CIT vs. Manjula J. Shah (Bombay High Court)

Indexed cost of gifted assets has to be determined with reference to previous owner

The assessee’s daughter purchased a flat on 29.1.1993 at a cost of Rs.50.48 lakhs. She gifted the flat to the assessee on 1.2.2003. The assessee sold the flat on 30.6.2003 for Rs. 1.10 crores. In computing LTCG, the assessee took the indexed cost of acquisition under Explanation (iii) to s. 48 on the basis that she “held” the flat since 29.1.1993. The AO held that as the assessee had “held” the flat from 1.2.2003, the cost inflation index for 2002-03 would be applicable. The CIT (A) and the Special Bench of the Tribunal upheld the claim of the assessee. On appeal by the department, HELD dismissing the appeal:

Under Explanation 1(i)(b) to s. 2(42A), in determining the period for which any asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner has to be included. Accordingly, though the assessee acquired the capital asset on 30.6.2003, she was deemed to hve “held” the asset from 29.1.1993 onwards. This fiction will apply to clause (iii) of the Explanation to s. 48 as well for determining the “indexed cost of acquisition”. The object of the legislature is to tax the gains arising on transfer of a capital acquired under a gift or will by including the period for which the said asset was held by the previous owner. This object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee.