Tax on Capital gain arising on the sale of gifted or inherited properties and Indexation of the same under Income Tax Act, 1961.
A capital asset being shares and securities (listed), unit of UTI (listed/unlisted), unit of equity oriented mutual fund (listed/unlisted), zero coupon bonds (listed/unlisted) is considered as long term capital asset if it is retained for more than 12 months and 24 months in case of unlisted shares and securities and land or building or both and 36 months in case of other assets . Any gain, arising from its sales is considered as long term capital gain. In case of long term capital gains the capital gains is calculated according to indexed cost of acquisition and improvement. Cost inflation index of the year of acquisition and improvement is considered for the purpose of capital gain calculation.
Where the capital asset is acquired by a person as a result of gift or inheritance, the question arises in mind which year’s cost inflation index should be considered for calculating indexed cost of acquisition.
For example if A purchases a property in the year 1985-86 and he dies in 2006-07 whereby the said property gets inherited by his only son B in the year 2006-07. B sells the same property in year 2017-18.
Now in the above case revenue would want to allow the indexation from year 2006-07 considering that B became owner of the property in year 2006-07, however B would like to get the indexation from year 1985-86 ie the year in which the property was first acquired by his father A.
Explanation 1(b) to section 2(42A) of Income Tax Act, 1961 provides answer to the above situation. It says that 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[ie in case of gift or inheritance or liquidation of a company or under irrevocable trust], there shall be included the period for which the asset was held by the previous owner referred to in the said section.
That means where an asset is acquired by gift or inheritance, the period of long term capital asset shall be reckoned from the date when the previous owner acquired such asset and the indexation shall be allowed accordingly from the year of acquisition by the previous owner.
Further section 49(1) also provides that in such cases 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 the case may be.
Thus the cost of acquisition as well as the cost of improvement by the previous owner of a capital asset shall be the cost of acquisition of such asset to the person selling the such capital asset acquired under gift or inheritance and the indexation shall be allowed from the year of acquisition or improvement by the previous owner.
Mumbai ITAT has also held in (2009) 318 ITR (AT)417 that the indexation in case of gifted or inherited property will be available from the year of acquisition of such property by previous owner, similar view also find support in (2012) 50 SOT 629, (2004) 89 TTJ Chd. Tribunal, 117 TTJ 121 Kolkata Tribunal, (2008) 19 SOT 251 Delhi Tribunal, (2010) 4 ITR 44 Chennai Tribunal.
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: firstname.lastname@example.org, M +919815243335)
(Republished With Amendments)