S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a capital asset received as a gift, indexed cost of acquisition needs to be computed by applying cost inflation index of the year in which the previous owner had first held the asset.

DCIT v. Manjula J. Shah

ITA No. 7315/Mum./2007

Date of Order : 16-10-2009

S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a
capital asset received as a gift, indexed cost of acquisition needs to be
computed by applying cost inflation index of the year in which the previous
owner had first held the asset.

Facts :

The assessee transferred a capital asset which was received
by her as a gift on 1-2-2003. The previous owner had acquired the capital
asset on 29-1-2003. While computing long term capital gain, the assessee
computed indexed cost of acquisition by applying cost inflation index of the
year in which the previous owner first held the asset. The AO was of the view
that the provisions of Explanation (iii) to S. 48 which define the term
‘indexed cost of acquisition’ are very clear and as per those provisions the
assessee is entitled to indexation from the year in which the asset was first
held by the assessee and not by the previous owner.

Aggrieved, the assessee preferred an appeal to CIT(A) which
was allowed.

Aggrieved by the order of CIT(A), Revenue preferred an
appeal to the Tribunal. Since there were divergent decisions of Division
Benches on this issue, a Special Bench was constituted to consider the issue.

Held :

A literal reading of Explanation (iii) to S. 48 suggests
that one has to go by the year in which the asset was held by the assessee.
The scheme of the Act as reflected in the definition of ‘short term capital
asset’ in Explanation 1(b) to S. 2(42A) provides that the period for which the
asset was held by the previous owner also has to be taken into account. Also,
the cost of acquisition of the previous owner is regarded as cost of
acquisition of the assessee. It is not logical that the cost of acquisition
and the period of holding is determined with reference to the previous owner
and the indexation factor is determined with reference to the date of
acquisition by the assessee. Therefore, literal interpretation of Explanation
(iii) to S. 48 is inconsistent with the scheme of the Act. Also, literal
interpretation will lead to absurdity and unjust results and will defeat the
purpose of the concept of ‘indexed cost of acquisition’. In accordance with
the principles of purposive interpretation of statutes, Explanation (iii) to
S. 48 has to be read to mean that the indexed cost of acquisition has to be
computed by taking into account the period for which the asset was held by the
previous owner.

The appeal filed by the Revenue was dismissed.