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

Issue:

What will be the indexation benefit available on asset received through gift, or inheritance? Whether cost of inflation of the year in which the asset was first held by previous owner will be taken for computing cost of acquisition will be taken or not?

Provision:

Explanation to section 2(42A)

In case the asset is received by way of gift than for determining the nature of capital asset, the aggregate period for which the capital asset is held by the assessee and previous owner shall be considered.

Section 48

The profit and gains arising on transfer of long term capital asset shall be computed by reducing the indexed cost of acquisition from the net sale consideration.

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

In this case the assessee had acquired a capital asset by way of gift from previous owner. The asset was long term capital asset considering the period of holding by the assessee and the previous owner. The assessee computed long term capital gain taking cost inflation index of the year in which asset is held by the previous owner. The Assessing Officer raised an objection that cost inflation index of the year in which the asset is first held by assessee should be taken.

The Bombay High Court held that the assessee is deemed to have the capital asset from the year the asset was held by previous owner and thus it is a long term capital asset. Therefore, for determining indexed cost of acquisition under section 48, the assessee held the asset from the year the asset was held by previous owner. Therefore the cost of inflation index for the year the asset was held by previous owner would be considered for determing cost of acquisition.

Conclusion:

As per Manjula J.Shah case law the indexed cost of acquisition in case of gifted, inherited asset can be calculated by taking cost inflation index of the year in which the asset was first held by previous owner.

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