Capital gains on gifted asset shall be computed by taking Cost inflation Index of year in which asset held by previous owner

By | October 13, 2015

Whether in case of an assessee covered under section 49(1), i.e., in case of gains arising on transfer of a capital asset acquired under a gift or will, capital gains liability has to be computed by considering that assessee held said asset from date it was held by previous owner and on same analogy indexed cost of acquisition has to be computed with reference to year in which previous owner first held asset and not with reference to year in which assessee became owner of such asset ?

Held Yes

Reference :-Section 49, read with section 2(42A), of the Income-tax Act, 1961

Assessment year 2007-08

Gift

IN THE ITAT MUMBAI BENCH ‘B’

Income Tax Officer-19(1)(1), Mumbai

v.

Nandlal R. Mishra

JOGINDER SINGH, JUDICIAL MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER

IT APPEAL NO. 445 (MUM.) OF 2014
[ASSESSMENT YEAR 2007-08]

JULY  1, 2015

Jeetendra Kumar, DR for the Appellant. Rajendra Kumar and I. Jain for the Respondent.

ORDER

Joginder Singh, Judicial Member – The Revenue is aggrieved by the impugned order dated 19/11/2013 of the ld. First Appellate Authority, Mumbai, on the ground that the ld. Commissioner of Income Tax (Appeals) erred in holding that the date of index cost of acquisition for computation of capital gain should be the year in which the previous owner acquired the property and not the year in which the assessee became the owner of such property.

2. During hearing of this appeal, ld. DR., Shri Jeetnedra Kumar advanced his arguments which are identical to the ground raised by defending the assessment order. On the other hand, Shri Rajendra Kumar I. Jain, ld. counsel for the assessee, defended the conclusion arrived at in the impugned order by placing reliance upon the decision from Hon’ble jurisdictional High Court in the case of CIT v. Manjula J. Shah [2013] 355 ITR 474/[2012] 204 Taxman 691/[2011] 16 taxmann.com 42 (Bom.). This assertion of the assessee was not controverted by the ld. DR with the help of any other case or on different facts.

2.1 We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the property in question was originally purchased by the partnership firm in the year 1975. The father of the assessee expired in 1976 who was a partner in the said firm. The assessee has taken the cost of the property as on 01/04/1981, while computing long term capital gain, at Rs.44,32,500/- as against the cost price given by the valuer as Rs. 44 lakh. For the purpose of claiming rights in the property, the accounts of the firm were made up on the date of sale and sale consideration so received was distributed among all the legal heirs of the partners of the firm. The assessee received 1/8th share out of the total sale consideration and the same was offered for tax in his return under the head income from long term capital gain. The Assessing Officer was of the view that the right on the property arise in the hands of the assessee after the dissolution of the firm, therefore, cost inflation index will be allowable after the dissolution of the firm and not as on 01/04/1981. The Assessing Officer estimated the value of the property, for the purposes of computation of LTCG, in the hands of the assessee, at Rs.4,64,250/- i.e. 1/8th of Rs.45,14,000/-, as per valuation of Mundrak Zila Adhikari, thus, the long term capital gain, in the hands of the assessee, was computed at Rs.21,03,705/-.

2.2 On appeal, before the ld. First Appellate Authority, the facts were considered and following the decision from the Hon’ble High Court in the case of Manjula J. Shah (supra), the issue was decided in favour of the assessee and the ld. Assessing Officer was directed to adopt the cost inflation index as on 01/04/2008. The Revenue is aggrieved and is in appeal before this Tribunal.

2.3. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, under the facts narrated in para 2.1. onwards, we deem at appropriate to reproduce hereunder the relevant portion from the order of the Hon’ble jurisdictional High Court in Manjula J. Shah (supra) for ready reference:—

“23. Since the assessee in the present case is held liable for long-term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the assessee, the indexed cost of acquisition has also to be determined on the very same basis.

24. In the result, we hold that the Tribunal was justified in holding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset.

25. Accordingly, we dispose of the appeal by answering the question in the affirmative i.e. in favour of the assessee and against the Revenue with no order as to costs.”

2.4 Before coming to any conclusion, we may refer to the relevant provisions of the Act relating to the taxability of the gains arising on transfer of the capital assets under the head ‘Capital gains’. Sec. 45 of the Act provides that any profits or gains arising from the transfer of a capital asset in the previous year shall be chargeable to income-tax under the head ‘Capital gains’. Where the gains arise on transfer of long-term capital asset, as defined under s. 2(29A) of the Act, the said gains are taxed as long-term capital gains. Sec. 47(iii) of the Act provides that where a capital asset is transferred under a gift or will or inheritance, then, such transaction shall not be regarded as transfer and in such a case the liability to pay capital gains tax would not arise. Liability to pay capital gains tax, however, would arise when the assessee transfers the capital asset acquired under a gift or will for valuable consideration. The mode and the manner of computing the capital gains is provided under s. 48 of the Act. As per s. 48, the income chargeable under the head “Capital gains” is liable to be computed by deducting from the full value of the consideration received on transfer of the capital asset, the amount of expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. Where the assessee acquires any capital asset under a gift or will without incurring any cost of acquisition, there would be no capital gains liability. However,section 49(1) (ii) of the Act provides that in the case of an assessee acquiring an asset under a gift or will, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Thus, on account of the deeming fiction contained in section 49(1) (ii) of the Act, gains arising on transfer of a capital asset acquired by the assessee under a gift or will would arise. In such a case, the capital gains under s. 48 of the Act would have to be determined by deducting from the total consideration received by the assessee, inter alia the deemed cost of acquisition.

