The income of a person has to be computed under any or all five ‘heads of income’ for the purpose of levying income tax. Section 14 of the Income tax Act,1961 (herein after referred to as ‘the act’) prescribes these five heads in which ‘capital gains’ is one among the other heads. Capital gains means a profit derived from the disposition of a capital asset as defined in section 2(14) of the act. In common parlance, the capital gain is the difference between a higher selling price with respect to a corresponding lower purchase price. But in the act, for the purpose of computation, the said purchase price is termed as ‘cost of acquisition’. Here, an issue may come up, in certain cases ,that a person might have acquired a capital asset with out consideration. To deal such cases, section 49(1) of the act has given a definition for cost of acquisition of a capital asset acquired without paying any consideration for the same.
For computing the capital gains, again the cost of acquisition has to be indexed according to explanation (iii) to section 48 of the act. Naturally, the index factor has two parts, represented by figures, namely numerator and denominator. The numerator figure of the index can be easily obtained from the government notification referred to in explanation (v) of section 48 of the act since it is concerned with the year of transfer of the capital asset which can be easily known from the transfer document. But there are a lot of debate/ dispute about the denominator of the index when a capital asset is acquired with out consideration though explanation (iii) to section 48 clearly says that ‘cost inflation index for the first year in which the asset is held by the assessee should be the denominator. For the sake of convenience , the said explanation is reproduced below:-
‘’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’’.
In spite of this clear explanation, judiciary has taken a different view, in a number of cases, that indexed cost of acquisition has to be computed with reference to the YEAR IN WHICH PREVIOUS OWNER FIRST HELD THE ASSET, and not from the year in which the assessee became owner of that asset. The author describes in this article certain such controversial decisions which puts the assessee in the state of uncertainty.
i) Mrs. Pushpa Sofat Vs. ITO (2002) 81 ITD 1(Chd- Tri)
The facts of the case are that the assessee and her sister were owner’s of one residential Kothi in Chandigarh and the same was sold by them in the accounting year 1992-93 . The said house was inherited by the above mentioned ladies from their father, who died on 17-2-1991 . Their father had built the house long back, i.e., much earlier to 1-4-1981 and had bequeathed the same to his daughters. Capital gain is worked out by applying the cost inflation index (denominator)of financial year 1981-82. The ITO and the CIT (Appeals) did not agree with this ,since there view was the indexed cost of acquisition was to be worked out with reference to the date on which the father of the assessee expired i.e. 17-2-1991 by applying explanation (iii) to section 48. The assessee preferred second appeal before the ITAT which decided the case in favour of the assessee’s. The tribunal observed that as the asset was acquired prior to 1981, the indexed cost of acquisition in the hands of the previous owner as on 1-4-1981 (100) was to be considered for computing the capital gains.
ii) Smt. Mina Deogun Vs. ITO (2008) 19 SOT 183(Kol-Tri).
In this case, the assessee’s father had acquired a property in 1958. He expired in 1968, whereupon the assessee’s mother became the owner of the property. The mother expired in September 1999,resulting in the assessee and her three sisters inherting the property as co-owners. The property was sold during the previous year relevant to assessment year 2004-05. The assessee claimed cost of indexation from financial year 1981-82. The ITO allowed indexation from the financial year 1999-2000. The first appellate authority agreed with the view of ITO. Before the tribunal it was argued that if the cost inflation index was adopted with reference to the year of succession, while cost was taken as of 1-4-1981, it would lead to absurd results and, therefore, a schematic interpretation should be adopted, and not a literal interpretation. The tribunal, therefore, held that the cost inflation index applicable to 1981-82 was to be applied, and not the index applicable to 1998-99. While deciding the case the tribunal relied on the case of Mrs. Puspa Sofat (supra) and Mumbai tribunal decision in DCIT Vs. Smt. Meera Khera ,2 SOT 902.
