Gifted property - Cost Inflation Index

[Kaladhara Saralaya]

In case of gifted property, what should be the Cost Inflation Index (CII) rate we have to apply to arrive at the cost for the purpose of calculating capital gains? Is it CII of the year in which the original owner (Donor) became the owner of the property or of the year on which the donee receives the gift?

[Surender Gupta]

The solution to this issue can be found after combined reading of section 47, 48 and 49 of the Income Tax Act, 1961. Section 47 specifies that certain situations in which transfer is not treated as transfer. Section 48 specifies the manner of computation. Section 49 states the situations where the cost of previous owner is taken as the cost. If you read the clause (iii) of explanation under section 48, CII is taken for the year in which assets held by the assessee. Therefore, even in case of gifted property where the cost of acquisition is taken of the previous owner, the Cost Inflation Index is taken for the year in which such property received by the assessee.

[DEV KUMAR KOTHARI]

In case of gifts, there is no transfer vide S. 49(1_ (ii), as per S. 2(42A)- Explanation 1 (c) in case capital asset is acquired by way of any manner laid down in S. 49, then the holding period of previous owner is included in holding period of assessee who received capital asset by way of gift etc. The assessee , in such case can exercise option ot take FMV as on 01.04.1981 in case previous owner held the property prior to that.In other words,as there was no taxable transfer at the time of gift, the contineous holding is deemed since the property was held by previous owner. Therefore, CII of the year of acquisition by previous ownere or 1981-82 (if held prior to 01.04.81 by previous owner) will be applicable. This is also as per purpsoe of CII that is to remove the element of cost inflation while computing capital gains on transfer of long term assets. This is also result of reading meaning of indexed cost of acquisitin and idexed cost of imporvement as given in the last proviso to S. 48 vide clauses (iii) and (iv) respectively. It cannot be that FMV is taken as on 01.04.1981 ,CII for improvement is taken for 1989 and 1999 when previous owner effected improvement and CII for cost of acquisition is taken for 2008 when present owner/ assessee got gift. That will lead to anamolus situation. On reading of these two meanings, it can be said that CII of the year in which cost or cost of improvement were incurred are relevant. On the basis of CII for the year in which previous owner acquired propery , computation can be made and there should not be difficulty though litigation may take place tht one have to be ready to face becasue there seems defect of drafting of meaning of indexed cost of acquisition. Generally it has been accepted. In case of one of my client ivolving conversion of debenture into shares,CIT(A) allowed date fo acquisition of debenture for LTC gain and CII and department accepted the order of CIT(A) though the revenu effect was substantial.

[DEV KUMAR KOTHARI]

The views expressed by me in my earlier reply found acceptance In DCIT12(2), Vs.MANJULA J SHAH, 2009-TIOL-698-ITAT-MUM-SB decided by Special Bench of ITAT on October 16, 2009. As per Special Bench, the date of acquisition by the previous owner in case of gift, is relevant for the purpose of indexing the cost of acquisition in hands of donee / assessee who subsequently sold the property received in gift from the previous owner. The bench applied purposeive approach, avoidance of anomolies, and some decisions of the Supreme Court on interpretation. I feel that one more aspect that when two or more provisiosn in the I.T.Act, are contradictory and pitted against each other, that is effect to one will defeat effect to another provisions, then the provision which is/ are beneficial to the assessee should be applied. In case of gift etc. the provisions to take date and cost of acquisition of previous owner and also allowing present owner to take FMV as on 01.04.1981, if property was acquired by previous owner before that date (though gift may be afterwards), treating long-term nature by including period of holding of previous owner, allowing cost of improvement to be indexed according to the year in whcih even previous owner incurred it, are in favour of assessee/ present owner, whereas only wordings in relation to CII of cost of acquisition is agaisnt the assessee. In such circumstances, provisions which are beneficial to assesseee need to be given weightage besides some drafting mistakes causing contradictions in drafting can be considered as drafting error and insuch situations language or words used can be modified to reach to purpose seeking appraoch and to avoid anomaly.

AI Summary

Indexed cost of acquisition: apply previous owner's acquisition year for inflation indexing on gifted property to avoid anomalies. Whether CII for a gifted asset is taken as of the year the donee received the gift or the year the previous owner acquired it; one reading applies CII of the year the asset is held by the assessee (donee), while a purposive construction applies CII of the previous owner's year of acquisition (or the prescribed base-date FMV where applicable), treating the previous owner's holding period and improvement years as carrying over to the donee to avoid indexing anomalies.