Inherited property indexation and section 54 relief allowed for delayed builder completion and foreign residential purchase

Inherited assets take indexed cost of acquisition from the year the previous owner first held the property, not merely from the date of inheritance, and the assessee succeeded on that point. Section 54 relief was allowed where investment in a residential flat was substantially made within time and completion was delayed by the builder, since bona fide compliance was sufficient. Section 54 was also available for purchase of a residential house outside India for the relevant assessment year, because no territorial restriction then existed in the provision. The Revenue's challenge on indexation failed, and the assessee obtained relief on both section 54 claims.

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Issues: (i) whether, in computing indexed cost of acquisition of inherited property, indexation is to be taken with reference to the year in which the previous owner first held the asset or the year in which the assessee became owner; (ii) whether deduction under section 54 is available where the assessee invested the sale proceeds in a residential flat after the stipulated period but the delay was attributable to the builder; and (iii) whether deduction under section 54 is available where the residential house was purchased outside India.

Issue (i): whether, in computing indexed cost of acquisition of inherited property, indexation is to be taken with reference to the year in which the previous owner first held the asset or the year in which the assessee became owner.

Analysis: The computation of capital gains in the case of an asset acquired through inheritance or succession has to take account of the holding period of the previous owner for indexation purposes. The appellate authority applied the principle that the benefit of indexation attaches to the year in which the previous owner first held the asset, and not merely to the date on which the assessee became owner by inheritance.

Conclusion: The issue is decided in favour of the assessee and against the Revenue.

Issue (ii): whether deduction under section 54 is available where the assessee invested the sale proceeds in a residential flat after the stipulated period but the delay was attributable to the builder.

Analysis: Section 54 is a beneficial provision intended to promote reinvestment in residential housing. Where the assessee had substantially invested the capital gains within time and had entered into arrangements for construction, denial of relief cannot be justified merely because the builder failed to complete the project within the prescribed period. The assessee's entitlement is not defeated when the delay is beyond her control and the investment made shows bona fide compliance with the statutory requirement. Circular No. 471 dated 15.10.1986 and Circular No. 672 dated 16.12.1993 support treatment of allotment and construction-linked investment as sufficient compliance.

Conclusion: The issue is decided in favour of the assessee.

Issue (iii): whether deduction under section 54 is available where the residential house was purchased outside India.

Analysis: For the assessment year in question, section 54 did not contain a restriction requiring the new residential house to be situated in India. In the absence of such a statutory limitation, the beneficial provision could not be read down to impose a territorial condition that the legislature had not yet enacted. The investment in a residential house in the United States therefore satisfied the pre-amendment requirement of section 54.

Conclusion: The issue is decided in favour of the assessee.

Final Conclusion: The Revenue's challenge to indexation fails, while the assessee succeeds on both claims for deduction under section 54, resulting in complete relief to the assessee on the substantive tax issues raised in the cross appeals.

Ratio Decidendi: For inherited assets, indexation follows the period during which the previous owner held the asset, and section 54, before its territorial amendment, allowed exemption for investment in a residential house even if the house was outside India, while substantial investment and bona fide compliance suffice where completion is delayed by circumstances beyond the assessee's control.

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