Gifted Shares: Donor Holding Period Counts, Indexation from Taxed Value Year

Taxable Gifted Shares: Donor’s Holding Period Counts, but Indexation Starts from Gift Year- Chennai ITAT

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) held that the previous owner’s holding period must be included when determining whether gifted shares constitute a long-term capital asset, even where the gift is taxable under Section 56(2)(x). However, where the value taxed on receipt becomes the deemed acquisition cost under Section 49(4), indexation is available from the year that value crystallised, rather than the year the donor originally acquired the shares.

The ruling was delivered in Venkataswaroop Reddy Siddavarapu v. DCIT, ITA No.1726/CHNY/2026, concerning Assessment Year 2022-23. The order was pronounced on 23 September 2026 by George George K, Vice President, and Padmavathy S, Accountant Member.

Background of the Case

The assessee filed his return declaring total income of Rs.8,89,37,300. During the relevant year, he sold 2,833 shares of SPI Music Pvt. Ltd., including 1,722 shares received as a gift from Mr. Kiran Reddy under a gift deed dated 24 March 2021.

The gifted shares attracted Section 56(2)(x), and their fair market value of Rs.4,13,87,047 was offered to tax. In computing capital gains on their subsequent sale, the assessee adopted the taxed value as the acquisition cost and claimed an indexed cost of Rs.7,85,51,042, treating the shares as long-term capital assets.

The Assessing Officer considered the holding period only from the date of the gift. Consequently, he treated the gains as short-term capital gains, denied indexation and made an addition of Rs.3,71,73,995.

The CIT(A) upheld the denial of indexation. Although its observations supported an extended holding period, the Tribunal noted that the appellate order contained no categorical finding on the shares’ long-term character.

Assessee’s Arguments

The assessee relied on Explanation 1(i)(b) to Section 2(42A), read with Section 49(1)(ii), arguing that acquisition through a gift requires inclusion of the previous owner’s holding period.

He submitted that taxation under Section 56(2)(x) did not change the transaction’s character as a gift. Further, Section 49(4) governed the acquisition cost without altering the statutory holding period.

For indexation from the previous owner’s acquisition year, he relied on CIT v. Manjula J. Shah and subsequent decisions. Alternatively, he sought indexation from 24 March 2021, when the deemed cost crystallised.

Revenue’s Position

The Revenue distinguished the rules governing holding period from those determining acquisition cost.

It argued that once the gift’s fair market value was taxed under Section 56(2)(x), Section 49(4) substituted that amount as a fresh statutory cost. Applying indexation from the donor’s acquisition year to this later value would provide inflation relief for a period during which that cost did not exist.

Taxation Does Not Change the Gift’s Character

The Tribunal accepted that the transaction remained a gift, notwithstanding taxation in the recipient’s hands.

It explained that Explanation 1(i)(b) to Section 2(42A) operates by reference to the mode of acquisition specified in Section 49(1), including a gift, will or inheritance. Its application does not depend on how the acquisition cost is subsequently computed.

The Tribunal further observed that Section 49(4) overrides the acquisition cost alone. It contains no corresponding provision resetting the holding period or displacing Section 2(42A).

Neither the Assessing Officer nor the CIT(A) had disputed the genuineness or character of the gift. Accordingly, the Tribunal held that the previous owner’s holding period must be included and that the shares constituted long-term capital assets.

Indexation Restricted to the Year of Deemed Cost

On indexation, the Tribunal distinguished Manjula J. Shah. In that case, the previous owner’s cost and holding period were carried forward under the connected statutory provisions. Both therefore travelled together for indexation purposes.

The position differed where Section 49(4) applied. Here, the acquisition cost was the value already subjected to tax under Section 56(2)(x), rather than the donor’s historical cost.

The Tribunal reasoned that this independent statutory cost first crystallised on 24 March 2021. Extending indexation backwards to the donor’s acquisition year would grant a benefit exceeding adjustment for inflation on that newly recognised value.

It also referred to the explanatory memorandum accompanying the Finance Bill, 2017, treating the relevant amendment as one concerning substitution of the taxed value as acquisition cost.

