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TMI Blog2009 (10) TMI 646X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost inflation index for the year 1987-88 would be applied to the said cost to work out the indexed cost of acquisition. Such a working will not stand to any reasonability or logic and will certainly defeat the very purpose of indexation scheme as explained in the aforesaid Circular No. 636, dated 31-8-1990. Considering the facts of the case and relevant material on record, We are of the view that for the purpose of computing long-term capital gain arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Explanation (iii) to section 48 after taking into account the period for which the said capital asset was held by the previous owner. In that view of the matter, we hold that the indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held the asset. Accordingly, we answer the question referred to us in favour of the assessee and uphold the impugned order of the learned CIT(A) on this issue. In the result the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002-03 and therefore cost inflation index of 447 applicable to that year should have been adopted for the purpose of arriving at the indexed cost of acquisition. He, therefore, sought the explanation of the assessee in the matter. In reply, reliance was placed by the assessee on the provisions of Explanation 1(b ) to section 2(42A ) to contend that the capital asset being flat having become her property under the gift, the holding period of the previous owner was liable to be included for determining the period for which the said flat was held by her. It was contended that the period of holding of the said flat was thus was to be reckoned from 29-1-1993 i.e., date from which the said flat was held by the previous owner. This contention of the assessee was not found acceptable by the Assessing Officer According to him, Clause (b) of Explanation 1 to section 2(42A) relied upon by the assessee was applicable only for determining whether the property in question was short-term capital asset or long-term capital asset. He held that the same however could not be extended or applied for the purpose of working out indexed cost of acquisition and in view of the clear provisions of Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Explanation (iii) to section 48. He contended that the view taken by the Assessing Officer on this issue thus was based on the relevant provisions of the Act which are plain and clear in this context and a similar view has also been taken by the Mumbai Bench of ITAT in the case of Dy. CIT v. Kishore Kanungo [2006] 102 ITD 437 after analyzing the said provisions. He contended that no doubt there are other decisions of the Tribunal taking a view in favour of the assessee on this issue, but the same have been expressed without taking into consideration the provisions of Explanation (iii) to section 48 which are relevant and material in this context. 5. The learned counsel for the assessee at the outset referred to the provisions of section 47(iii) to point out that transaction involving gift is not regarded as transfer. He submitted that cost of acquisition of the previous owner is treated as cost of acquisition of the assessee for the purpose of computing long-term capital gain on the transfer of capital asset becoming property of the assessee under a gift and as per second proviso to section 48, indexed cost of acquisition is to be adopted for working out long-term capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars, the only logical conclusion is that the benefit of indexation should be given for the corresponding period. He contended that if the interpretation sought to be given by the D.R. is accepted, nobody would get the benefit of indexation for the period of holding of the capital asset by the previous owner which is certainly not acceptable in logical terms. He contended that such literal interpretation on the contrary would result in absurdity and unjust result which has to be avoided as held by the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597. He contended that in its decision rendered by the Mumbai Bench of ITAT in the case of Kishore Kanungo (supra), such a literal interpretation was adopted and as the same is leading to absurdity and unjust result, the view taken by the Division Bench of the Tribunal adopting such literal interpretation needs to be reviewed by this Special Bench. He contended that the decision rendered by Calcutta Bench of ITAT in the case of Smt. Mina Deogun v. ITO [2008] 117 TTJ (Kol.) 121, taking a view in favour of the assessee on this issue, on the other hand, is a well discussed and well considered one. He therefore strongly relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the capital asset becoming the property of the assessee under gift is transferred by him as envisaged in section 45, it gives rise to capital gain chargeable to tax and as per the provision of section 49(1), the cost of acquisition of such 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 the asset incurred or borne by the previous owner or the assessee, as the case may be. As per second proviso to section 48, where the long-term capital gain arises from the transfer of long-term capital asset, what would be deductible from the full value of the consideration for computing the income from capital gain is the indexed cost of acquisition and indexed cost of any improvement. The definition of "Long-term capital asset" is given in section 2(29A) to mean a capital asset which is not a short-term capital asset. The expression "short-term capital asset" is defined in section 2(42A) so as to mean a capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. As per Explanation 1(b) to section 2(42A), in the case of capital asset which becomes the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Explanation 1(b) to section 2(42A) allowing inclusion of the period for which the asset was held by the previous owner in determining the period for which any capital asset is held by the assessee in the case of such capital asset becoming the property of the assessee under the gift is relevant only to ascertain whether the said capital asset is a short-term capital asset or long-term capital asset. We find it difficult to accept this contention of the ld. D.R. for the reasons which are set forth hereunder. 12. The expression "indexed cost of acquisition" used in section 48 is defined in Explanation (iii) as under:-- (iii)"indexed 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 1st day of April, 1981, whichever is later; 13. The definition of "short-term capital asset" is given in section 2(42A) and Explanation 1(b ) to the said section reads as under :-- "42A. "Short-term capital asset" means a capital asset held by an assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set became the property of the assessee" as used in section 49(1). 15. As already observed, the transaction of gift is not regarded as transfer and accordingly, capital gain arising from such transfer is not made chargeable to tax under section 45. However, this capital gain by implication is brought to tax at second stage when capital asset becoming the property of the assessee under gift is subsequently transferred by him by adopting the date and cost of acquisition of the capital asset of the previous owner as the date and cost of acquisition of the assessee. This precisely is the scheme of the Act as laid out in the relevant provisions and if Explanation (iii ) to section 48 is interpreted in the way sought by the ld. D.R. by taking the date on which the capital asset received by the assessee under a gift becoming his property for the purpose of working out the indexed cost of acquisition, it will certainly not be in consonance with the scheme. We, therefore, agree with the contention of the ld. Counsel for the assessee that one should not go by the literal meaning of the words or by the grammatical structure of the sentence while interpreting the relevant provisions of Explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal in the case of Kishore Kanungo (supra) would result in not giving the benefit of indexation for the period of holding of capital asset by the previous owner which will defeat the very purpose of allowing the benefit of indexation as explained in paragraph No. 35 of CBDT Circular No. 636, dated 31-8-1992 which is extracted below :-- "35. The Finance Act has recast the system of taxation of long-term capital gains. At present, an asset is considered to be long-term if it is held for a period of more than 36 months except for shares of a company, where the period of holding should be more than 12 months. This definition continues to be the same in the changed format. In the scheme prior to 1-4-1992 a basic deduction of Rs. 15,000 and a fixed percentage of the balance amount of capital gains was allowed as deduction under section 48(2). The percentage depended on the nature of the asset and the status of the assessee, but was unrelated to the length of the period of holding. This deduction was intended to give a rough and ready relief for inflation, to counteract bunching of profits and to exclude from the tax net capital gains which were relatively small. As an additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition" in the statute. The settled principle of statutory interpretation with reference to Tax Laws is that the words in the "statute" are to be understood in the sense in which they best harmonize with the subject of the enactment and object which the Legislature has in view. This is also known as rule of purposive construction. As held by the Hon'ble Supreme Court in the case of C.W.S. (India) Ltd. v. CIT [1994] 208 ITR 649, the object of all rules of interpretation is to give effect to the object of enactment and such object or legislative intention can be gathered from the memorandum explaining the relevant provisions. 18. It is also observed that if the interpretation as sought by the ld. D.R. is assigned to Explanation (iii) to section 48, there would be a resultant conflict between the said clause (iii) and clause (iv) of the Explanation which read as under : (iii)"indexed 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 1st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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