The income of a person has to be computed under any or all five ‘heads of
income’ for the purpose of levying income tax. Section 14 of the Income
tax Act,1961 (herein after referred to as ‘the act’) prescribes these five
heads in which ‘capital gains’ is one among the other heads. Capital gains
means a profit derived from the disposition of a capital asset as defined in
section 2(14) of the act. In common parlance, the capital gain is the
difference between a higher selling price with respect to a corresponding lower
purchase price. But in the act, for the purpose of computation, the said
purchase price is termed as ‘cost of acquisition’. Here, an issue may come up,
in certain cases ,that a person might have acquired a capital asset with out
consideration. To deal such cases, section 49(1) of the act has given a
definition for cost of acquisition of a capital asset acquired without paying
any consideration for the same.
For computing the capital gains, again the cost of acquisition has
to be indexed according to explanation (iii) to section 48 of the act.
Naturally, the index factor has two parts, represented by figures, namely
numerator and denominator. The numerator figure of the index can be easily
obtained from the government notification referred to in explanation (v) of
section 48 of the act since it is concerned with the year of transfer of
the capital asset which can be easily known from the transfer document. But
there are a lot of debate/ dispute about the denominator of the index when a
capital asset is acquired with out consideration though explanation (iii) to
section 48 clearly says that ‘cost inflation index for the first year in which
the asset is held by the assessee should be the denominator. For the sake of
convenience , the said explanation is reproduced below:-
‘’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,1981 whichever is later’’.
In spite of this clear explanation, judiciary has taken a
different view, in a number of cases, that indexed cost of acquisition has to
be computed with reference to the YEAR IN WHICH PREVIOUS OWNER FIRST HELD
THE ASSET, and not from the year in which the assessee became owner of that
asset. The author describes in this article certain such
controversial decisions which puts the assessee in the state of
uncertainty.
i) Mrs. Pushpa Sofat Vs. ITO (2002) 81 ITD 1(Chd- Tri)
The facts of the case are that the assessee and her sister
were owner’s of one residential Kothi in Chandigarh and the same
was sold by them in the accounting year 1992-93 . The said house was inherited
by the above mentioned ladies from their father, who died on 17-2-1991 . Their
father had built the house long back, i.e., much earlier to 1-4-1981 and had
bequeathed the same to his daughters. Capital gain is worked out by
applying the cost inflation index (denominator)of financial year 1981-82. The
ITO and the CIT (Appeals) did not agree with this ,since there view was
the indexed cost of acquisition was to be worked out with reference to the date
on which the father of the assessee expired i.e. 17-2-1991 by applying
explanation (iii) to section 48. The assessee preferred second appeal before
the ITAT which decided the case in favour of the assessee’s. The tribunal
observed that as the asset was acquired prior to 1981, the indexed cost
of acquisition in the hands of the previous owner as on 1-4-1981 (100) was to
be considered for computing the capital gains.
ii) Smt. Mina Deogun Vs. ITO (2008) 19 SOT
183(Kol-Tri).
In this case, the assessee’s father had acquired a property in
1958. He expired in 1968, whereupon the assessee’s mother became the owner of
the property. The mother expired in September 1999,resulting in the assessee
and her three sisters inherting the property as co-owners. The property was
sold during the previous year relevant to assessment year 2004-05. The assessee
claimed cost of indexation from financial year 1981-82. The ITO allowed
indexation from the financial year 1999-2000. The first appellate authority
agreed with the view of ITO. Before the tribunal it was argued that if the cost
inflation index was adopted with reference to the year of succession, while
cost was taken as of 1-4-1981, it would lead to absurd results and, therefore,
a schematic interpretation should be adopted, and not a literal
interpretation. The tribunal, therefore, held that the cost inflation index
applicable to 1981-82 was to be applied, and not the index applicable to
1998-99. While deciding the case the tribunal relied on the case of Mrs. Puspa
Sofat (supra) and Mumbai tribunal decision in DCIT Vs. Smt. Meera Khera ,2 SOT
902.
iii) Kamal Mishra Vs. ITO (2008) 19 SOT 251(Del-Tri)
The facts of the case is as follows:-
The assessee was in receipt of certain shares and securities on
the death of her husband in January 1998. The shares were sold during the year
under consideration viz., assessment year 2002-03. While computing capital
gain, the assessing officer allowed indexation by taking the year of
acquisition of shares as 1998, instead of the year in which shares were
acquired by her husband, as claimed by the assessee. On appeal the
Commissioner (Appeals) allowed the claim of the assessee with regard to
indexation of securities. On further appeal by the revenue, the tribunal
observed as follows:-
There cannot be two different dates in respect of the same asset
devolving on the heir, one date to determine the date of cost of acquisition
and another to determine the indexed cost of acquisition. Even otherwise the
period of holding for determining long-term capital gains includes the period
for which the original owner held the asset that devolved upon the legal heir.