Decision of the Tribunal

The Assessing Officer was directed to recompute the gains by treating the gifted shares as long-term capital assets and allowing indexation on the deemed cost of Rs.4,13,87,047 with reference to Financial Year 2020-21.

Thus, the donor’s holding period determined the asset’s classification, while the year in which the taxed value became the statutory cost determined the starting point for indexation.

The assessee’s appeal was partly allowed, and the accompanying stay application was dismissed as infructuous.

Cases Discussed

• CIT v. Manjula J. Shah — 355 ITR 474 (Bombay HC)
• Arun Shungloo Trust v. CIT — 249 CTR 294 (Delhi HC)
• CIT v. Gautam Manubhai Amin — 38 taxmann.com 42 (Gujarat HC)
• DCIT v. Archit Aggarwal — 180 taxmann.com 819 (Delhi ITAT, 2025)
• Mahendra M. Ajmera (HUF) v. Sixth ITO — 15 ITD 728
• CIT v. Janhavi S. Desai — 24 taxmann.com 314 (Bombay HC)
• Vijay Gupta v. CIT — 68 taxmann.com 131 (Delhi HC)
• Mrs. Lalitha Rathnam v. ITO — 35 taxmann.com 371 (Chandigarh ITAT)
• Sanjay Harichand Kumar v. ITO — 88 taxmann.com 355 (Chennai ITAT)
• Rohan Developers v. ITO — 139 taxmann.com 32 (Bombay HC, 2022)
• Bharat Lakhaji Nandwana v. DCIT — 184 taxmann.com 271 (Ahmedabad ITAT, 2026)
• CIT v. Saroja Naidu — 128 taxmann.com 127 (Madras HC, 2021)
• PCIT v. Redington (India) Ltd. — 122 taxmann.com 136 (Madras HC)
• Sonia Bhatia v. State of U.P. — (1981) 2 SCC 585

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal and the Stay Application (SA) by the assessee are against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 13.02.2026 for Assessment Year (AY) 2022-23. The assessee raised the following grounds of appeal:

“The grounds of appeal listed below are independent and without prejudice to each other.

1. That the order of the Commissioner of Income-tax (Appeals), Income Tax Department, National Faceless Assessment Centre, Delhi (‘learned CIT(A)’) dated 13 February 2026 bearing Document Identification Number: ITBA/NFAC/S/250/2025-26/1085990140(1) is erroneous, bad in law, illegal, prejudicial to the Appellant, contrary to the facts and circumstances of the case and deserves to be quashed.

2. Without prejudice, the Assessment order issued by the learned Assessing Officer (‘learned AO”) dated 24 March 2024 under section 143(3) read with section 144B of the Income-tax Act, 1961 (‘the Act’) is erroneous, bad in law and contrary to the facts and circumstances of the case.

3. The learned AO and the learned CIT(A) have erred in considering the period of holding of gifted shares as 8 months without including the period of holding of previous owner.

4. The learned AO and the learned CIT(A) have erred in considering the gains arising out of the sale of shares (acquired vide gift) to be short-term capital gains by not including the period of holding of previous owner.

5. The learned AO as a consequence of not including the period of holding of previous owner and treating the gains as short-term capital gains, has not provided the indexation on the cost of shares.

6. The learned CIT(A) has erred in not providing the benefit of indexation on the cost of shares in spite of treating it as a long-term capital asset.

7. The learned AO and learned CIT(A) had failed to appreciate that by virtue of Explanation 1(b) to section 2(42A) of the Act, the period of holding of the previous owner to be included to determine the asset qualifies as short term or long term capital asset.

8. The learned AO and learned CIT(A) failed to appreciate that the provisions of section 49(4) of the Act has no bearing effect on the nature of capital asset viz short term or long term capital ascertained in accordance with provisions of section 2(42A) read with section 2(29AA) of the Act.

9. Without prejudice to the above, the learned AO and the learned CIT(A) has erred in not providing consequential proportional deduction under section 54F of the Act. The learned AO and the learned CIT(A) ought to have treated the shares as long term capital and consequently ought to have granted benefit of the deduction under section 54F of the Act.

