Case Law Details

Case Name : ITO Vs Pritendra C. Jhaveri (ITAT Mumbai)
Appeal Number : ITA No. 354/Mum/2016
Date of Judgement/Order : 04/07/2016
Related Assessment Year :
Courts : All ITAT (5373) ITAT Mumbai (1672)

ITO Vs Pritendra C. Jhaveri (ITAT Mumbai)

Since the expression ‘held by the assessee’ is not defined under section 48, the same has to be understood as defined under Explanation 1(i)(b) to section 2(42A) which provides that in determining the period for which an asset is held by assessee under a gift or will the period for which the asset was held by the previous owner would be included. Accordingly, indexed cost of acquisition was to be computed with reference to the year in which previous owner first held the asset and not the year in which assessee inherited the property.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal has been filed by the Revenue against the order of the Commissioner (Appeals)-30, Mumbai dated 12-11-2015 for assessment year 2011-12.

2. The Revenue has raised the following ground in the appeal:–

“1. Whether on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) was justified in allowing the appeal filed by the assessee by directing the assessing officer to re-compute the capital gains by adopting year for the indexed cost of acquisition of the capital asset in question with reference to the year in which the previous owner first held the assessee and not the first year in which the asset was held by the assessee.”

3. None appeared on behalf of the assessee even though notices were duly sent. We, therefore, decided to dispose off the appeal after hearing the learned Departmental Representative. After hearing the learned Departmental Representative and going through the orders of the authorities below we noted that the only dispute arising in this appeal relates to the determination of indexed cost of acquisition. The assessee during the year sold a plot of land on Malabar Hill Division for a consideration of Rs. 54 crores, the stamp value of which was Rs. 54,51,78,000 alongwith other owners. The assessee’s share in the property was 1/12. Similarly the assessee has sold its rights in respect of Room No. 4 at 97, Bungalow Walkeshwar Road, for a consideration of Rs. 17,25,500 market value of which was Rs. 22,04,000. The assessee has also sold his share (being 1/6th) in Room No. 5 at 97, Bungalow Walkeshwar Road for a consideration of Rs. 1,03,70,000, market value of which comes to Rs. 1,32,45,000. The assessing officer also noted that the assessee has claimed indexed cost of acquisition taking the base period on 1-4-1981. When questioned the assessee explained that Shri Chandrakant Jhaveri was the 50% owner. He expired on 12-3-2005. After his death the assessee inherited the property. The assessing officer noted that since the assessee has inherited the property in the financial year 2004-05 therefore he took the cost of indexation for the purpose of computation of capital gain when the property was inherited by the assessee. The assessee went in appeal before the Commissioner (Appeals). The Commissioner (Appeals) directed the assessing officer to take the indexed cost of acquisition when the property was acquired in the previous year as Late Shri Chandrakant Jhaveri acquired the property prior to 1981, therefore he directed the assessing officer to take the indexed cost of acquisition taking the base year for assessment year 1981-82 by observing as under:–

“8.3 I have carefully perused the material available on record and legal position as applicable to the year under consideration The appellant became the owner of the subject property by way of non-testamentary succession after demise of his father. It is not in dispute that Late Chandrakant Jhaveri, father of the appellant had purchased the said property prior to 1981. He was expired on 12-3-2005 after which the appellant and other legal heirs became the owners of this property by succession/inheritance. The share of property was sold by the appellant along with the other co-owners in the year 2010. The long term capital gain was calculated by the appellant by taking the cost inflation index for the year 1981-82 i.e., 100. However, the assessing officer is of the opinion that the indexed cost of acquisition is to be computed taking the year of acquisition as 2004-05 i.e., the year when the appellant inherited the subject property. Thus, the sole controversy is that whether for the purpose of computing long term capital gains arising from the transfer of a capital asset which had become property of the appellant by succession, inheritance the indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held the asset, in the present case 1981-82, or with reference to the year i.e., financial year 2004-05 in which the appellant first held the asset in question. In other words, the dispute is about the’ year of holding of the property for indexed cost of acquisition According to the appellant, under clause (iii) of Explanation to section 48, the indexed cost of acquisition of the capital asset has to be computed with reference to the year in which the previous owner first held the asset. It is the case of the assessing officer that going by the expression the first year in which the asset was held by the assessee used in the said clause of Explanation to section 48, indexed cost of acquisition is to be computed with reference to the financial year 2004-05 when the appellant became the owner of the capital asset and not the financial year 1981-82. However, as on date, this issue is squarely covered in favor of the appellant by the decision of Bombay High Court in the case of Mainjula. J Shah (355 ITR 474), wherein the Hon’ble High Court held as under:–