iii) Kamal Mishra Vs. ITO (2008) 19 SOT 251(Del-Tri)
The facts of the case is as follows:-
The assessee was in receipt of certain shares and securities on the death of her husband in January 1998. The shares were sold during the year under consideration viz., assessment year 2002-03. While computing capital gain, the assessing officer allowed indexation by taking the year of acquisition of shares as 1998, instead of the year in which shares were acquired by her husband, as claimed by the assessee. On appeal the Commissioner (Appeals) allowed the claim of the assessee with regard to indexation of securities. On further appeal by the revenue, the tribunal observed as follows:-
There cannot be two different dates in respect of the same asset devolving on the heir, one date to determine the date of cost of acquisition and another to determine the indexed cost of acquisition. Even otherwise the period of holding for determining long-term capital gains includes the period for which the original owner held the asset that devolved upon the legal heir. Accordingly, the assessing officer is directed to recompute capital gains on sale of securities by indexing cost of acquisition with reference to the year in which husband of assessee acquired them.
iv) ACIT Vs. Suresh Verma (2012) 72 DTR 82(Del-Tri)
The assessee has declared long term capital gain, claiming the indexation cost as on 1st April, 1981. The Assessing Officer held that the father of the assessee had expired on 6th April 1990 hence indexation will be available only with the reference to financial year 1990-91. In appeal the Commissioner (Appeals) allowed the claim of indexation from 1-4-1981. On appeal by revenue the Tribunal held that as the property was acquired by assesee’s father in 1965 and inherited by assessee on death of his father in 1990, indexed cost of acquisition of property shall have to be determined as on 1st April 1981, for purpose of computation of capital gains. (A.Y. 2007-08).
v) CIT Vs. Manjula J. Shah (2011) 16 Taxmann.com 42
The facts of the case is the assessee acquired a residential flat as a gift from her daughter under a gift deed dated 02-01-2003 . The said flat was originally acquired by the previous owner on 29-01-1993. The assessee sold the flat on 30-06-2003 and offered long term capital gains. While calculating the capital gains she took the index of year 1993-94. The ITO recomputed the capital gains with index of 2002-03 and passed order accordingly. The appeal before CIT (Appeals) and the ITAT was decided in favour of the assessee. The revenue preferred appeal before the Bombay High Court which was again decided in favour of the assessee. While delivering the order the Bombay High Court, laid down that when the law provides to consider the period of holding of the previous owner also, then a different treatment cannot be accorded for calculation of the indexed cost of acquisition by not adopting the cost inflation index of the year in which the asset was acquired by the previous owner. Therefore, the court said, indexation should be allowed from the year in which such asset was acquired by the previous owner.
vi) Arun Shungloo Trust Vs. CIT (2012)205 Taxmann 456 (Del).
The facts of the case are discussed hereunder.
One Mr. Arun Shungloo acquired property in New Delhi before 1st April, 1981. On 5th January, 1996, Mr.Arun Shungloo transferred the property to Arun Shungloo Trust. The said trust sold and transferred the acquired property to a third party during assessment year 2001-02. The substantial question of law mentioned above relates to the computation of long term capital gains. The contention of the Revenue which has been accepted by the tribunal is that appellant is entitled to indexed cost of acquisition for the period on or after 5th January, 1996, i.e., the date on which the trust had acquired the property upto the date of sale. The contention of the appellant assessee is that it is entitled to the benefit of indexed cost of acquisition from 1.4.1981, i.e. for the period during which Mr. Arun Shungloo also held the property before it was transferred to the trust.
While delivering the judgement in favour of th appellant, the Delhi High Court observed as follows;-
There is no reason and justification to hold that clause (iii) of the explanation to section 48 intents to reduce or restrict the "indexed cost of acquisition" to the period during which the assessee has held the property and not the period during which the property was held by the previous owner. The interpretation relied by the assessee is reasonable and in consonance with the object and purpose behind Sections 48 and 49 of the Act. The expression "held by the assessee" used in Explanation (iii) to Section 48 has to be understood in the context and harmoniously with other Sections. The cost of acquisition stipulated in Section 49 means the cost for which the previous owner had acquired the property. The term "held by the assessee" should be interpreted to include the period during which the property was held by the previous owner. Accordingly the benefit of indexation was allowed from 1-4-1981.
The author feels that the view taken by the tribunal/ high court is not in tune with the law prevailing in explanation (iii) to section 48 of the Income tax Act,1961 and, therefore, will result in unnecessary hard ship to the assessee’s / professionals at any point of time. Therefore, the tribunal / high court would have applied the literal rule of construction and the words of the statute would have understood in their ordinary and popular sense while delivering the judgement.
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