10. The learned AO has erred in levying consequential interest under section 234B of the Act.

11. The learned AO has erred in law and facts, by initiating penalty proceedings under Section 270A of the Act, without appreciating the contentions placed in the above grounds. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. Further, the Appellant craves that the grounds raised above are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”

2. The assessee is an individual and filed the return of income for AY 2022-23 on 07.11.2022 declaring total income of Rs.8,89,37,300/-. The case was selected for scrutiny, and the statutory notices were duly served on the assessee. During the year under consideration, the assessee has sold 2833 shares of SPI Music Pvt. Ltd. and out of the said shares 1722 shares were received by the assessee as a gift from Mr. Kiran Reddy vide gift deed dated 24.03.2021. The assessee during the AY 2022-23 has offered the gift u/s. 56(2)(x) of the Act to the tune of Rs. 4,13,87,047/-. The assessee on sale of the shares claimed indexed cost of acquisition amounting to Rs.7,85,51,042/- treating shares as long term capital asset. The AO however did not accept the contention that the impugned shares are long term capital asset in the hands of the assessee and held that since the shares were acquired only on 24.03.2021 which is short term capital asset and accordingly the gain arising on the same should be treated as short term capital gain (STCG). The A.O also did not allow the indexation since the asset sold according to the A.O which is short term capital asset. The A.O while completing the assessment u/s. 143(3) of the Act therefore made an addition of Rs.3,71,73,995/-. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) allowed the contention of the assessee that the asset is a long term capital asset. However, the CIT(A) upheld the addition made by the AO stating that the indexation benefit cannot be allowed to the assessee. The assessee is in appeal before the Tribunal against the order of the CIT(A).

3. The Ld. Authorized Representative (AR) of the Assessee made a detailed written submissions as extracted below:

“Submissions on Issue on Nature of asset:

3.1. At the outset, the Appellant would like to humbly submits that the said shares of SPI Music were gifted by Mr. Kiran Reddy to the Appellant. Hence, the Appellant would like to draw your good-self’s attention to the provisions of 2(42A) of the Act whereby in the case of a gift (one of the events mentioned in section 49(1) of the Act), the period of holding should be reckoned from the date on which the asset was held by the previous owner.

3.2. The extract of section 2(42A) of the Act is provided below:

“short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer:

Provided also that in the case of a share of a company (not being a share listed in a recognised stock exchange in India), or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twenty-four months” had been substituted.

Explanation 1.- (i) In determining the period for which any capital asset is held by the assessee-

(b) 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, there shall be included the period for which the asset was held by the previous owner referred to in the said section;”

(emphasis supplied)

3.3. Further, the Appellant submits an extract of section 49(1) of the Act wherein it is stated as follows:

“Where the capital asset became the property of the assessee…

(ii) under a gift or will;…’

3.4. As per the above provision, where the capital asset becomes the property of the assessee by way of ‘circumstances mentioned under Section 49(1) of the Act, the period of holding for the Transferee shall include the period for which such capital asset was held by the Transferor. Section 49(1) of the Act envisages the circumstance, amongst others, of receipt of a capital asset specifically by way of gift.

3.5. Where the capital asset (being shares of an unlisted company) becomes the property of the Donee by way of a gift as envisaged under section 49(1) of the Act, the period of holding in such case should include the period for which the capital asset was held by the previous owner i.e., Doner.

3.6. In light of the above provisions of the Act, the period of holding of Mr Kiran Reddy should also be considered for the purpose of classifying the asset as a long-term or a short-term capital asset. Given that the shares are held for more than 24 months by the previous owner, the gain arising from transfer of such shares shall be long-term capital gain.

3.7. The appellant further submits that the Commissioner of Income Tax (Appeals) [‘CIT(A)’] had made the following observation (Para 24-Page 014 of Main appeal set)

“…..24. In other words, while the asset may be long-term in nature by virtue of the extended holding period, the particular monetary value of 4,13,87,047/- is a new statutory cost crystallised on 24.03.2021 upon its taxation under section 56(2)(x).”

