Capital gain: Indexed cost: Sections 2(42A), 48 and 49 : A.Y. 2005-06: Acquisition of asset by inheritance: Indexation to be made w.r.t. the holding of asset by previous owner.

In or about the year 1942, the assessee’s father acquired the immovable property from his father. The assessee’s father expired on 21-8-1988, leaving behind a will bequeathing the property to his wife (assessee’s mother) and the assessee in equal shares. The assessee’s mother expired on 21-2-2000 and her 50% share was inherited by the assessee. In the previous year corresponding to the A.Y. 2005-06, the assessee sold the property for a consideration of Rs.9.5 crore and declared a long-term capital gain of Rs.38,44,247. While computing the capital gain the assessee considered the date of acquisition of the property to be prior to 1-4-1981 and took the cost of acquisition and indexed the same w.r.t. 1-4-1981. The AO held that for the purpose of indexation, the actual date of acquisition by the assessee must be taken. Accordingly, he indexed the cost in respect of 50% w.r.t. 21-8-1988 (date of death of father) and the balance 50% w.r.t. 21-2-2000 (date of death of mother). The CIT(A) allowed the assessee’s appeal and held that the indexation should be w.r.t. 1-4- 1981. The Tribunal upheld the order of the CIT(A) w.r.t. 50% of the property acquired from the father. In respect of the balance 50% acquired from mother, the Tribunal held that the indexation should be w.r.t. 21-8-1988 when the mother acquired the property from the father. The Tribunal held that for the purpose of indexation, the period of holding of the asset by the previous owner should be taken into account.

The Revenue filed appeal in respect of the 50% decided in favour of the assessee and the assessee filed cross-objection in respect of the balance 50%. The Bombay High Court dismissed the appeal and allowed the cross-objection and held as: “

(i) The Explanation to section 49(1) defines the expression ‘previous owner of the property’ to be the last previous owner thereof, who acquired it by a mode of acquisition ‘other than that referred to in clauses (i) to (iv) of s.s (1)’. The last previous owner of the property, who acquired the property by a mode of acquisition other than those referred to in clauses (i) to (iv), was the assessee’s grand-father. The assessee’s father admittedly acquired the property in 1942 from his father.

 (ii) As far as the 50% portion of the property acquired by the assessee from his father is concerned, the cost of acquisition must be determined to be the cost at which the assessee’s grandfather, in any event the assessee’s father acquired the property and not the date on which the assessee acquired it. The Tribunal does not hold otherwise either.

(iii) The Tribunal however held that in respect of 50% of the property inherited by the assessee from her mother, the period of holding would start from 21-8-1988, as she became owner of her 50% share in the property only from that date. This requires consideration. The last previous owner of the assessee’s mother’s 50% share was her husband’s father and at the highest her husband. Thus the assessee must be deemed to have held this 50% share in the property also from 1-4-1981.

(iv) In the circumstances, the questions are answered in favour of the assessee. The period of holding shall be from 1-4-1981 in respect of the entire property.”