March 2012
Capital gain: Computation: Section 2(42A) and section 48 Indexed cost: A.Y. 2001-02: Acquisition of capital asset by gift, will, etc.: Indexed cost to be determined w.r.t. the holding of the asset by the previous owner.
By K. B. Bhujle, Advocate
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The settler of the assessee-trust had acquired the property before 1-4-1981 and he settled it on trust on 5-1-1996. The assessee-trust sold the property and computed the indexed cost of acquisition on the basis that it ‘held’ the property from the time the settler had held it. The Assessing Officer accepted that the settler’s cost of acquisition had to be treated as the assessee’s cost of acquisition but held that the settler’s period of holding could not be treated as the assessee’s period of holding. The Tribunal upheld the decision of the Assessing Officer.
On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal, followed the judgment of the Bombay High Court in the case of CIT v. Manjula J. Shah, 16 Taxman.com 42 (Bom.) and held as under:
“(i) The Department’s contention that in a case where section 49 applies the holding of the predecessor has to be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the indexed cost of acquisition will result in absurdities. It leads to a disconnect and contradiction between ‘indexed cost of acquisition’ and ‘indexed cost of improvement’.
(ii) This cannot be the intention behind the enactment of section 49 and Explanation to section 48. There is no reason why the Legislature would want to deny or deprive an assessee the benefit of the previous holding for computing ‘indexed cost of acquisition’ while allowing the said benefit for computing ‘indexed cost of improvement’.
(iii) The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gains tax on the ‘real’ or actual ‘gain’ and not on the increase in the capital value of the property due to inflation.
(iv) 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 and as 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.”
