[2012] 19 taxmann.com 2 (Article)
Cost Indexation from the year of acquisition by previous owner
An analysis CIT v. Manjula J. Shah [2011] 16 taxmann.com 42 (Mum.)
Introduction
1. Under the provisions of the Income-tax Act, 1961 ('the Act'), an assessee can acquire
a 'Capital Asset' as defined under section 2(14) of the Act with or without a
consideration. As per section 49(1) of the Act, where a 'capital asset' is acquired without
paying any consideration for the same, then 'cost of acquisition' of such an asset would
be taken to be the cost as was in the hands of the 'previous owner'. There has, however,
been a lot of debate/dispute on how to compute 'indexed cost of acquisition' whenever
an assessee acquires 'capital asset' without any consideration, as no specific provision
regarding the same has been provided for under the Act. Further, there has been split in ROHIT GARG*
the judiciary (discussed infra) on this aspect, especially because no decision rendered by
any High Court is available, which puts an assessee in the state of uncertainty.
In the case of CIT v. Manjula J. Shah [2011] 16 taxmann.com 42, the Bombay High Court, after
analyising the facts of the case and position, in law, laid down an important legal proposition that
while computing capital gains arising on transfer of a capital asset acquired by an assessee under
a gift, indexed cost of acquisition has to be computed with reference to year in which previous
owner first held the asset, and not from the year in which the assessee became owner of that
asset.
Facts of the case
2. The assessee acquired a residential flat as a gift from her daughter under a gift deed, dated 2-12003, without incurring any cost. The said flat was originally acquired by the previous owner
(daughter) on 29-1-1993 at a cost of Rs. 50,48,350. The assessee sold the said capital asset on
30-6-2003 for Rs. 1,10,00,000 and offered the long-term capital gains to tax.
During the course of assessment proceedings, the Assessing Officer recomputed the long-term
capital gain holding that indexation benefit should be allowed to the assessee only from the year
2002-03, i.e., the year in which the flat was acquired by the assessee for the first time under the
gift deed, as against the claim of the assessee of indexed cost of acquisition being calculated by
taking indexation benefit from the date when the flat was acquired by the previous
owner, i.e., during 1993-94.
The assessee preferred an appeal against the above order of the Assessing Officer before the
Commissioner of Income-tax (Appeals) ['CIT(A)'],which was allowed in favour of the assessee,
holding that indexation should be calculated with reference to cost of inflation index for the year
1993-94.
Against the above order of the CIT(A), the revenue preferred an appeal before the Tribunal. The
Tribunal, vide an order reported asDy. CIT v. Manjula J. Shah [2009] 126 TTJ 145/[2010] 33
SOT 105 (Mum.), upheld the order of the CIT(A), thereby dismissed the appeal of the revenue.
Feeling aggrieved, the Revenue preferred further appeal before the Bombay High Court against
the above order of the Tribunal.
Decision of the High Court
3. The High Court, after analyzing the entire facts on record as well as the position, in law,
dismissed the appeal of the Revenue and held that, although the assessee became the owner of
the flat in the year 2003 by way of a gift, yet as per section 2(42A) of the Income-tax Act, 1961
('the Act'), for determining the period of holding of an asset, the period of holding of the previous
owner is also included, and the cost of acquisition of the previous owner is deemed to the cost of
the assessee, then, there was no justification for giving different treatment for allowing the
benefit of indexation only from the year in which the capital asset was first acquired by the
assessee, as against the year in which it was acquired by the previous owner.
Comments
4. As per section 48 of the Act, the income chargeable under the head 'Capital Gains' is to be
computed by deducting the cost from the full value of consideration.
For determining the nature of capital gains, section 2(42A) of the Act provides that where a
capital asset, except for shares/securities, is held for less than a period of 36 months, then such
capital asset would be termed as 'Short Term Capital Asset' and the capital gains arising on
transfer of such 'short-term capital asset' would be taxable as 'Short Term Capital Gains' (STCG).
Further, as per section 2(29A), read with section 2(29B) of the Act, capital gains arising on
transfer of those capital assets which are not short-term capital assets would be taxable as 'Long
Term Capital Gains' (LTCG).
As per second proviso to section 48 of the Act, while computing LTCG, the term 'cost of
acquisition' would be substituted by the term 'indexed cost of acquisition'.
Clause (iii) of the Explanation to section 48 provides that the 'indexed cost of acquisition' would
mean an amount which bears to the cost of acquisition, the same proportion as cost inflation
index ('CII') for the year in which the asset is transferred bears to the CII for the first year in
which the asset was held by the assessee or for the year beginning on the 1st April, 1981,
whichever is later.
