PERIOD OF HOLDING UNDER SEC 54F

Holding period for such asset will be counted from the date of acquisition of the previous owner [As per the decision by Bombay High Court in the case of Manjula J. Shah]. 

Extracts...

" While computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, whether the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset ? "

 In the assessment year in question, the assessee had declared total income of Rs.20,92,400/-. The said return of income included long term capital gains arising from the sale of a residential flat bearing No.1202-A ('capital asset' for short) at Chaitanya Towers, Prabhadevi, Mumbai. The said flat was originally purchased by the daughter of the assessee ('previous owner' for easy reference) on 29/1/1993 at a cost of Rs.50,48,350/-. By a gift deed dated 1/2/2003, the previous owner gifted the said capital asset to the assessee. On 30/6/2003, the assessee sold the said capital asset for a total consideration of Rs.1,10,00,000/- and offered the long term capital gains to tax.

During the assessment proceedings, the assessee contended that though the capital asset in question was acquired by the assessee under a gift deed dated 1/2/2003 and transferred on 30/6/2003, under Section 48 read with Section 49 and Section 2(42A) of the Income Tax Act, 1961 ('the Act' for short), the gains arising therefrom were liable to be computed as long term capital gain, by deducting from the total consideration received, inter alia, the amount of indexed cost of acquisition. The assessee contended that the indexed cost of acquisition has to be determined with reference to the cost inflation index for the year in which the cost of acquisition was incurred. In the present case, the cost of acquisition was incurred on 29/1/1993 and, hence, cost inflation index for 1993-94 would be applicable. The assessing officer was of the opinion that under Explanation (iii) to Section 48 of the Act, the indexed cost of acquisition has to be determined with reference to the cost inflation index for the first year in which the asset was first held by the assessee. According to the assessing officer, the asset was held by the assessee from 1/2/2003 and, therefore, the cost inflation index for 2002-03 would be applicable in determining the indexed cost of acquisition.

On appeal filed by the assessee, the CIT(A) allowed the claim of the assessee by holding that the long term capital gain has to be determined by computing the indexed cost of acquisition with reference to the cost inflation index for 1993-94 instead of the cost inflation index for AY 2002-03 as held by the assessing officer.

 On further appeal filed by the revenue, the ITAT concurred with the decision of CIT(A) and dismissed the appeal filed by the revenue.

It is not disputed by the revenue that the assessee must be deemed to have held the capital asset from 29/1/1993 (though actually held from 1/2/2003) by applying the Explanation 1(i)(b) to Section 2(42A) of the Act and hence liable for long term capital gains tax. However, the revenue disputes the applicability of the deemed date of holding the asset from 29/1/1993 while determining the indexed cost of acquisition under clause (iii) of the Explanation to Section 48 of the Act.

 Apart from the above, Section 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 Section 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.

The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. As per the CBDT Circular No.636 dated 31/8/1992 a fair method of allowing relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at .the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under Section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee.

 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.

 In the result, we hold that the ITAT 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.

Full text::  https://indiankanoon.org/doc/138298548/

Thanks Bro Dhirajlal.

You are a very helpful person indeed. God Bless you.

Is there any other citation on the subject from any HC or SC?

Date of Judgement/Order : 12/12/2012 Related Assessment Year : 2006- 07 Courts :

ITAT CHANDIGARH BENCH ‘A’ Vishwanath Sharma versus Assistant Commissioner of Income-tax IT Appeal NO. 956 (CHD.) OF 2012 [ASSESSMENT YEAR 2006-07] DECEMBER 12, 2012

1. CIT v. Manjula J.Shah[2012] 204 Taxman 691

2. Arun Shungloo Trust v. CIT[2012] 205 Taxman 456

3. Asstt. CIT v. Suresh Verma[2012] 135 ITD 102

4. Dy. CIT v. Smt.Meera Khera[2004] 2 SOT 902 (Mum.)

5. Smt.Mina Deogun v. ITO[2008] 19 SOT 183 (Kol.) 6. Mrs. Pushpa Soft v. ITO[2002] 81 ITD 1 (Chd.)

MANY THANKS SIR FOR YOUR KINDNESS

My Pleasure.