It is the contention of the revenue that since the indeed cost of acquisition as per clause (iii) of the Explanation to section 48 has to be determined with reference to the cost inflation index for the first year in which the asset was held by the assessee and in the present case, as the assessee held the asset with effect from 1-2-2003, the first year of holding the asset would be financial year 2002-03 and, accordingly, the cost inflation index for 2002-03 would he applicable in determining the indexed cost of acquisition (Para 16)

There is no merit in the above contention. As rightly contended by the assessee, the indexed cost of acquisition has to be determined with reference to the cost inflation index for the first year in which the capital asset was ‘held by the assessee’ Since the expression ‘held by the assessee’ is not defined under section 48, that expression has to be understood as defined under section 2 Explanation 1(i)(b) to section 2(424) provides that in determining the period for which an asset is held by an assessee under a gift, the period for which the said asset vas held by the previous owner shall be included. As the previous owner held the capital asset from 29-1-1993, as per Explanation 1(i)(b) to section 2(42A), the assessee is deemed to have held the capital asset from 29-2-1993. By reason of the deemed holding of the asset from 29-1-1993, the assessee is deemed to have held the asset as a long term capital asset. If the long term capital gains liability has to be computed under section 48 by treating that the assessee held the capital asset from 29-1-1993, then, naturally in determining the indexed cost of acquisition under section 48, the assessee must be treated to have held the asset from 29-1-1993 and, accordingly, the cost inflation index for 1992-93 would be applicable in determining the indexed cost of acquisition (Para 17)

If the argument of the revenue that the deeming fiction contained in Explanation 1(i)(b) to section 2(42A) cannot be applied in computing the capital gains under section 48 is accepted, then, the assessee would not be liable for long term capital gains tax, because, it is only by applying the deemed fiction contained in Explanation 1(i)(b) to section 2(42A) and section 49(1)(ii) the assessee is deemed to have held the asset from 29-1-2993 and deemed to have incurred the cost of acquisition and accordingly, made liable for the long term capital gains tax. Therefore, when. the legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will and the capital gains under section 48 has to be computed by applying the deemed fiction, it is not possible to accept the contention of revenue that the fiction contained in Explanation 1(i)(b) to section 2(42A) cannot he. applied in determining the indexed cost of acquisition under section 48 (Para 18)

In the insult, that the Tribunal was justified in holding that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset “(Para 24)”

8.4 Thus the Bombay High Court clearly held that the indexed cost of acquisition of such capital asset acquired under a gift has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. Though the decision was rendered in the context of gift, the ratio is equally applicable where the capital assets became the property of an assessee by succession or inheritance as envisaged in clause (iii)(a) to section 49 (1) of the Income Tax Act. The decision in the case of Manjula Shah was reaffirmed by the Bombay HC in the recent decision in the case of CIT v. Nita Kamlesh Tanna (220 Taxman 165), wherein the property was acquired by the assessee by inheritance from her mother. In the present case, the assessing officer has not doubted that the property in question was not acquired by the previous owner i.e., Late Chandrakant Jhaveri in the year prior to 1981-82. The only objection of the assessing officer is that indexed cost of acquisition should be reckoned with reference to the year in which the appellant acquired the property by succession i.e., in the year 2004-05 and not with reference to the year in which the previous owner acquired the property. In such circumstances and respectfully following the decisions of the Bombay High Court quoted supra, the assessing officer is directed to re-compute the capital gains by adopting year for the indexed cost of acquisition of the capital asset in question with reference to the year in which the previous owner first held the asset. In other words, in the formula for calculation of indexed cot of acquisition of the property, the denominator has to be taken as 100 i.e., cost inflation index of the year 1981-82 as against 480 considered by the assessing officer Ground No 7 of the appeal is thus allowed.”

4. The learned Departmental Representative, even though vehemently relied on the order of the assessing officer, but could not bring to our knowledge any contrary decision taking different view on the stand taken by the Hon’ble Jurisdictional High Court. We, therefore, confirm the order of the Commissioner (Appeals).

5. In the result, appeal filed by the Revenue is dismissed.

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Category : Income Tax (28050)
Type : Judiciary (12267)

2 responses to “Cost inflation index in case of Property inherited from previous owner”

  1. Bhadkamkar Avinash Vishnu says:

    Is the above decision is applicable if one purchased a flat on resale. Suppose Mr. A purchased a flat in 2001-02. He sold the flt to Mr. B in 2007-08. Mr. B sold the flat in 2017-18. What will be the base year for LTCG tax for Mr. B – 2001-02 or 2007-08?

    • rugram says:

      The judgement reported above relates to cases where a person inherited a property or got it as a gift – in such cases, the property is deemed to have been held by the beneficiary from the date of its holding by the previous owner from whom the present owner obtined the property by way of gift or as inheritance.

      It clearly appears that the case cited by you does not fall in the category of ownership by gift or inheritance in the hands of Mr B as he had purchased the property from Mr A in 2007-08. Thus, Mr B has to consider the base year for indexation purposes as 2007-08 and not 2001-02.

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