For properties acquired prior to 1-4-1981, cost of acquisition will be FMV as on 1-4-1981

ITO Vs. Ms. Noella P. Perry (ITAT Mumbai)

The ITAT Mumbai Bench ‘B’ heard an appeal by the Income-tax Officer against the order of the Commissioner of Income Tax (Appeals) in the case of Ms. Noella P. Perry for the assessment year 2006-07. The appeal raised two main issues: determining the cost of acquisition for a house property acquired before 1st April 1981 and establishing the date from which the cost inflation index (CFI) should be applied.

Cost of acquisition: The previous owners acquired the house property prior to 1st April 1981. As per the Income Tax Act, for properties acquired before this date, the cost of acquisition can be substituted with the fair market value (FMV) of the property as of 1st April 1981. In this case, the property was acquired through inheritance, which is not regarded as a transfer. Therefore, the FMV on 1st April 1981 is considered the cost of acquisition. As the assessee owned a 50% share, she can claim 50% of the FMV as the cost of acquisition for computing long-term capital gains.

Cost inflation index (CFI): The holding period for the assessee is determined based on the date of acquisition by the previous owner. The CFI is used to calculate indexed cost of acquisition for the period from 1st April 1981 to the year of transfer. The Revenue restricted the indexation benefit to the period when the property devolved on the assessee, i.e., 20th May 1998. However, the ITAT Mumbai Bench and the jurisdictional high court upheld that the indexation benefit should be applied from 1st April 1981 onwards. The indexation benefit is meant to account for inflation and is applicable to long-term capital assets.

ITAT Mumbai Bench ‘B’ dismissed the Revenue’s appeal and upheld the Commissioner of Income Tax (Appeals)’s order. The ruling confirms that for properties acquired before 1st April 1981, the FMV as of that date can be considered the cost of acquisition. Additionally, it establishes that the cost inflation index should be applied from 1st April 1981 onwards for calculating the indexed cost of acquisition. This ruling provides clarity on the computation of long-term capital gains for properties acquired prior to 1st April 1981.

FULL TEXT OF THE ITAT ORDER

This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-30, Mumbai, dated 30.09.2010, partly allowing the assessee’s appeal contesting its assessment for the assessment year (A.Y.) 2006-07 vide order u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 12.12.2008.

2. The first issue involved in the present appeal, projected per the Revenue’s Ground No. 1, agitates the direction by the ld. CIT(A) in taking the fair market value of the capital asset as on 01.04.1981, being a house property, the acquisition of which by the previous owner being prior to that date, as its cost of acquisition, as against 1/4th of the said value by the Assessing Officer (A.O.). The said issue is the date from which the cost inflation index would apply in computing the long term capital gains under reference.

3.1 We have heard the parties, and perused the material on record. The primary facts of the case, i.e., the manner in which the assessee became the owner of 50% of the house property under reference, which stands sold during the year, is not in doubt or dispute, and stands stated at para 4, pgs. 1 and 2 of the assessment order. The property stood bequeathed to the assessee along with her sister, by their grand father, Shri Lewis Perry, through his will, which was probated in the Bombay High Court on 20.05.1998. Shri Lewis Perry, in turn, had acquired the said share, to the extent of 25% on the death of his wife, Mrs. Lewis Perry in the financial year (f.y.) 1985-86, and to the extent of 50% on the death of his sister Mrs. Rose G. Pereira in the f.y. 1983-84. Rose G. Pereira was the original owner of the property, which is stated to have been constructed in the year 1954. During the f.y. 1960-61, she transferred 25% share therein each to Shri Lewis Perry and his wife Mrs. Louisa Perry. The conveyance of property through inheritance or by will is not regarded as a transfer u/s. 47 of the Act. The cost of acquisition to the previous owner, i.e., to the owner who comes to own the property in a manner other than those specified in section 49, as under will (section 49(1)(ii)) or succession or inheritance or devolution (per section 49(1)(iii)(a)), is to be deemed as the cost of acquisition in the hands of the assessee, in whose hands the entire capital gains on the transfer of the property is to be computed. The fiction extends to the holding period of the asset as well, so that the lives of the testator and the legatee/s are combined for reckoning the holding period (Explanation 1(b) to section 2(42A)). Further, where the date of acquisition is prior to 01.04.1981, i.e., the cut off date, the assessee may, at its option, substitute the fair market value of the capital asset as on that date for its cost of acquisition. As would be apparent from the afore-stated incidents, which facts are not in dispute, each of the three owners through whom the assessee and her sister have derived their title, i.e., directly or indirectly, acquired the property prior to 01.04.1981. We, therefore, find no infirmity in the treatment of the fair market value of the asset as on 01.04.1981 as the cost of acquisition. The assessee having 50% share therein can, consequently, claim only 50% of the said value (which has been worked by the registered valuer at Rs. 16,84,125/-), i.e., at Rs. 8,42,063/-, in the computation of the long term capital gains in her hands. In fact, even as pointed out by the assessee’s counsel, with reference to the working reproduced at pg. 6 of the impugned order, a better way would be to compute the entire long term capital gains on the sale of house property, and allocate the capital gains so computed to the extent of 50% each in the hands of the assessee and her sister, Ms. Crystal Perry. We direct like-wise, as has in fact, the ld. CIT(A). We decide accordingly.

3.2 The second issue arising in the instant appeal is in respect of the date from which the cost inflation index (CFI) is to be applied. The holding period by the assessee is to be reckoned with reference to the date of acquisition by the previous owner, i.e., the owner who came to own the property in any of the modes other than those specified in section 49. The CFI, which is to be applied for the period of holding since 01.04.1981 (to the year of the transfer) in view of sec. 48 of the Act, has been restricted by the Revenue to the period for which the assessee owned and held the relevant asset In other words, though the cost of acquisition was, at the assessee’s option, taken as the fair market value as on 01.04.1981 (u/s.55(2)(b)(ii)), the benefit of indexation for working out the indexed cost of acquisition stands taken from the date the property devolved on the assessee, i.e., 20.05.1998, while the assessee claims it w.e.f 01.04.1981. The ld. CIT(A) has, however, agreed with the assessee, allowing it the indexation benefit since 01.04.1981 onwards, following the decisions by the Tribunal. The Special Bench of the tribunal in the case of Dy. CIT v. Manjula J. Shah [2010] 35 SOT 105 (Mum.) has confirmed the said treatment. In fact, even as conceded to by the parties, the said decision by the tribunal has been since upheld by the hon’ble jurisdictional high court in the case of CIT v. Manjula J. Shah [2012] 204 Taxman 691  copy on record. When the cost of acquisition, it was clarified per the said decisions, is deemed by the fiction of law to be the cost to the previous owner, as well as the holding period of the assessee in respect of the said asset, again, to be reckoned with reference to the holding by the previous owner, the indexation benefit, which is to be applied to a long-term capital asset and, further, is only for providing the benefit of inflation in the working of the capital gains for the period of holding since 01.04.1981, could not be denied to the assessee. The law having been settled by the Honorable jurisdictional high court thus, we do not find any merit in the Revenue’s case. The said issue, agitated by it per its Ground Nos. 2 and 3 of the instant appeal, also, thus, fails. We decide accordingly.

4. In the result, the Revenue’s appeal is dismissed.