Section 49 requires previous owner's holding be included when computing indexed cost; Section 55(2)(b)(ii) FMV election upheld

ITAT CHANDIGARH allowed the appeal, holding that where section 49 applies the period of holding for computing indexed cost must include the previous owner's holding. The Tribunal set aside the AO's and CIT(A)'s refusal to recognise the assessee's election under section 55(2)(b)(ii) to adopt fair market value as on 1.4.1981, finding the Patwari certificate and comparable sale prima facie evidence which the revenue failed to rebut. The AO/CIT(A) computation based on the gift deed and 2002-03 base year was held unsustainable.

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Issues: (i) Whether, for computing indexed cost of acquisition and long-term capital gains in respect of an asset received by way of gift, the period of holding and base-year fair market value are to be determined by including the period and cost as held by the previous owner and whether the assessee validly exercised the option to adopt fair market value as on 1.4.1981 under section 55(2)(b)(ii) of the Income-tax Act, 1961.

Analysis: The issue was examined with reference to section 2(42A) and its Explanation, section 49(1), section 48 and its Explanation (iii), and section 55(2)(b)(ii). The statutory scheme treats cost of acquisition in the hands of an assessee, where acquisition is by modes specified in section 49, as the cost to the previous owner and includes the period for which the asset was held by the previous owner for determining period of holding. Section 55(2)(b)(ii) gives the assessee the option to adopt the fair market value of the asset as on 1.4.1981 where the previous owner acquired the asset before that date. The tribunal also considered precedents applying these provisions and the evidentiary nature of a Patwari certificate and comparable sale to establish fair market value as on 1.4.1981. The tribunal found that the lower authorities erred in ignoring the period of holding by the previous owner and in rejecting the assessee's valid exercise of the statutory option to adopt the base-year fair market value, without displacing the evidentiary material presented by the assessee.

Conclusion: Issue (i) is answered in favour of the assessee. The period of holding and the indexed cost of acquisition must include the period and cost as attributable to the previous owner under section 2(42A) and section 49, and the assessee's option to adopt fair market value as on 1.4.1981 under section 55(2)(b)(ii) stands accepted; consequently the addition made by the lower authorities is set aside and the appeal is allowed.

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