The appellant submits that despite making the above observation, the CIT(A) dismissed the appeal filed by the appellant. The appellant submits that while the CIT(A) in the operative portion of the order has made observation that asset maybe a long-term capital asset, proceeded to conclude his order only on the second issue namely whether the appellant is entitled for benefit of indexation. The CIT(A) failed to appreciate that there were two distinct issues in the appeal as stated in para 2.2 above. The appellant prays that for reasons stated above and further the fact that the CIT(A) had made observations in favour of the appellant and there being no further appeal, this Hon’ble Tribunal maybe pleased to hold that the asset are long term capital asset.

Submissions on Indexation

3.8. As per second proviso to section 48 of the Act, the Appellant shall be eligible to deduct indexed cost of acquisition from full value of consideration of shares.

3.9. An extract of the second proviso to section 48 of the Act is provided below:

“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 clause (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”

Given the above, the Appellant he shall be eligible for indexation since the asset is a long-term capital asset. There had been some interpretation issues as to whether indexation should be available in respect of period during which the previous owner was holding the capital asset, although such period was to be construed in view of section 2(42A) in determining whether the asset is long term or not. Various courts have considered this and concluded that the period during which the previous owner was holding the capital asset shall also be considered as period for which indexation would be eligible for in conjunct reading of section 2(42A) and section 48. Some of such cases are explained in the ensuing passages:

3.10. The appellant further submits that in CIT Vs Manjula Shah (355 ITR 474) (Bom HC), the Hon’ble Bombay High Court held that the object of the legislature is to tax the gains arising on transfer of a capital asset acquired under a gift or will 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. Extract of the same has been provided below:

“…9. 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 clause (iii) of Explanation to Section 48 of the Act, one has to see the object with which the said words are used in the statute. If one reads Explanation 1(i)(b) to Section 2(42A) together with Section 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 under a gift or will as provided under Section 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 acquired under a gift or will 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 clause (iii) of the Explanation to Section 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 Explanation 1(i)(b) to section 2(42A) of the Act…

…22… 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…”

The above judgment was upheld and agreed in the following cases wherein the period of holding of previous owner was included while determining whether the asset is long-term or short-term:

(i) Arun Shungloo Trust v. Commissioner of Income-tax [2012] 249 CTR 294 (Delhi HC).

(ii) Commissioner of Income-tax I v. Gautam Manubhai Amin [2013] 38 taxmann.com 42 (Gujarat HC)

(iii) Deputy Commissioner of Income-tax vs Archit Aggarwal [2025] 180 taxmann.com 819 (Delhi Tribunal)

Mahendra M. Ajmera (HUF) Vs Sixth Income Tax Officer [1986] 15 ITD 728 (BOМ.), held that it was incumbent upon the ITO to take into account the period for which the asset was held by the previous owner because the assessees got the land under a gift deed within the meaning of section 49(1)(ii) of the Act.

CIT vs. Janhavi S Desai [2012] 24 taxmann.com 314 (Bombay HC), held that it is provided that there shall be included the period for which the asset was held by the “previous owner referred to in the said section”. The said section is section 49(1). Thus, the definition of “previous owner” in the Explanation to section 49(1) is incorporated in Explanation (1)(i)(b) to section 2(42A). If therefore a capital asset becomes the property of the assessee in the circumstances mentioned in section 49(1) and the period for which it is held as determined by section 49(1) read with section 2(42A) is more than the period stipulated in section 2(42A), the case would not fall within the ambit of a short-term capital asset.

Vijay Gupta Vs Commissioner of Income Tax [2016] 68 taxmann.com 131 (Delhi HC), held that the “… 15. Reading Explanation I to section 2(42A) with section 49 of the Act shows that for computing the period of holding a capital asset, which becomes the property of the assessee by way of gift or will, the period for which the asset was held by the previous owner shall be included. 16. Therefore, for the purposes of computing capital gains on transfer of shares in DLF Ltd., the Petitioner should have included the period for which the said shares were held by his mother. This, it is contended, was not done when the return of income was filed. Since the period for which the mother had held the shares was in excess of the stipulated period for computing “short term capital gains”, the gains made by the petitioner on sale of the subject shares were “long term capital gains” which were exempt from tax under section 10(38) of the Act…”

Mrs. Lalitha Rathnam vs Income-tax Officer [2013] 35 taxmann.com 371[Chandigarh Tribunal], the Hon’ble Tribunal held that this Explanation clearly shows that period for which the-asset was held by the previous owner has to be added to the period of holding of the assessee. Therefore, once the period of holding of the previous owner is added, period of holding becomes more than three years thus this asset has to be treated as long-term capital asset.

