TaxTMI 
TaxTMI 
2026 (10) TMI 507
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....ification Number: ITBA/NFAC/S/250/2025-26/1085990140(1) is erroneous, bad in law, illegal, prejudicial to the Appellant, contrary to the facts and circumstances of the case and deserves to be quashed. 2. Without prejudice, the Assessment order issued by the learned Assessing Officer ('learned AO") dated 24 March 2024 under section 143(3) read with section 144B of the Income-tax Act, 1961 ('the Act') is erroneous, bad in law and contrary to the facts and circumstances of the case. 3. The learned AO and the learned CIT(A) have erred in considering the period of holding of gifted shares as 8 months without including the period of holding of previous owner. 4. The learned AO and the learned CIT(A) have erred in considering the gains arising out of the sale of shares (acquired vide gift) to be short-term capital gains by not including the period of holding of previous owner. 5. The learned AO as a consequence of not including the period of holding of previous owner and treating the gains as short-term capital gains, has not provided the indexation on the cost of shares. 6. The learned CIT(A) has erred in not providing the benefit ....
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....ost of acquisition amounting to Rs. 7,85,51,042/- treating shares as long term capital asset. The AO however did not accept the contention that the impugned shares are long term capital asset in the hands of the assessee and held that since the shares were acquired only on 24.03.2021 which is short term capital asset and accordingly the gain arising on the same should be treated as short term capital gain (STCG). The A.O also did not allow the indexation since the asset sold according to the A.O which is short term capital asset. The A.O while completing the assessment u/s. 143(3) of the Act therefore made an addition of Rs. 3,71,73,995/-. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) allowed the contention of the assessee that the asset is a long term capital asset. However, the CIT(A) upheld the addition made by the AO stating that the indexation benefit cannot be allowed to the assessee. The assessee is in appeal before the Tribunal against the order of the CIT(A). 3. The Ld. Authorized Representative (AR) of the Assessee made a detailed written submissions as extracted below: "Submissions on Issue on Nature of asset: 3.1. At the....
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.... the above provisions of the Act, the period of holding of Mr Kiran Reddy should also be considered for the purpose of classifying the asset as a long-term or a short-term capital asset. Given that the shares are held for more than 24 months by the previous owner, the gain arising from transfer of such shares shall be long-term capital gain. 3.7. The appellant further submits that the Commissioner of Income Tax (Appeals) ['CIT(A)'] had made the following observation (Para 24-Page 014 of Main appeal set) ".....24. In other words, while the asset may be long-term in nature by virtue of the extended holding period, the particular monetary value of 4,13,87,047/- is a new statutory cost crystallised on 24.03.2021 upon its taxation under section 56(2)(x)." The appellant submits that despite making the above observation, the CIT(A) dismissed the appeal filed by the appellant. The appellant submits that while the CIT(A) in the operative portion of the order has made observation that asset maybe a long-term capital asset, proceeded to conclude his order only on the second issue namely whether the appellant is entitled for benefit of indexation. The CIT(A) ....
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.... was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. Extract of the same has been provided below: "...9. It is true that the words of a statute are to be understood in their natural and ordinary sense unless the object of the statute suggests to the contrary. Thus, in construing the words 'asset was held by the assessee' in clause (iii) of Explanation to Section 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Explanation 1(i)(b) to Section 2(42A) together with Section 48 and 49 of the Act, it becomes absolutely clear that the object of the statute is not merely to tax the capital gains arising on transfer of a capital asset acquired by an assessee by incurring the cost of acquisition, but also to tax the gains arising on transfer of a capital asset inter alia acquired by an assessee under a gift or will as provided under Section 49 of the Act where the assessee is deemed to have incurred the cost of acquisition. Therefore, if the object of the legislature is to tax the gains arising on transfer of a capital acquired under a gift or will by including ....
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.... 2(42A). If therefore a capital asset becomes the property of the assessee in the circumstances mentioned in section 49(1) and the period for which it is held as determined by section 49(1) read with section 2(42A) is more than the period stipulated in section 2(42A), the case would not fall within the ambit of a short-term capital asset. Vijay Gupta Vs Commissioner of Income Tax [2016] 68 taxmann.com 131 (Delhi HC), held that the "... 15. Reading Explanation I to section 2(42A) with section 49 of the Act shows that for computing the period of holding a capital asset, which becomes the property of the assessee by way of gift or will, the period for which the asset was held by the previous owner shall be included. 16. Therefore, for the purposes of computing capital gains on transfer of shares in DLF Ltd., the Petitioner should have included the period for which the said shares were held by his mother. This, it is contended, was not done when the return of income was filed. Since the period for which the mother had held the shares was in excess of the stipulated period for computing "short term capital gains", the gains made by the petitioner on sale of the subject shares were "long....
