2015 (8) TMI 1206 - AT - Income Tax

Inherited Asset Cost for Capital Gains: Previous Owner's Holding Period Key

The Income Tax Officer, International Taxation - 2 (2), Chennai Versus Shri Abdul Samad Khanaruzzaman and Shri Sulaiman Shaikh Mohamed

The Tribunal affirmed that the indexed cost of acquisition for computing capital gains should be based on the period the asset was held by the previous ... Computation of capital gains - whether indexed cost of acquisition has to be computed with reference to the year in which the previous owner was held the assessee as held by CIT(A) or the year in which the assessee become owner by way of inheritance? - Held that:- The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No.636 dated 31/8/1992 a fair method of allowing relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at . The indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under Section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee. See CIT v. Manjula J. Shah [2011 (10) TMI 406 - BOMBAY HIGH COURT] The expression “held by the assessee” used in Explanation (iii) to Section 48 has to be understood in the context and harmoniously with other Sections. The cost of acquisition stipulated in Section 49 means the cost for which the previous owner had acquired the property. The term “held by the assessee” should be interpreted to include the period during which the property was held by the previous owner. See Arun Shungloo Trust v. CIT [2012 (2) TMI 259 - DELHI HIGH COURT ] - Decided in favour of assessee. Issues:Computation of capital gains - Indexed cost of acquisition: Whether indexed cost of acquisition should be computed with reference to the year in which the previous owner held the asset or the year in which the assessee became the owner by way of inheritanceRs.Analysis:I. Computation of Capital Gains - Indexed Cost of Acquisition:The case involved three appeals by the Revenue against orders of the Commissioner of Income Tax related to assessment year 2006-07. The primary issue was the computation of capital gains concerning the indexed cost of acquisition. The non-resident assessee inherited a property and later sold it, leading to capital gains. The Assessing Officer disallowed indexation benefit claimed by the assessee, resulting in additional capital gains. On appeal, the CIT(A) directed the Assessing Officer to recompute the capital gains based on the year the previous owner first held the asset, not the year the assessee inherited it. The Revenue challenged this decision, arguing in line with the Assessing Officer. However, the assessee did not appear during the proceedings. The Tribunal analyzed relevant legal precedents, including the judgments of the Bombay High Court and Delhi High Court, emphasizing that the indexed cost of acquisition should consider the period the asset was held by the previous owner. The Tribunal concurred with the decisions of the High Courts and upheld the CIT(A)'s order, dismissing all appeals by the Revenue.In conclusion, the Tribunal affirmed that for the computation of capital gains, the indexed cost of acquisition should be determined based on the period the asset was held by the previous owner, aligning with the legislative intent and the principles of indexation to offset inflation effects. The Tribunal found no fault in the CIT(A)'s decision, as it was in line with established legal interpretations, ultimately dismissing all appeals by the Revenue.