Sanjay Harichand Kumar VS Income Tax Officer [2017] 88 taxmann.com 355 (Chennai Tribunal), the Hon’ble Tribunal held that “…However, the said property was purchased by the assessee’s ancestors i.e. grandfather, Late Keshavdas on 14.6.1971 and after that it was bequeathed to the assessee’s father, Shri Harichand on the death of his grandfather on 24.6.2001. Thereafter, the property was gifted to the assessee on 20.11.2005. Accordingly, the cost of indexation to be applied as on 1.4.1981, after fixing the value of asset as on 1.4.1981 and it cannot be said that the assessee acquired property under dispute on 20.11.2005 so as to compute the capital gains as short term capital gains. In other words, capital gains has to be assessed as long term capital gains by fixing the cost of asset as on 1.4.1981 and thereafter applying the cost of inflation index in terms of sec.49(1)(iii)(a) of the Act and consequently, the assessee is also entitled for exemption u/s 54 of the Act…”

Rohan Developers Vs Income Tax Officer [2022] 139 taxmann.com 32 (Bombay), held that the cost of acquisition of the property in the hands of seller is deemed to be the cost for which the said property was acquired by late ‘D’ and the period of holding of late ‘D’, and ‘R’ are also to be included in the period of holding of seller for ascertaining the period for which the property was held by the seller. Based on the Scheme of the Act, as provided in section 49(1)(ii), clauses (29A) and (42A) of section 2 and section 55(2)(b)(ii) of the Act, indexation of the cost of acquisition under the second proviso to section 48 should be available from the financial year 1981-82.

The aforesaid judgement has been upheld by the Ahmedabad Tribunal in the case of Bharat Lakhaji Nandwana v. Deputy Commissioner of Income- tax [2026] 184 taxmann.com 271.

Further, the Appellant humbly submits that a similar view has also been taken by the Hon’ble Madras High Court in CIT v. Saroja Naidu [2021] 128 taxmann.com 127 (Madras), wherein the Hon’ble Court followed the decision of the Hon’ble Bombay High Court in Manjula J. Shah (supra) and held that while computing capital gains arising on transfer of a capital asset acquired through inheritance, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset.

In light of the above judicial precedents, the Appellant humbly submits before your good-self that the period of holding of previous owner is to be considered for determination of the asset as a long-term and consequently, indexation benefit should also be provided for the period of holding of previous owner.

3.11. Without prejudice to the above, the appellant submits that for submissions made in para 3.1-3.7, the asset sold by the appellant is a long-term capital asset, indexation on the cost of Rs.4,13,87,047 should be given from 24.03.2021, the date on which the cost got crystallised upon its taxation under section 56(2)(x). Further the appellant also submits that the Appellant should also be granted proportional deduction under section 54F of the Act. Further, given that the issue is litigious in nature, the Appellant humbly prays that penalty proceedings is not warranted in this case.

4. SUBMISSION OF REVENUE AND REBUTTAL OF THE APPELLANT

It is submitted that the CIT(A) rejected the submission of the appellant on the ground that the once the appellant had invoked provisions of section 49(4) and taken the fair market value as the cost of acquisition, the cost of acquisition ceases to be cost to the previous owner and is replaced by FMV and hence the appellant is not entitled for indexation from period of holding of the previous owner. The revenue counsel submitted before this Tribunal once 49(4) applies, indexation cannot be granted from the holding period of the previous owner. In response to this submissions, the Appellant makes the following arguments

The provisions of section 49 of the Act are only for determining cost of acquisition in certain cases. The same is not material for computing the period of holding or whether indexation is available to the appellant. Period of holding is specifically defined in section 2(42A) of the Act and the same provides for period of holding of the previous owner where asset is acquired by means specified under section 49(1).

