Inherited property indexation follows the previous owner's holding period, while attached funds must reduce compensatory interest.

In computing capital gains on inherited property, indexation follows the holding period of the previous owner, so the cost inflation benefit may run from the base year linked to that owner's acquisition and the fair market value as on 1 April 1981 may be adopted where applicable. A reference to the Departmental Valuation Officer for determining that fair market value was upheld because it was made pursuant to appellate directions, at the assessee's instance, and was not effectively challenged. Interest under sections 234A and 234B had to be recomputed after giving credit for amounts lying under provisional attachment, as such sums were available towards the tax demand.

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Issues: (i) whether, in computing capital gains on an inherited asset, indexation was to be allowed from the year in which the previous owner first held the property and the fair market value as on 1.4.1981 was to be adopted; (ii) whether the reference to the Departmental Valuation Officer for determining fair market value as on 1.4.1981 was valid; and (iii) whether interest under sections 234A and 234B was required to be recomputed after giving effect to the amount covered by provisional attachment under section 281B.

Issue (i): whether, in computing capital gains on an inherited asset, indexation was to be allowed from the year in which the previous owner first held the property and the fair market value as on 1.4.1981 was to be adopted.

Analysis: The asset had been inherited from the previous owner, who had acquired it before 1.4.1981. For the purpose of capital gains on inherited property, the period of holding is to be viewed with reference to the previous owner, and succession is not to interrupt the computation of the holding period. The statutory scheme of capital gains therefore required application of the cost inflation index from the relevant base year linked to the previous owner's holding, together with adoption of the fair market value as on 1.4.1981 where permissible.

Conclusion: The indexation benefit was correctly allowed from 1.4.1981, and the Revenue's challenge failed.

Issue (ii): whether the reference to the Departmental Valuation Officer for determining fair market value as on 1.4.1981 was valid.

Analysis: The valuation reference had been made pursuant to earlier appellate directions and at the instance of the assessee in the course of the proceedings. The assessee did not avail the opportunities to object to the valuation report before the Assessing Officer, and no material was produced to dislodge the valuation adopted. In these circumstances, the reference itself and the valuation based on it could not be faulted.

Conclusion: The challenge to the valuation reference and the resultant fair market value determination was rejected.

Issue (iii): whether interest under sections 234A and 234B was required to be recomputed after giving effect to the amount covered by provisional attachment under section 281B.

Analysis: The money lying in the attached post office deposit was under the control of the department pursuant to provisional attachment. Such amount was to be treated as available towards the tax demand, and the consequential computation of interest had to reflect that adjustment.

Conclusion: Interest under sections 234A and 234B was directed to be recomputed after giving credit for the attached amount.

Final Conclusion: The assessee succeeded on the interest issue, while the Revenue failed on the indexation issue and the valuation challenge was also rejected, resulting in a partly favourable outcome for the assessee overall.

Ratio Decidendi: In computing capital gains on inherited property, indexation follows the holding period of the previous owner, and an attached amount under provisional attachment must be given due effect while recomputing compensatory interest.

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