here is an example
if A purchases a property in the year 1985-86 and he dies in 2006-07 whereby the said property gets inherited by his only son B in the year 2006-07. B sells the same property in year 2011-12.
Now in the above case revenue would want to allow the indexation from year 2006-07 considering that B became owner of the property in year 2006-07, however B would like to get the indexation from year 1985-86 ie the year in which the property was first acquired by his father A.
Explanation 1(b) to section 2(42A) of Income Tax Act, 1961 provides answer to the above situation. It says that in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1)]of section 49[ie in case of gift or inheritance or liquidation of a company or under irrevocable trust], there shall be included the period for which the asset was held by the previous owner referred to in the said section.
That means where an asset is acquired by gift or inheritance, the period of long term capital asset shall be recokned from the date when the previous owner acquired such asset and the indexation shall be allowed accordingly from the year of acquisition by the previous owner.
Further section 49(1) also provides that in such cases 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 assets incurred or borne by the previous owner or the assessee, as the case may be.