Indexed cost of acquisition is provided under section 48 of the Act. On conjoint reading of 2(42A) and section 48, Courts have consistently held that the indexation is to be applied from the period of holding of the previous owner. The department has not filed any appeal against those orders and the proposition that benefit of indexation is available from holding of previous owner is now a settled legal position.

Therefore, merely because 49(4) becomes applicable in the case of the appellant, the same would not replace the definition of period of holding or deny benefit of indexation as per section 48. The arguments of the Ld. DR and the order of the CIT(A) are thus contrary to settled position of law and are required to be rejected.”

4. The Ld.AR made a separate written submission regarding the impugned transaction remains a gift irrespective of tax being paid under section 56(2)(x) of the Act by the assessee. The Ld. AR submitted that the term “gift” is not defined under the Act, and reliance must accordingly be placed on Section 122 of the Transfer of Property Act, 1882, which requires the existence of identifiable property, a voluntary transfer by the donor, and acceptance by the donee. The Ld. AR submitted that the impugned transaction satisfies all these requirements, since the shares constitute identifiable property, the transfer was made voluntarily by Mr. Kiran Reddy under a duly executed gift deed dated 24.03.2021, and the same stands accepted and acted upon by the assessee. The Ld. AR further submitted that the Act contains no provision which alters the character of a transaction, and that section 56(2)(x) merely brings certain income to tax without re-characterising the underlying transfer, so that offering the value of the shares to tax under the said section does not detract from its character as a gift. The Ld. AR also submitted that neither the AO nor the Ld. CIT(A) has disputed the genuineness or character of the transaction as a gift, and since the Revenue has not challenged this finding, the said characterisation has attained finality. In support of the above, the Ld. AR relied on the decision of the Hon’ble Madras High Court in PCIT- 5, Chennai vs. Redington (India) Ltd. (122 taxmann.com 136) (Mad.), for the essential ingredients of a valid gift, and on the decision of the Hon’ble Supreme Court in Sonia Bhatia vs. State of U.P. (1981) 2 SCC 585, for the general conceptual understanding of a gift as a voluntary and gratuitous transfer.

5. The Ld. Departmental Representative (DR), also made detailed written submissions and the gist of the said submissions is extracted here under –

i. The tacking provision in Explanation I(b) to Section 2(42A) applies only for determining the character of the capital asset (whether short-term or long-term).

ii. However, once Section 56(2)(x) is triggered and FMV is taxed, Section 49(4) kicks in as a specific and overriding deeming fiction for cost of acquisition. It replaces the “cost to the previous owner” rule of Section 49(1) with a new statutory cost crystallised on the date of receipt/gift (24.03.2021).

iii. Indexation under Section 48 is linked to the “first year in which the asset was held by the assessee” with reference to this deemed cost. The FMV taxed u/s 56(2)(x) never existed as the assessee’s cost prior to 24.03.2021. Allowing indexation from FY 2010-11 on this new cost base would confer an unintended windfall and defeat the legislative intent of Section 49(4) (to prevent double taxation without granting extra inflation relief on a value that was itself brought to tax only in AY 2021-22).

iv. The assessee cannot selectively invoke the beneficial tacking provision of 49(1) for indexation while simultaneously invoking the specific deeming fiction of 49(4) for cost and that the decision of the Hon’ble Bombay High Court was rendered prior to insertion of section 49(4).

6. We have carefully considered the rival submissions and perused the material available on record. The assessee received 1,722 shares of SPI Music Pvt. Ltd. under a gift deed dated 24.03.2021. Since the gift attracted the provisions of section 56(2)(x) of the Act, the assessee offered the fair market value of the said shares amounting to Rs.4,13,87,047/- to tax in the year of receipt. During the previous year relevant to the assessment year under consideration, the assessee transferred the said shares and computed the resultant capital gains by adopting the value taxed under section 56(2)(x) as the cost of acquisition, claiming the benefit of indexation and offering the gains as long-term capital gains. The A.O, however, held that since the assessee acquired the shares only on 24.03.2021, the period of holding was less than the prescribed period and, therefore, the gains were liable to be assessed as short-term capital gains. Consequently, the A.O denied the benefit of indexation and completed the assessment accordingly. Though CIT(A) did not sustain the action of the A.O in treating the gains as short-term capital gains, no categorical finding has been recorded as to whether the impugned shares constitute a long-term capital asset. CIT(A), however, upheld the denial of indexation. Therefore, the controversy before us gives rise to three issues for consideration, namely, (i) whether the impugned shares constitute a short-term capital asset or a long-term capital asset, (ii) if the shares constitute a long-term capital asset, whether the assessee is entitled to the benefit of indexation in the light of section 49(4) of the Act, and (iii) if the answer to the second issue is in the affirmative, from which point of time the indexation is to be granted.

