2016 (7) TMI 689 - AT - Income Tax

Determination of capital gains on the sale of capital asset - short-term capital gains or long-term capital gains - exemption under section 54 denied - period of holding of property inherited by the assessee from his father - application of the cost of acquisition in terms of section 49(1)(iii)(a) - Held that - In the present case, the assessee inherited the property on November 20, 2005. However, the said property was purchased by the assessee s ancestors, i.e., grandfather, the late Keshavdas on June 14, 1971, and after that it was bequeathed to the assessee s father, Shri Harichand, on the death of his grandfather on June 24, 2001. Thereafter, the property was gifted to the assessee on November 20, 2005. Accordingly, the cost of indexation to be applied as on April 1, 1981, after fixing the value of asset as on April 1, 1981, and it cannot be said that the assessee acquired the property under dispute on November 20, 2005, so as to compute the capital gains as short-term capital gains. In other words, capital gains has to be assessed as long-term capital gains by fixing the cost of asset as on April 1, 1981, and, thereafter, applying the cost of inflation index in terms of section49(1)(iii)(a) of the Act and, consequently, the assessee is also entitled for exemption under section 54 of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Determination of capital gains as short-term or long-term.
2. Application of cost inflation index for computing capital gains.
3. Entitlement to exemption under section 54 of the Income-tax Act.

Issue 1: Determination of Capital Gains:
The appeal involved a dispute regarding the period of holding of inherited property, leading to the incorrect classification of capital gains as short-term instead of long-term. The Assessing Officer assessed the income of the appellant based on the cost inflation index of 497 relevant for the financial year 2005-06, resulting in a tax demand. The Commissioner of Income-tax (Appeals) upheld the short-term capital gains classification, denying the appellant the benefit of exemption under section 54 of the Act. However, the Tribunal found that the property was inherited by the appellant on November 20, 2005, but originally acquired by the appellant's ancestors in 1971. Therefore, the capital gains were deemed long-term, and the appellant was entitled to the exemption under section 54.

Issue 2: Application of Cost Inflation Index:
The case involved a disagreement over the correct application of the cost inflation index for computing capital gains. The appellant argued for the cost inflation index to be computed from April 1, 1981, based on the property's acquisition by the ancestors. The Departmental representative contended that the appellant's father became the legal heir of the property in 2001, and the indexation should start from that year. The Tribunal referenced previous judgments and held that indexation should be allowed based on the period of holding of the asset, ignoring intermediate transfers due to succession. Consequently, the cost inflation index was applied from April 1, 1981, supporting the appellant's position.

Issue 3: Entitlement to Exemption under Section 54:
The appellant's entitlement to exemption under section 54 of the Income-tax Act was a crucial aspect of the appeal. The Commissioner of Income-tax (Appeals) denied the exemption, considering the property sale within 36 months of the appellant becoming the owner. However, the Tribunal determined that the property was inherited by the appellant in 2005, and the correct cost inflation index should be applied from 1981. Consequently, the capital gains were classified as long-term, making the appellant eligible for the exemption under section 54.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant based on the correct determination of capital gains as long-term, the application of the cost inflation index from 1981, and the consequent entitlement to exemption under section 54 of the Income-tax Act.