Inherited property capital gains must use the previous owner's indexed cost, which can eliminate taxable gain.

Where an inherited asset devolves by will, section 49 deems the previous owner's cost of acquisition to be the assessee's cost for capital gains purposes, and sections 48 and 49 require indexation to be traced to that earlier acquisition. On that basis, the indexed cost was computed with reference to the father's acquisition and the 1-4-1981 value, which exceeded the sale consideration. As a result, no taxable long-term capital gain arose on the sale of the inherited property and the capital gains addition was deleted.

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Issues: Whether, in computing long-term capital gains on sale of inherited property, the indexed cost of acquisition had to be taken with reference to the previous owner who originally acquired the property, so that no taxable capital gain arose.

Analysis: The property had devolved upon the assessee by will from her father. Under section 49 of the Income-tax Act, the cost of acquisition in such a case is deemed to be the cost for which the previous owner acquired the asset. The relevant indexed cost therefore had to be worked out with reference to the father's acquisition and the value as on 1-4-1981, since the property had been acquired long before that date. The statutory scheme of section 48, read with section 49, required the indexed cost of acquisition of the previous owner to be adopted for computing capital gains. On the accepted value as on 1-4-1981, the indexed cost exceeded the sale consideration.

Conclusion: The taxable capital gain was not exigible in the hands of the assessee, and the addition made on account of capital gains was deleted.

Ratio Decidendi: Where a capital asset devolves by inheritance or will, the indexed cost of acquisition for capital gains purposes must be traced to the previous owner's acquisition under section 49, and if that indexed cost exceeds the sale consideration, no taxable capital gain arises.

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