Distinct interests in property require apportionment of sale consideration, with prior ownership counting for long-term capital gains relief.

Where property is transferred by persons holding distinct interests, the sale consideration must be apportioned by reference to those interests, so the amount attributable to the life-interest holder is excluded from the remainder owners' capital gains computation. The property was also acquired through a mode covered by section 49(1), so the previous owner's holding period counted under section 2(42A), preserving long-term capital asset status. On that basis, indexation was available from the previous owner's acquisition date and the assessees could claim deductions under sections 54 and 54EC, subject to verification of the claim particulars.

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Issues: (i) Whether, in computing capital gains on sale of property held with distinct interests, the consideration payable to the life-interest holder was liable to be excluded and the balance alone taxed in the hands of the remainder owners. (ii) Whether the assessees were entitled to take the previous owner's holding period for treating the asset as a long-term capital asset and to claim indexation and deductions under sections 54 and 54EC.

Issue (i): Whether, in computing capital gains on sale of property held with distinct interests, the consideration payable to the life-interest holder was liable to be excluded and the balance alone taxed in the hands of the remainder owners.

Analysis: The property had been settled so that the father had only a life-time enjoyment right without power of alienation, while the assessees held the remainder interest. The sale was effected by all concerned, and the father's right stood extinguished on transfer. On these facts, section 46 of the Transfer of Property Act, 1882, applied to persons having distinct interests, and section 2(47)(ii) of the Income-tax Act, 1961, recognised extinguishment of rights as a transfer. The amount attributable to the father's life interest could not, therefore, be treated as part of the assessees' sale consideration.

Conclusion: The consideration relatable to the life-interest holder was to be excluded, and only the assessees' share of the sale proceeds was assessable in their hands.

Issue (ii): Whether the assessees were entitled to take the previous owner's holding period for treating the asset as a long-term capital asset and to claim indexation and deductions under sections 54 and 54EC.

Analysis: The asset had come to the assessees through a settlement falling within the statutory mode of acquisition contemplated by section 49(1) of the Income-tax Act, 1961. In such a case, section 2(42A) permits inclusion of the previous owner's holding period. Once that period was counted, the asset retained the character of a long-term capital asset, making indexation available from the date the previous owner acquired the property and preserving eligibility for deductions under sections 54 and 54EC, subject to verification of the claim details.

Conclusion: The assessees were entitled to the previous owner's holding period, indexation benefit, and the claimed deductions under sections 54 and 54EC, subject to verification.

Final Conclusion: The appellate order was set aside and the assessment was directed to be recomputed by excluding the amount attributable to the father's life interest and by granting the consequential capital gains benefits available on a long-term basis.

Ratio Decidendi: Where property is transferred for consideration by persons holding distinct interests, the consideration must be apportioned according to those interests, and where the asset is acquired through a statutory mode covered by section 49(1), the previous owner's holding period counts for long-term capital gains treatment and related indexation and exemption benefits.

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