Under section 48 of the Income Tax Act, 1961 (the Act), capital gains on the transfer of a long term capital asset, defined under section 2(29A) read with sections 2(14) and 2(42A) of the Act, can be computed after deducting either the cost of acquisition or indexed cost of acquisition of the capital asset from the net consideration.
An assessee can choose to offer long term capital gains for taxation computed either with or without indexation benefit whichever bears lower tax.
But the moot question is when or from which date is this Indexation Benefit available? As per Explanation (iii) to section 48 of the Act, “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as cost inflation index (CII) for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on April 1, 1981, whichever is later. As the words used are “CII for the first year in which the asset was held by the assessee” one must remember is that the indexation benefits are available to the assessee only from the first year in which capital asset is held by assessee. Under section 49(1) of the Act, where the capital asset became the property of the assessee in any of the modes referred to therein like partition of a Hindu undivided family, gift, will, succession, dissolution, liquidation et al, 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 per the Explanation to section 49(1) of the Act, the expression “previous owner of the property” in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clauses (i) to (iv) thereof.
Thus, in the above cases, the cost of acquisition of the previous owner is to be taken as the cost of acquisition for the assessee. But, if the previous owner also acquired the capital asset in the manner listed above, then the previous owner would mean the last previous owner who acquired the capital asset by means otherwise than as covered in section 49(1) of the Act, listed above.
Now, let us consider the recent case of Mrs. Pushpa Sofat v. Income Tax Officer [2002] 81 ITD 1 (Chd.) (SMC). In this case, the assessee sold in accounting year 1992-1993 an immovable property for Rs 7,40,000, wherein she and her sister were equal owners. This immovable property was inherited by the assessee and her sister from their father, who passed away on February 17, 1991, under a valid Will and was transferred in their names on August 14, 1992. The property was acquired by their father between 1969 and 1972 and hence, the fair market value thereof as on April 1, 1981 of Rs 4,06,144 was considered along with the CII for financial year 1981-1982 of 100.
The assessee declared a long term capital loss on the sale of the above property of Rs 82,850 being her share in the total loss of Rs 1,65,701 (i.e. Rs 7,40,000 - [Rs 4,06,144 * 223 / 100]) after taking indexation benefit from financial year 1981-1982. However, the Assessing Officer determined a long term capital gain of Rs 1,42,437 i.e. + of Rs 2,84,874 (i.e. Rs 7,40,000 - [Rs.4,06,144 * 223 / 199]) after allowing indexation benefit from financial year 1991-92 being the year in the property was inherited by the ladies from their father. In response to the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) confirmed the view of the AO.
However, in further appeal, the Tribunal confirmed the view of the assessee that indexation benefit would be available to the assessee, who had inherited an immovable property on death of the previous owner, from the year in which the asset was acquired by the previous owner or April 1, 1981, whichever is later.
However, the above contrary decision has added an important twist to the issue of the period from which indexation benefit would be available to an assessee when the capital asset has been acquired in any of the modes referred to in section 49(1) of the Act.
However, the above contrary decision has added an important twist to the issue of the period from which indexation benefit would be available to an assessee when the capital asset has been acquired in any of the modes referred to in section 49(1) of the Act as this goes against the widely accepted interpretation of section 49(1) of the Act.
Source: The Financial Express..
In my opinion, applying the rule of 'litera legis' i.e. the rule of 'Literal Construction', one can consider section 48 as such, and hence cost of indexation will apply in respect of the year in which the asset was first held by the assessee himself.
Since as per Sec 48
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 1.4.1981, whichever later"
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