Accordingly, the assessing officer is directed to recompute capital gains on
sale of securities by indexing cost of acquisition with reference to the year
in which husband of assessee acquired them.
iv) ACIT Vs. Suresh Verma (2012) 72 DTR
82(Del-Tri)
The assessee has declared long term capital gain,
claiming the indexation cost as on 1st April, 1981. The Assessing Officer
held that the father of the assessee had expired on 6th April 1990 hence
indexation will be available only with the reference to financial year
1990-91. In appeal the Commissioner (Appeals) allowed the claim of
indexation from 1-4-1981. On appeal by revenue the Tribunal held
that as the property was acquired by assesee’s father in 1965 and
inherited by assessee on death of his father in 1990, indexed cost of
acquisition of property shall have to be determined as on 1st April 1981, for
purpose of computation of capital gains. (A.Y. 2007-08).
v) CIT Vs. Manjula J. Shah (2011) 16 Taxmann.com 42
The facts of the case is the assessee acquired a residential flat
as a gift from her daughter under a gift deed dated 02-01-2003 . The said flat
was originally acquired by the previous owner on 29-01-1993. The assessee sold
the flat on 30-06-2003 and offered long term capital gains. While calculating
the capital gains she took the index of year 1993-94. The ITO recomputed
the capital gains with index of 2002-03 and passed order accordingly. The
appeal before CIT (Appeals) and the ITAT was decided in favour of
the assessee. The revenue preferred appeal before the Bombay High Court
which was again decided in favour of the assessee. While delivering the order
the Bombay High Court, laid down that when the law provides to consider the
period of holding of the previous owner also, then a different treatment cannot
be accorded for calculation of the indexed cost of acquisition by not adopting
the cost inflation index of the year in which the asset was acquired by the
previous owner. Therefore, the court said, indexation should be allowed from
the year in which such asset was acquired by the previous owner.
vi) Arun Shungloo Trust Vs. CIT (2012)205 Taxmann 456 (Del).
The facts of the case are discussed hereunder.
One Mr. Arun Shungloo acquired property in New Delhi before
1st April, 1981. On 5th January, 1996, Mr.Arun Shungloo transferred the
property to Arun Shungloo Trust. The said trust sold and
transferred the acquired property to a third party during assessment year
2001-02. The substantial question of law mentioned above relates to the
computation of long term capital gains. The contention of the Revenue which has
been accepted by the tribunal is that appellant is entitled to indexed cost of
acquisition for the period on or after 5th January, 1996, i.e., the date on
which the trust had acquired the property upto the date of sale. The contention
of the appellant assessee is that it is entitled to the benefit of indexed cost
of acquisition from 1.4.1981, i.e. for the period during which Mr. Arun Shungloo
also held the property before it was transferred to the trust.
While delivering the judgement in favour of th appellant, the
Delhi High Court observed as follows;-
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. The interpretation relied by the assessee is reasonable and
in consonance with the object and purpose behind Sections 48 and 49 of the Act.
The expression "held by the assessee" used in Explanation (iii) to
Section 48 has to be understood in the context and harmoniously with other Sections.
The cost of acquisition stipulated in Section 49 means the cost for which the
previous owner had acquired the property. The term "held by the
assessee" should be interpreted to include the period during which the
property was held by the previous owner. Accordingly the benefit of indexation
was allowed from 1-4-1981.
The author feels that the view taken by the tribunal/ high court
is not in tune with the law prevailing in explanation (iii) to section 48 of
the Income tax Act,1961 and, therefore, will result in unnecessary hard ship to
the assessee’s / professionals at any point of time. Therefore, the tribunal /
high court would have applied the literal rule of construction and the
words of the statute would have understood in their ordinary and popular sense
while delivering the judgement.
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