Mukesh Patel.in
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THE MAGIC WAND OF INDEXATION!

Gujarat High Court holds capital gains on gifted or inherited assets also enjoy indexation from date of original holding!

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under gift or Will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer.

In the above context, an interesting question that would arise for consideration is whether while computing the taxable capital gains arising on transfer of a capital asset acquired by a taxpayer under gift or inheritance, the ‘indexed cost of acquisition,’ as per the provisions of Section 48, has to be computed with reference to the year in which the previous owner first held the asset or the year in which the taxpayer became the owner of the asset.

Consider a case where your grandfather had acquired a plot of land for Rs.20 lakhs in late 1981, which you received by way of inheritance on his death in 2013 and you were planning to sell the same in early 2014 for a consideration of Rs.1.80 crore. Guess, what would be the income-tax you would be required to pay on your capital gains? Difficult to believe, but ‘zero tax’ is the correct answer.

 In the above case, if just the aforesaid two concessional provisions of Sections 2(42A) and 49(1) were taken into consideration, your taxable capital gains (deemed as long term) would still have worked out to Rs.1.60 crore (1.80 crore – 20 lakhs), attracting a tax liability of Rs.36,25,600 (at 22.66%).

 However, as per the recent decision of the Hon’ble Gujarat High Court rendered in the case of CIT v. Gautam Manubhai Amin 38 taxmann.com 42, the benefit of computing ‘Indexed Cost of Acquisition’ (ICA) can also be availed in cases of transfer covered under Section 49 such as assets received via gift or inheritance.

Considering the ‘Cost Inflation Index’ (CII) of 939 for 2013-14 with reference to the CII of 100 for 1981-82, the ICA of the plot of land inherited and proposed to be sold by you in the above mentioned case would work out to Rs. 1,87,80,000. Since your sale consideration is expected to be Rs.1.80 crore, your taxable capital gains will result in a net loss of Rs.8,78,000 and you will thus not attract any liability to income-tax.

SOUND REASONING OF HIGH COURTS

In the above case, the Gujarat High Court has categorically held that for the purpose of computation of long term capital gain, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the taxpayer became the owner of the asset.

While drawing the above conclusion, the Gujarat High Court observed that the issue involved was squarely covered by ratio of its own decision in the case of B.N. Vyas v. CIT [1986] 159 ITR 141 and also the decision of the Bombay High Court in the case of CIT v. Manjula J. Shah [2012] 204 Taxman 691. Observing that the aforesaid decisions dealt with a case of gift, the Gujarat High Court held that the same analogy would apply in the case of a property received under inheritance as well.

Interestingly, even the Delhi High Court in the case of ‘Arun Shungloo Trust v. CIT [2012] 205 Taxman 456 (Del.)’ has also following the aforesaid decision of the Bombay High Court decided this very issue in favour of the taxpayer.

 In all the above decisions, the Courts have emphatically rejected the plea of the Revenue that the indexation factor in such cases was required to be determined only with reference to the date of  acquisition of the taxpayer selling such asset. They have logically held that since the taxpayer is held liable for long term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the taxpayer, the indexed cost of acquisition has also to be determined on the very same basis. The Courts have further elucidated that the benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the ‘real’ or ‘actual gain’ and not on the increase in the capital value of the property due to inflation.

The trio of the Gujarat, Bombay and Delhi High Court decisions thus grant a unique tax shelter via indexation in all cases of capital gains arising on sale of gifted or inherited assets.

 

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