2.5 For better appreciation of the dispute, we quote the relevant part of s. 48 of the Act hereunder :

“48. The income chargeable under the head ‘Capital gains’ shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :

(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;
Provided that …..
Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of cl. (ii) shall have effect as if for the words ‘cost of acquisition’ and ‘cost of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost of any improvement’ had respectively been substituted :
Provided also….
Explanation. ‘For the purposes of this section,’
(i) to (ii)** ** **
(iii) ‘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 on the 1st day of April, 1981, whichever is later;
(iv) ‘indexed cost of any improvement’ means an amount which bears to the cost of improvement the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to the asset took place;
(v) ‘Cost Inflation Index’, in relation to a previous year, means such index as the Central Government may, having regard to seventy-five per cent of average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.”

2.6 Thus, the indexed cost of acquisition has to be determined with reference to the cost inflation index for the first year in which the capital asset was ‘held by the assessee’. Since the expression ‘held by the assessee’ is not defined under s. 48 of the Act, that expression has to be understood as defined under s. 2 of the Act. Explanation 1(i)(b) to s. 2(42A) of the Act provides that in determining the period for which an asset is held by an assessee as was held by the previous owner shall be included. As the previous owner held the capital asset from 1975, as per Expln. 1(i)(b) to s. 2(42A) of the Act, the assessee is deemed to have held the capital asset from 1975. By reason of the deemed holding of the asset from 1975, the assessee is deemed to have held the asset as a long-term capital asset. If the long-term capital gains liability has to be computed under s. 48 of the Act by treating that the assessee held the capital asset from 1975, then, naturally in determining the indexed cost of acquisition under s. 48 of the Act, the assessee must be treated to have held the asset from 1975 and accordingly would be applicable in determining the indexed cost of acquisition.

2.7 If the argument of the Revenue that the deeming fiction contained in Expln. 1(i)(b) to s. 2(42A) of the Act cannot be applied in computing the capital gains under s. 48 of the Act is accepted, then, the assessee would not be liable for long-term capital gains tax, because, it is only by applying the deemed fiction contained in Expln. 1(i)(b) to s. 2(42A) and section 49(1) (ii) of the Act, the assessee is deemed to have held the asset from 1975 and deemed to have incurred the cost of acquisition and accordingly made liable for the long-term capital gains tax. Therefore, when the legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will and the capital gains under s. 48 of the Act has to be computed by applying the deemed fiction, it is not possible to accept the contention of Revenue that the fiction contained in Expln. 1(i)(b) to s. 2(42A) of the Act cannot be applied in determining the indexed cost of acquisition under s. 48 of the Act.

2.8 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 cl. (iii) of Expln. to s. 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Expln. 1(i)(b) to s. 2(42A) together with ss. 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 as provided under s. 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 asset acquired under a gift or will or inheritance by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. In other words, in the absence of any indication in cl. (iii) of the Explanation to s. 48 of the Act that the words ‘asset was held by the assessee’ has to be construed differently, the said words should be construed in accordance with the object of the statute, that is, in the manner set out in Expln. 1(i)(b) to s. 2(42A) of the Act.

2.9 Apart from the above, s. 55(1)(b)(2)(ii) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under section 49(1)  of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital gains under s. 48 of the Act. The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under section 49(1) of the Act would arise only if the period for which the asset was held by the previous owner is included in determining the period for which the asset was held by the assessee. Therefore, it is reasonable to hold that in the case of an assessee covered under section 49(1) of the Act, the capital gains liability has to be computed by considering that the assessee held the said asset from the date it was held by the previous owner and the same analogy has also to be applied in determining the indexed cost of acquisition. For determining the capital gain, the cost of acquisition of capital asset is crucial. Thus, keeping in view, the totality of facts, we hold that the long terms capital gains has to be from the date from which the capital asset in question was held by the previous owner and the indexed cost of acquisition also has to be determined on the very same basis, consequently, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of such asset. The ratio laid down in B.N. Vyas v. CIT [1986] 159 ITR 141/25 Taxman 133 (Guj.), CIT v. N.N. Mohan & Sons [2001] 250 ITR 131/115 Taxman 252 (Delhi), CIT v. Harbhagwan [1999] 236 ITR 620/[1998] 100 Taxman 306 (Punj. & Har.) , Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681/[1986] 29 Taxman 32 (Kar.), Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 (Guj.), CIT v. M. Ramaiah Reddy [1986] 158 ITR 611/24 Taxman 764 (Kar.), CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557/[1987] 30 Taxman 50 (Ker.), CIT v.Steel Group Ltd. [1981] 131 ITR 234/7 Taxman 295 (Cal.), CIT v. Duncan Bros. & Co. Ltd. [1994] 209 ITR 44/74 Taxman 283 (Cal.), Arun Sunny v. Dy. CIT [2012] 344 ITR 249/[2009] 184 Taxman 498 (Ker.) further supports the case of the assessee. Respectfully following the decision from Hon’ble jurisdictional High Court in Manjula J. Shah (supra), we affirm the conclusion drawn by the ld. Commissioner of Income Tax (Appeals), therefore, the appeal of the Revenue is dismissed.

Finally, the appeal of the Revenue is dismissed.

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