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....ioner of Incometax [2026] 184 taxmann.com 271. Further, the Appellant humbly submits that a similar view has also been taken by the Hon'ble Madras High Court in CIT v. Saroja Naidu [2021] 128 taxmann.com 127 (Madras), wherein the Hon'ble Court followed the decision of the Hon'ble Bombay High Court in Manjula J. Shah (supra) and held that while computing capital gains arising on transfer of a capital asset acquired through inheritance, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset. In light of the above judicial precedents, the Appellant humbly submits before your good-self that the period of holding of previous owner is to be considered for determination of the asset as a long-term and consequently, indexation benefit should also be provided for the period of holding of previous owner. 3.11. Without prejudice to the above, the appellant submits that for submissions made in para 3.1-3.7, the asset sold by the appellant is a long-term capital asset, indexation on the cost of Rs. 4,13,87,047 should be given from 24.03.2021, the date on which the cost got crystallised....
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....AR submitted that the term "gift" is not defined under the Act, and reliance must accordingly be placed on Section 122 of the Transfer of Property Act, 1882, which requires the existence of identifiable property, a voluntary transfer by the donor, and acceptance by the donee. The Ld. AR submitted that the impugned transaction satisfies all these requirements, since the shares constitute identifiable property, the transfer was made voluntarily by Mr. Kiran Reddy under a duly executed gift deed dated 24.03.2021, and the same stands accepted and acted upon by the assessee. The Ld. AR further submitted that the Act contains no provision which alters the character of a transaction, and that section 56(2)(x) merely brings certain income to tax without re-characterising the underlying transfer, so that offering the value of the shares to tax under the said section does not detract from its character as a gift. The Ld. AR also submitted that neither the AO nor the Ld. CIT(A) has disputed the genuineness or character of the transaction as a gift, and since the Revenue has not challenged this finding, the said characterisation has attained finality. In support of the above, the Ld. AR relied....
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.... taxed under section 56(2)(x) as the cost of acquisition, claiming the benefit of indexation and offering the gains as long-term capital gains. The A.O, however, held that since the assessee acquired the shares only on 24.03.2021, the period of holding was less than the prescribed period and, therefore, the gains were liable to be assessed as short-term capital gains. Consequently, the A.O denied the benefit of indexation and completed the assessment accordingly. Though CIT(A) did not sustain the action of the A.O in treating the gains as short-term capital gains, no categorical finding has been recorded as to whether the impugned shares constitute a long-term capital asset. CIT(A), however, upheld the denial of indexation. Therefore, the controversy before us gives rise to three issues for consideration, namely, (i) whether the impugned shares constitute a short-term capital asset or a long-term capital asset, (ii) if the shares constitute a long-term capital asset, whether the assessee is entitled to the benefit of indexation in the light of section 49(4) of the Act, and (iii) if the answer to the second issue is in the affirmative, from which point of time the indexation is to b....
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....r's side of the very same transaction. Section 47(iii) of the Act excludes a transfer of a capital asset by an individual or Hindu undivided family under a gift from being regarded as a transfer at all for the purposes of section 45, and this exclusion is unconditional, irrespective of the relationship between the donor and the donee or on whether the donee is subsequently taxed under section 56(2)(x) of the Act. We are of the view that had the taxation of the donee under section 56(2)(x) been intended to alter the fundamental character of the transaction as a gift, a corresponding consequence would have been expected on the donor's side as well, and yet section 47(iii) continues to apply to the donor without any such qualification. It is relevant to mention here that since section 47(iii) removes such a gift from the ambit of a transfer chargeable under section 45 in the first place, no other provision of the Act, comes into play so as to tax the donor. In such a scenario, we are of the view that the Act contemplates taxation of a genuine gift, where one arises at all, only in the hands of the donee under section 56(2)(x), and this donee based taxation does not, by itself,....
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....We have considered the decision in Manjula Shah (supra) carefully. In that case, the Hon'ble Court held that the assessee is deemed to have held the asset from the date the previous owner acquired it and is simultaneously deemed to have incurred the cost of acquisition from that very date, both consequences flowing from the same deeming fiction contained in Explanation 1(b) to section 2(42A) read with section 49(1). It was on this basis that the Court held it would be inconsistent to accept the deemed holding period for computing long term capital gains, while rejecting the deemed cost carried over from the same fiction for the purpose of indexation. In such a scenario, both the period of holding and the cost of acquisition travel together, since they arise from one and the same source. We are of the view that the position is materially different once section 49(4) of the Act is attracted. The period of holding of the impugned shares continues to be governed by Explanation 1(b) to section 2(42A) read with section 49(1), for the reason already discussed herein above since the mode of acquisition remains a gift. The cost of acquisition, however, is no longer the cost to the previ....