7. We first take up the question whether the impugned shares constitute a short term or a long-term capital asset. The Ld. AR submitted that since the shares were received by the assessee under a gift, the case falls within section 49(1)(ii) of the Act, and Explanation 1(b) to section 2(42A) requires the period for which the shares were held by the previous owner to be included in the period of holding of the assessee. We notice that Explanation 1(b) to section 2(42A) is attracted where the asset becomes the property of the assessee in the circumstances mentioned in section 49(1), and this circumstance is defined by the mode of acquisition, such as gift, will or inheritance, and not by the manner in which the cost of the asset is subsequently computed. The contention of the Ld. AR is that the taxation of the gift under section 56(2)(x) of the Act does not alter the nature of the transaction as a gift, since section 56(2)(x) is a separate charging provision layered on the same transaction, and does not re-characterise the transfer itself into something other than a gift. We see merit in the said contention since, the circumstance mentioned in section 49(1)(ii), being acquisition under a gift, remains satisfied regardless of whether the gift also attracts tax under section 56(2)(x). We further notice that section 49(4) of the Act, by its own language, overrides only the cost of acquisition of the property, and contains no words extending its operation to the period of holding or to section 2(42A) of the Act. In our view had the Legislature intended that invoking section 49(4) should also affect the period of holding, it would have said so in express terms, as it has done in respect of cost, and its silence on this aspect is a matter of some significance rather than an inadvertent omission. It is relevant in this connection to notice that the Act treats cost of acquisition and period of holding as distinct questions requiring separate provisions, as is evident from the case of shares received on amalgamation, where section 49(2) separately provides for carry over of cost, while clause (c) of Explanation 1 to section 2(42A) separately and expressly provides for carry over of the period of holding, rather than leaving the latter to be inferred from the former.

8. This position finds further support from the manner in which the Act treats the donor’s side of the very same transaction. Section 47(iii) of the Act excludes a transfer of a capital asset by an individual or Hindu undivided family under a gift from being regarded as a transfer at all for the purposes of section 45, and this exclusion is unconditional, irrespective of the relationship between the donor and the donee or on whether the donee is subsequently taxed under section 56(2)(x) of the Act. We are of the view that had the taxation of the donee under section 56(2)(x) been intended to alter the fundamental character of the transaction as a gift, a corresponding consequence would have been expected on the donor’s side as well, and yet section 47(iii) continues to apply to the donor without any such qualification. It is relevant to mention here that since section 47(iii) removes such a gift from the ambit of a transfer chargeable under section 45 in the first place, no other provision of the Act, comes into play so as to tax the donor. In such a scenario, we are of the view that the Act contemplates taxation of a genuine gift, where one arises at all, only in the hands of the donee under section 56(2)(x), and this donee based taxation does not, by itself, disturb the character of the transaction as a gift for any other purpose under the Act, including the period of holding under Explanation 1(b) to section 2(42A).

9. We further notice that the Ld. CIT(A), in the impugned order, has himself observed that the argument of the assessee could at best support the asset being treated as long term in nature by virtue of the extended holding period, though the said finding has not been rendered in categorical terms. We also notice, on perusal of the written submissions filed by the Ld. DR before us, that the tacking provision in Explanation 1(b) to section 2(42A) is stated to apply for the purpose of determining the character of the capital asset, and the controversy raised on behalf of the Revenue is confined to the question of indexation. It is also relevant to mention here that the AO and the Ld. CIT(A) have, throughout, proceeded on the footing that the impugned transaction is a gift, no adverse finding has been recorded by either authority disputing the genuineness or character of the said transaction, and the Revenue has not challenged this finding by way of appeal or cross-objection. We accordingly hold that the impugned shares are to be considered as long-term capital asset and gain arising out of the transfer of the same should be taxed under the Act long term capital gain.

