Court clarifies indexed cost calculation for capital gains tax

The High Court dismissed the Tax Appeal, affirming the approach to calculate the indexed cost of acquisition for capital gains tax based on the cost at which the previous owner acquired the asset. The judgment clarified the interpretation of section 48 Explanation (iii) and emphasized the importance of the deeming fiction in section 49 for determining the cost of acquisition in cases involving gifted assets.

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Issues:
1. Interpretation of section 48 Explanation (iii) regarding the application of inflation index for computing capital gains.
2. Calculation of indexed cost of acquisition for capital gains tax on a gifted asset.

Issue 1: Interpretation of section 48 Explanation (iii)
The appeal raised questions regarding the application of section 48 Explanation (iii) for computing capital gains tax. The primary concern was whether the inflation index should apply based on the year the asset was first held by the assessee. The case involved shares purchased by the father of the assessee in 1989, gifted to the son in 2009, and sold by the son in the same year. The divergence of opinion between the assessee and the Revenue centered on the relevant date for determining the cost of acquisition for indexation purposes.

Issue 2: Calculation of indexed cost of acquisition for gifted asset
The court referred to a previous Division Bench judgment in a similar case to settle the issue. The judgment clarified that the indexed cost of acquisition should be calculated with reference to April 1, 1981, for assets acquired before that date. The court emphasized the importance of the deeming fiction in section 49, which dictates that the cost of acquisition in the hands of the assessee is the cost at which the previous owner acquired the asset. The court rejected the Revenue's interpretation that the cost of acquisition should be based on the present assessee, highlighting that such an approach would undermine the deeming fiction and create inconsistencies in the law. Additionally, the court noted that the provision for cost of improvement in section 49 further supported the calculation method based on the previous owner's cost of acquisition.

In conclusion, the High Court dismissed the Tax Appeal, affirming the approach to calculate the indexed cost of acquisition for capital gains tax based on the cost at which the previous owner acquired the asset. The judgment provided clarity on the interpretation of section 48 Explanation (iii) and emphasized the significance of the deeming fiction in section 49 for determining the cost of acquisition in such cases.

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