TaxTMI 
TaxTMI 
2009 (10) TMI 646
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....an individual who derives income from business, house property, capital gain and other sources. The return of income for the year under consideration was filed by her on 28-4-2004 declaring a total income of Rs. 20,92,400. In the said return, long-term capital gain arising from sale of residential flat bearing No. 1202-A at Chaitanya Towers, Prabhadevi, Mumbai was declared by the assessee at Rs. 4,17,338. The total consideration of the said flat sold on 30-6-2003 was shown at Rs. 1,10,00,000 and after deducting indexed cost of acquisition of Rs. 1,04,81,552 and stamp duty of Rs. 1,01,010, long-term capital gain of Rs. 4,17,338 was offered by the assessee to tax. The flat so sold was actually received by the assessee as gift from her daughter Mrs. Shilpa J. Shah under a gift deed dated 1-2-2003. As submitted on behalf of the assessee before the Assessing Officer during course of assessment proceedings, the said flat was purchased by the previous owner Mrs. Shilpa J. Shah on 29-1-1993 for a total consideration of Rs. 50,48,350 and adopting the cost inflation index of 223 applicable to financial year 1992-93, the indexed cost of acquisition was worked out at Rs. 1,04,81,552 by taking ....
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....in determining the period of holding of the asset by the assessee. He noted that the definition of "indexed cost of acquisition" was given in section 48 and there was nothing to indicate that for determining the indexed cost of acquisition, the provisions of section 2(42A) and section 49(1) should not be followed. He, therefore, held that the assessee was entitled for the benefit of indexation with effect from 29-1-1993 and accordingly directed the Assessing Officer to re-compute the long-term capital gain by allowing the said benefit. Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal before the Tribunal. 4. The ld. D.R. invited our attention to the provisions of Explanation (iii) to section 48 wherein the definition of the expression "indexed cost of acquisition" is given. He pointed out that the words used therein are "the first year in which the asset was held by the assessee". He then referred to the provisions of Explanation 1(b) to section 2(42A) and submitted that the said Explanation allowing inclusion of period for which the asset was held by the previous owner for determining the period of holding by the assessee is specifically applicable t....
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....xation. 6. The learned counsel for the assessee also contended that when the date and cost of acquisition of the original owner are treated as the date and cost of acquisition of the assessee for the purpose of computing the capital gain, there is no reason or logic in not working out the indexed cost of acquisition by adopting the date of acquisition of the original owner as the date of acquisition of the assessee. He contended that any interpretation contrary to this will be against the scheme of the Act as laid out in the relevant provisions and non-granting of indexation for the earlier period of holding by adopting such interpretation would result in absurdity. Relying on the decision of Hon'ble Supreme Court in the case of CIT v. Laksmi Machine Works [2007] 290 ITR 6671 he contended that schematic interpretation of the relevant provisions thus needs to be adopted to serve the legislative intention behind enacting the relevant provisions. 7. The learned counsel for the assessee further submitted that if the provisions of Explanation 1(b ) to section 2(42A) create a legal friction as contented by learned D.R., it has to be carried to its logical conclusion as held, inter alia....
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....ction 2(42A) as further explained in Explanation 1(b ) cannot be applied in such different context especially when there is nothing in Explanation (iii) to section 48 to suggest or indicate to this effect. 9. We have considered the rival submissions and also perused the relevant material on record. The relevant provisions dealing with computation of income from capital gains are contained in sections 45 to 55A of the Income-tax Act, 1961. Section 45 is a charging provision according to which any profit or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head 'Capital gains' save as otherwise provided in section 54 etc. Section 47 enumerates certain transactions which are not regarded as transfer. Section 48 lays down the manner and method of computing the income chargeable under the head 'Capital gains'. As provided in section 48, the cost of acquisition of the asset, inter alia, is to be deducted from the full value of the consideration received or receivable as a result of the transfer of the capital asset and such cost with reference to certain modes of acquisition is specified in section 49. Insofar as transf....
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.... capital gains. The entire capital gain including the capital gain which would have been chargeable as a result of transfer of a capital asset by the previous owner to the assessee as a result of gift but for the provisions of section 47 thus is made chargeable to tax at the second stage when the capital asset becoming the property of the assessee under gift is transferred by him. This is the scheme of the Act as laid out in the relevant provisions which treat the cost and date of acquisition of the previous owner as the cost and date of acquisition of the assessee. 11. As per the definition given in Explanation (iii ) to section 48, the "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning the first day of April, 1981 whichever is later. Relying on this definition, the ld. D.R. has contended that the year in which the capital asset was received by the assessee under gift would be the first year in which the same could be said to be held by....
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....l be included the period for which the asset was held by the previous owner referred to in the said section." 14. A combined reading of both the aforesaid provisions, "which are relevant in the present context, clearly shows that importance is assigned to the period of holding of the capital asset inasmuch as Explanation (iii) to section 48 refers to the first year in which the asset was held by the assessee whereas Explanation 1(b) to section 2(42A) provides for inclusion of the period for which the asset was held by the previous owner in determining the period for which any capital asset is held by the assessee. Having regard to this aspect as well as keeping in view that the definitions given in section 2 are applicable for the entire Act, we are of the view that the legislative intention behind enacting these provisions is very clear to treat the date as well as cost of acquisition of capital asset of the previous owner to be the date and cost of acquisition of the assessee for the purpose of computing capital gain in terms of section 48. This is the scheme of the Act as laid out in the relevant provisions and this is the context in which the same has to be understood and appr....
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....e, the only view possible from the interpretation of relevant provisions is that the period for which the asset was held by the previous owner is to be included in determining the period for which the asset was held by the assessee as provided in Explanation 1(b) to section 2(42A) and this position is applicable even for working out the indexed cost of acquisition within the meaning of Explanation (iii) to section 48. 16. This is so also because when the cost of acquisition to the previous owner as on the date of acquisition of the capital asset by him is to be adopted as cost of acquisition to the assessee even for the purpose of working out the indexed cost of acquisition as per the meaning given in Explanation (iii ) to section 48, it does not sound logical to adopt the cost inflation index for the year in which the capital asset became the property of the assessee and not that for the year in which the asset was acquired by the previous owner. In our opinion, when the cost of acquisition of the previous owner as on the date of acquisition of the capital asset by him is to be taken for working out the indexed cost of acquisition, the only conclusion which logically and reasonab....
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....tatus of the assessee, but was unrelated to the length of period of holding. This deduction was intended to give a rough and ready relief for inflation. It was, however, felt that a fair method of allowing relief for these factors would be to link it to the period of holding and for this purpose, provisions have been made to inflate the cost of acquisition of the asset and cost of improvement of the asset so as to arrive at the indexed cost of acquisition and indexed cost of improvement and deduct these amounts from the sale consideration to arrive at the long-term capital gains. It is thus clear that the legislative intention to introduce the concept of "indexed cost of acquisition" and "indexed cost of improvement" in the statute has been to allow deduction while computing the capital gains on the basis of length of the period of holding of the capital asset. In this situation, if the meaning to "indexed cost of acquisition" as sought to be given by the ld. D.R. relying on Explanation (iii ) to section 48 is assigned, the length of period of holding of the capital asset by the previous owner would get completely excluded while giving the benefit of indexation. Such an interpretat....