This article summarizes a recent ruling of the Special Bench (SB) of the Mumbai Income Tax Appellate Tribunal (ITAT) [ITA No. 7315/Mum/2007] in the case of DCIT vs. Manjula Shah (Taxpayer) which held that, in the case of gifted capital asset, indexation benefit is available to a donee from the year of its acquisition by the previous owner. The SB adopted a purposive construction of the definition of ‘Indexed Cost of Acquisition’ (ICOA) by looking at the scheme of the Indian Tax Law (ITL), which seeks to grant the benefit of cost and holding period of the previous owner to the donee.
Background and facts of the case
- As per the provisions of the ITL, profit or gains arising from the transfer of a capital asset, effected in a tax year, is computed by deducting Cost of Acquisition (COA) of the capital asset from the full value of the consideration, received or receivable. Where the asset is a long-term capital asset, i.e. held for more than 1 year for financial assets like shares, securities etc. and 3 years for other assets, the ITL permits deduction of the ICOA instead of the COA.
- The ICOA is computed by enhancing the COA by cost inflation index (CII)[2], as per the following formula :
ICOA = COA x CII of the year of transfer
CII of the first year in which the asset was held by the taxpayer
[2] CII is notified every year on the basis of average rise in Consumer Price Index for urban non-manual employees.
