A big question arise in the mind of every professional that whether benefit of Indexation can be claimed on Inherited Property ; if yes then second half thought is whether it can be claimed from the year in which it is first held by the assessee or from the year in which it is occupied by the Previous Owner or predecessor.
Since As per Explanation (iii) to Section 48 Of Income Tax Act “”indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later”
Section 49(1) Of Income Tax Act says that “Where the capital asset became the property of the assessee by succession, inheritance etc . then 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.
THERE IS A CONFLICT BETWEEN BOTH THESE PROVISIONS
For Better Understanding lets take a Case Example :
Now the question arise that whether the Indexation will be claimed at 582 (FY 2008-2009) or at 172 (FY 1989-1990)
Analysis of case
If you carefully understand Explanation (iii) to Section 48 Of Income Tax Act it has clearly state that ”For the purpose of computation of Indexed Cost of Assets the Cost Inflation Index has to be considered for the first year in which the asset was held by the assessee “ which is 2008-2009 in the given case. And Section 49(1) says that the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it (therefore consider Cost Inflation Index for the year in which the assets is acquired by the Previous owner) which is 1989-1990 in the given case.
The said issue have been challenged many times in many Tribunals and High Courts but the matter has been reasonably resolved in the Following Cases:
a) In Case of CIT Vs. Gautam Manubhai Amin (Gujrat High Court); Assessee (An Individual) sold property inherited by him for Rs 3.35Cr. hence calculated his share of Capital Gain at Rs.21.24 Lac after considering the benefit of Cost Inflation Index as per base year 1981-1982 but the Assessing Officer is of the view that Cost Inflation Index should be as per Financial Year 1998-99 which is the year in which the property is acquired by the assessee under Inheritence therefore compute Capital Gains accordingly.
Assessee was aggrieved with the decision of Assessing Officer therefore filed an appeal to CIT (Appeals) where CIT (A) on considering the decision held in case of CIT Vs. Manjula J. Shah (Bombay High Court) pass the order in favour of Assessee.
Later on ITAT also confirmed the order passed by Assessing Officer in the same case.
At last the matter was placed before Gujrat High Court on the appeal filed by Revenue in which High Court conclude that “For the purpose of computation of Capital Gains , Indexed Cost of Acquisition was to be computed with reference to year in which previous owner first held asset and not the year in which assessee become owner of assets by inheritance”.
b) In Case of Arun Shungloo Trust Vs. CIT (Delhi High Court) : Assessee (Mr. Arun) acquired property before 1981 then in 1996 Mr. Arun transferred the property to the trust Managed by the Appellant , during 2001-2002 the Appellant sold the aforesaid property.
The contention of the appellant assessee is that it is entitled to the benefit of indexed cost of acquisition from the period during which Mr. Arun Shungloo held the property before it was Transferred to the trust.
There is no reason and justification to hold that clause (iii) of the explanation to section 48 intents to reduce or restrict the “indexed cost of acquisition” to the period during which the assessee has held the property and not the period during which the property was held by the previous owner.
In the given case Delhi High Court held that the Assessee Trust have acquired the property in 1996which was acquired by the transferor (Previous Owner) sometimes before 01.04.1981 therefore on the sale of property by the Assessee Trust in 2001-2002, Trust is entitled to the benefit of Indexed Cost of Acquisition from 01.04.1981 and not for the period after 1996.
benefit of Indexed Cost of Acquisition from 01.04.1981 and not for the period after 1996.
Some latest relevant cases are as under:
1. 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. [Refer – ITO Vs Pritendra C. Jhaveri (ITAT Mumbai)]
2. Indexed cost of acquisition is to be computed with reference to year in which previous owner first held gifted assets. [Refer – DCIT V/s Soni Sonu Mirchandani]
(Republished with Amendments by Team Taxguru)