Benefit of cost inflation index is available even in respect of foreign assets.
Mumbai Tribunal in the case of Aarav Fragrances and Flavors Pvt. Ltd (ITA 546/Mum/2024) has held that the benefit of cost inflation index for the foreign assets.
Let us have a Short Overview of the Case:
Aarav Fragrances and Flavors Pvt. Ltd. is engaged in the manufacture and sale of fragrance compounds and flavors.
The company has two wholly-owned subsidiaries: Aarav ITES Pvt. Ltd. and Aarav Suisse SA (a foreign company).
During the assessment year 2016-17, Assessee sold shares of Aarav Suisse SA under a buyback scheme and computed long-term capital gain by deducting the indexed cost of acquisition, resulting in a long-term capital loss of Rs. 22.93 crores.
Key Points:
Assessing Officer’s (AO) decision:
The AO disallowed the benefit of cost inflation index for the foreign assets, arguing that the cost inflation index is based on Indian inflation and should not apply to foreign assets.
The AO re-computed the long-term capital gain, reducing the long-term capital loss to Rs. 11.53 crores.
CIT(A)’s decision:
The CIT(A) allowed the benefit of cost inflation index to the assessee, leading to this Revenue’s appeal before the Tribunal.
Tribunal’s ruling:
The Tribunal noted that the second proviso to section 48 of the Act, which grants the benefit of cost inflation index, does not distinguish between assets held in India and those held outside India.
The Tribunal emphasized that the provisions of the Act should be applied strictly as written, without referring to internal or external aids for interpretation unless there is ambiguity.
The Tribunal rejected the Revenue’s reliance on Mumbai Tribunal’s case (ICICI Bank Ltd. v. DCIT) due to lack of clarity on facts, the parity of facts between the present case and the case of ICICI Bank Ltd cannot be established.
Accordingly, the Tribunal affirmed the CIT(A)’s order, allowing the benefit of cost inflation index for the foreign assets.
The copy of the order is as under:
