Indexed cost of gifted assets has to be determined with reference to previous owner – Bombay HC

CIT vs. Manjula J. Shah (Bombay High Court)- In the present case, the capital asset in question (Flat No. 1202-A) was originally acquired by the previous owner (daughter) on 29/1/1993 and the same was acquired by the assessee under a gift deed dated 2/1/2003 without incurring any cost. The assessee sold the said capital asset on 30/6/2003 for Rs.1,10,00,000/-.

Since the assessee held the capital asset for less than thirty six months (2/1/2003 to 30/6/2003) in the ordinary course, as per Section 2(42A) of the Act the assessee would have held the asset as a short term capital asset and accordingly liable for short term capital gains tax. However, in view of Explanation 1(i)(b) to Section 2(42A) of the Act which provides that in determining the period for which any asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner shall be included, the assessee is deemed to have held the asset as a long term capital asset and accordingly, liable for long term capital gains tax. Thus, by applying the deeming provision contained in the Explanation 1(i)(b) to Section 2(42A) of the Act, the assessee is deemed to have held the asset from 29/1/1993 to 30/6/2003 (by including the period for which the said asset was held by the previous owner) and accordingly held liable for long term capital gains tax.