In case of gifted assets index to be taken of the year in which acquired by previous owner

s. 55(1)(b)(2)(ii) provides that where the capital asset became the property of the assessee by any of the modes specified under s. 49(1), 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 s. 48.

The question of deducting the cost of improvement incurred by the previous owner in the case of an assessee covered under s. 49(1) 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 s. 49(1), 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 dt. 31st Aug., 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 u/s. 49(1), 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.

INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES ‘F’ MUMBAI

BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER &
SHRI RAJENDRA, ACCOUNTANT MEMBER

  ITA No. 5616/Mum/2010 – Assessment Year 1995-96

A.C.I.T.  Vs. Shri Vijay Kamlakar Wagh

ITA No. 5782/Mum/2010 – Assessment Year 1995-96

Shri Vijay Kamlakar Wagh Vs.  A.C.I.T.

Date of Hearing  : 09-05-2013

Date of Pronouncement : 17-05-2013

OR D E R