10. This brings us to the second and third issues, namely, whether the assessee is entitled to the benefit of indexation, and if so, from which point of time. The Ld. AR submitted that section 49 of the Act only governs the cost of acquisition, and has no bearing on the period of holding, which is separately defined under section 2(42A) of the Act. The Ld. AR relied on the decision of the Hon’ble Bombay High Court in CIT vs. Manjula J. Shah (355 ITR 474) and a line of decisions following it, for the proposition that indexation must be computed with reference to the year in which the previous owner first held the asset. The Ld. DR, on the other hand, submitted that section 49(4) is a specific and overriding provision which replaces the cost to the previous owner with a fresh statutory cost crystallised on the date of receipt of the gift, and that indexation computed from the previous owner’s period of holding on this new cost would confer an unintended benefit, since the said cost never existed prior to the date of the gift. We have considered the decision in Manjula Shah (supra) carefully. In that case, the Hon’ble Court held that the assessee is deemed to have held the asset from the date the previous owner acquired it and is simultaneously deemed to have incurred the cost of acquisition from that very date, both consequences flowing from the same deeming fiction contained in Explanation 1(b) to section 2(42A) read with section 49(1). It was on this basis that the Court held it would be inconsistent to accept the deemed holding period for computing long term capital gains, while rejecting the deemed cost carried over from the same fiction for the purpose of indexation. In such a scenario, both the period of holding and the cost of acquisition travel together, since they arise from one and the same source. We are of the view that the position is materially different once section 49(4) of the Act is attracted. The period of holding of the impugned shares continues to be governed by Explanation 1(b) to section 2(42A) read with section 49(1), for the reason already discussed herein above since the mode of acquisition remains a gift. The cost of acquisition, however, is no longer the cost to the previous owner arising from that very fiction. It is instead a separate and independent statutory cost fixed under section 49(4), being the value on which the assessee has already been taxed under section 56(2)(x), and this value came into existence for the first time only on 24.03.2021. In this regard, we notice that section 49(4) is triggered not by the mode of acquisition, but by the fact that the value of the asset has already been subjected to tax under section 56(2)(x), and it operates independently of, and later in point of time than, the fiction contained in section 49(1). Therefore, unlike the position in Manjula Shah (supra), the period of holding and the cost of acquisition in the present case do not arise from a single, common fiction, and there is accordingly no inconsistency in holding that the two need not travel together for the purpose of indexation.

11. It is relevant to mention here that the Memorandum explaining the provisions of the Finance Bill, 2017, by which section 49(4) was amended to align it with the newly inserted section 56(2)(x), describes the amendment as a consequential one, confined in its own terms to substituting the section 56(2)(x) value as the cost of acquisition under section 49(4). We are therefore of the view that extending the ratio of Manjula Shah (supra) to a case governed by section 49(4) would result in indexation being computed on a cost that came into existence only in the year 2021, by applying the cost inflation index of a year decades earlier, when the previous owner first held the shares. Such a result would confer a benefit going well beyond removing the effect of inflation on the cost actually incurred and would not be warranted by the object of section 49(4), which, as the Ld. DR rightly points out, is only to recognise a value that has already been taxed once, and not to grant additional relief referable to a period during which the said value did not exist at all. Accordingly in our considered view the assessee is entitled to the benefit of indexation, but the same has to be computed with reference to the cost inflation index for the year in which the value under section 56(2)(x) was brought to tax, namely, financial year 2020-21, and not with reference to the year in which the shares were first held by the previous owner. The AO therefore directed to recompute the capital gains treating the impugned shares as long term capital asset and apply the indexation benefit from 24.03.2021 on the deemed cost of acquisition under section 49(4) i.e. the value which was subject to tax under section 56(2)(x). It is ordered accordingly.

12. In view of our decision in the appeal, the stay application of the assessee has become infructuous and dismissed accordingly

13. In the result, the appeal of the assessee is partly allowed and the stay application is dismissed as infructuous.

Order pronounced on 23rd day of September, 2026 at Chennai.