Act to resolve the issue. Section 45 of the Act charges profits or gains from the transfer of a capital asset to income tax under the head 'Capital gains.' Section 47(iii) specifies that a transfer under a gift, will, or inheritance is not regarded as a transfer, thus not attracting capital gains tax until the asset is transferred for valuable consideration. Section 48 details the computation of capital gains, including deductions for the cost of acquisition and improvement. Section 49(1)(ii) provides that the cost of acquisition for an asset acquired under a gift or will is deemed to be the cost at which the previous owner acquired it.

The Tribunal emphasized that the indexed cost of acquisition under Section 48 should be determined with reference to the cost inflation index for the first year in which the asset was held by the assessee or from 01/04/1981, whichever is later. Explanation 1(i)(b) to Section 2(42A) includes the period for which the asset was held by the previous owner in determining the holding period for the assessee.

The Tribunal concluded that the assessee is deemed to have held the asset from 1975, thus the indexed cost of acquisition should be computed from that year. This interpretation aligns with the object of the statute to tax gains arising from the transfer of assets acquired under a gift or will by including the period the asset was held by the previous owner.

The Tribunal also cited various case laws supporting this interpretation, concluding that the long-term capital gains liability and the indexed cost of acquisition should be computed from the date the previous owner held the asset.

Final Judgment:

The Tribunal dismissed the Revenue's appeal, affirming the decision of the First Appellate Authority to adopt the cost inflation index as on 01/04/2008, in line with the decision in Manjula J. Shah. The order was pronounced in the open court in the presence of representatives from both sides on 25/06/2015.