It is further to be noted that clause (b) of the Explanation-1 to section 2(42A) provides that where
the capital asset is acquired by an assessee by any of the modes prescribed under section 49(1) of
the Act, then the expression first year in which the asset was held by the assessee shall include
the holding period of the previous owner as well.
Section 49(1) of the Act sets out the cost of acquisition with reference to certain mode of
acquisition which, inter alia, includes Will, succession, inheritance or devolution of the property.
The cost of acquisition of the asset, when the provisions of section 49(1) of the Act are
applicable, is deemed to be the cost at which the previous owner of the asset acquired it as
increased by the cost of any improvement incurred or borne by the previous owner or the
assessee, as the case may be.
In a case, where the capital asset became the property of the assessee in the circumstances
specified in section 49(1) of the Act (as stated above) and capital asset became the property of
the previous owner before April 1, 1981, in terms of section 55(2)(b)(ii) of the Act, the assessee
has the option to take actual cost or the fair market value of the asset (other than a depreciable
asset), as on April 1, 1981 as the cost of acquisition. In such a situation, the period of holding
shall be determined under section 2(42A) of the Act by including period for which such an asset
was held by the previous owner.
A conjoint reading of sections 2(42A), 47(iii), 49(1) and 55(2) of the Act suggests that, in law, no
"transfer" of a "capital asset" is considered to take place on inheritance and succession. The
liability for capital gain arises only when the capital asset is actually transferred by the successor.
It is only when the ultimate successor transfers the capital asset for a consideration, the capital
gains are assessed to tax.
In the case of Manjula J. Shah (supra), the Bombay High Court was confronted with a question
whether while calculating capital gains on transfer of a capital asset, which was acquired by the
assessee by way of a gift, indexed cost of acquisition would be considered by considering the CII
of the year in which the capital asset was first acquired by the assessee by way of gift, or would
it be of that year in which the said asset was acquired by the previous owner.
The Bombay High Court, in a very elaborative and reasoned manner, laid down that when the
law provides to consider the period of holding of the previous owner also, then different
treatment cannot be accorded for calculation of the indexed cost of acquisition by not adopting
the CII of the year in which the asset was acquired by the previous owner.
The Court further substantiated its above view by noticing that even as per section 55(1)(b)(2)(ii)
of the Act, 'cost of improvement' incurred by the previous owner needs to be deducted from the
total consideration.
The Court also observed that as per the CBDT's Circular No. 636, dated 31-8-1992, the purpose
of providing indexation benefit was to counter-balance the effect of inflation. That being so,
since the cost of the asset was first incurred by the previous owner, and no consideration was
passed on to such previous owner by the subsequent acquirer by way of section 49(1), the
indexation should be allowed from the year in which such an asset was acquired by the previous
owner.
Prior to the aforesaid ruling of the Bombay High Court, following decisions of the Tribunal were
also holding the same view, i.e., in favour of the assessee :
(i) Asstt. DIT v. Rajeev Ajmani [IT Appeal No. 2057 of 2011] (Delhi).
(ii) Kamal Mishra v. ITO [2008] 19 SOT 251 (Delhi).
(iii) Smt. Mina Deogun v. ITO [2008] 19 SOT 183 (Kol.).
(iv) Mrs. Pushpa Sofat v. ITO [2002] 81 ITD 1 (Chd.)(SMC).
(v) Dy. CIT v. Smt. Meera Khera [2004] 2 SOT 902 (Mum.).
(vi) Asstt. CIT v. Kotak Mahindra Bank Ltd. [IT Appeal No. 2672 of 2006] (Mum.).
However, the decision of the Mumbai Bench of the Tribunal in the case of Dy. CIT v. Kishore
Kanungo [2006] 102 ITD 437 was against the assessee.
Similarly, the Delhi High Court has, in the case of Arun Shungloo Trust v. CIT [2012] 18
taxmann.com 261, also laid down the above proposition and held likewise. In the said decision,
the Delhi High Court has also taken note of the above ruling of the Bombay High Court in the
case of Manjula J. Shah (supra).
The above decisions of the High Court would definitely provide a sigh of relief as well as
certainty in the minds of the taxpayers as to which year's CII should be adopted in case of a
capital asset acquired by way of modes mentioned under section 49(1) of the Act.
Disclaimer
The above analysis is based on the personal view of the author and does not necessarily convey's
the views of the firm concerned.
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*Associates, Vaish Associates.
•DT - Secs. 2(42A), 47(iii), 49(1) and 55(2).