Indexation for gifted assets must run from the previous owner's first year of holding, not the transferee's acquisition year.

Where a capital asset is acquired by gift and later transferred, the transferee takes the previous owner's cost of acquisition, and the previous owner's holding period is included in computing the asset's period of holding. On that basis, the indexed cost of acquisition under the capital gains provisions must be linked to the year in which the previous owner first held the asset, not the year of the transferee's gift acquisition. A contrary reading would undermine the object of indexation and deny inflation adjustment for the earlier holding period.

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Issues: Whether, in computing capital gains on transfer of a gifted asset, the indexed cost of acquisition must be computed with reference to the year in which the assessee first became owner or the year in which the previous owner first held the asset.

Analysis: The statutory scheme governing capital gains under sections 45, 47, 48 and 49 treats a gift as a non-transfer, but where the gifted asset is later transferred, the cost of acquisition of the previous owner is adopted for the transferee. Explanation 1(b) to section 2(42A) expressly includes the period for which the asset was held by the previous owner in determining the assessee's period of holding. Reading that provision with Explanation (iii) to section 48, and applying a schematic and purposive construction, the relevant indexation base must align with the period for which the asset was actually held in the hands of the previous owner. A contrary literal reading would defeat the object of indexation, create anomalies, and deny inflation relief for the earlier holding period.

Conclusion: The indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset, not the year in which the assessee acquired it. The issue is answered in favour of the assessee.

Ratio Decidendi: Where a capital asset is acquired by gift and later transferred, the period of holding of the previous owner is to be included for indexation purposes, so the indexed cost of acquisition under section 48 must be linked to the previous owner's first year of holding.

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