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In case of transfer by gift, will, trust, etc indexed cost to be determined with reference to holding by previous owner

The settlor acquired property before 1.4.1981 and he settled in 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 settlor had held it. The AO accepted that the settlor’s cost of acquisition had to be treated as the assessee’s cost of acquisition but held that the settlor’s period of holding could not be treated as the assessee’s period of holding. This was upheld by the Tribunal. On appeal by the assessee to the High Court, HELD reversing the Tribunal:

The department’s contention that in a case where s. 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”. This cannot be the intention behind the enactment of s. 49 and the Explanation to s. 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”. 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 expression “held by the assessee” used in Explanation (iii) to s. 48 has to be understood in the context and harmoniously with other Sections and as the cost of acquisition stipulated in s. 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 (CIT v. Manjula J. Shah 16 Taxman 42 (Bom) followed).

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