2014 (10) TMI 698 - AT - Income Tax

ITAT affirms indexed cost of acquisition calculation for long-term gains, includes all prior owners

The ITAT upheld the CIT(A)'s decision, ruling that the indexed cost of acquisition for long-term capital gains should be computed from the year the ... Interpretation of word previous owner - Family settlement agreement/memorandum – transfer of shares - Held that:- Section 49 makes it clear that if the mode of acquisition of a capital asset was by way of gift or will then it would not mean only the last previous owner but would include the previous owner from whom the capital asset devolved on the last previous owner because indexation is to be allowed in respect of period of holding of the asset and not in relation to the individuality of the assessee – following the decision in CIT vs. M/s Janhavi S. Desai [2012 (7) TMI 496 - BOMBAY HIGH COURT] - while computing the capital gains arising on sale of shares acquired by the assessee by way of gift, the indexed cost of acquisition is to be computed with reference to the year in which the previous owners first held the assets and not the year in which the assessee became the owner of the asset – thus, there was no infirmity in the order of CIT(A) directing the AO to compute the capital gains in the case of the assessee by applying the indexed cost of acquisition in which the previous owners first held the shares – Decided against revenue. Issues Involved:1. Determination of Indexed Cost of Acquisition for Long Term Capital Gains.2. Interpretation of 'Previous Owner' under Section 49(1) of the Income Tax Act.3. Applicability of various judicial precedents and CBDT Circulars.Issue-wise Detailed Analysis:1. Determination of Indexed Cost of Acquisition for Long Term Capital Gains:The core issue was the method of calculating the indexed cost of acquisition for shares received as gifts by the assessee. The assessee declared long-term capital gains based on the indexed cost of acquisition from the dates when the previous owners first held the shares. The Assessing Officer (AO) argued that the indexation should start from the year the assessee received the shares as gifts, not from when the previous owners first held them. The AO recalculated the indexed cost of acquisition based on the year the assessee first held the shares, resulting in a higher taxable gain.2. Interpretation of 'Previous Owner' under Section 49(1) of the Income Tax Act:The AO's interpretation of 'previous owner' was limited to the immediate previous owner from whom the assessee received the shares. The AO contended that the benefit of indexation should only be applied from the year the assessee first held the shares. The AO cited Section 2(42A)(b) and Section 55(2)(b) of the Income Tax Act to support this interpretation, arguing that these sections only extend the period of holding for determining long-term or short-term capital gains and do not provide for indexation benefits for the period the asset was held by previous owners.3. Applicability of Various Judicial Precedents and CBDT Circulars:The assessee relied on several judicial precedents and CBDT Circulars to support their claim. Key judgments included:- Deputy CIT vs. Manjula J. Shah: The Special Bench of ITAT held that the indexed cost of acquisition should be computed with reference to the year the previous owner first held the asset.- Smt. Neena Devgan vs. ITO: This case emphasized that indexation is related to the period of holding of the asset, not the individuality of the assessee.- Mrs. Pushpa Sofat vs. ITO: The Chandigarh bench of ITAT ruled that indexation should start from the year the previous owner acquired the property.- CIT vs. Ms. Janhavi S. Desai: The Bombay High Court confirmed that the indexed cost of acquisition should be computed from the year the previous owner first held the asset.- Arun Shungloo Trust vs. CIT: The Delhi High Court held that the benefit of indexation for cost improvements by previous owners should be allowed.Judgment:The CIT(A) allowed the assessee's appeal, ruling that the indexed cost of acquisition must be computed with reference to the year in which the previous owners first held the asset. This decision was based on the interpretation that the benefit of indexation should be applied to the entire period the asset was held by the previous owners, not just from the year the assessee received the asset as a gift. The CIT(A) relied on the above judicial precedents to support this interpretation.The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The Tribunal concurred with the CIT(A) that the indexed cost of acquisition should be computed from the year the previous owners first held the shares, in line with the judicial precedents cited by the assessee. The Tribunal emphasized that the term 'previous owner' includes all previous holders of the asset, not just the immediate previous owner, and that indexation should reflect the entire holding period of the asset, including the period it was held by previous owners.Conclusion:The appeal by the Revenue was dismissed, and the assessee's method of calculating the indexed cost of acquisition from the dates when the previous owners first held the shares was upheld. The Tribunal reinforced the interpretation that the benefit of indexation should be applied to the entire period the asset was held by previous owners, aligning with the judicial precedents and CBDT Circulars cited by the assessee.