ITO, Bangalore V. Smt. Kusuma Rao, Bangalore

ITA 1303/BANG/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7035 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 02-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Keywords: Capital asset; Gift; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.1303/BANG/2013 ASSESSMENT YEAR : 2005-06 THE INCOME TAX OFFICER, WARD 4(1), BANGALORE. VS. SMT. KUSUMA RAO, NO.238, 43 RD CROSS, 5 TH BLOCK JAYANAGAR, BANGALORE 560 041. PAN : ACFPR 6783G APPELLANT RESPONDENT APPELLANT BY : DR. P.K. SRIHARI, ADDL. CIT(DR) RESPONDENT BY : NONE DATE OF HEARING : 01.10.2014 DATE OF PRONOUNCEMENT : 10.10.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDE R DATED 19.6.2013 OF THE CIT(APPEALS)-II, BANGALORE RELATING TO ASSES SMENT YEAR 2005-06. 2. THE EFFECTIVE GROUNDS RAISED BY THE REVENUE READ S AS UNDER: 2. THE CIT(A) ERRED IN ACCEPTING THE ASSESSEES CO NTENTION THAT THE COST INFLATION INDEX RELEVANT TO THE YEAR OF ACQUISITION OF ITA NO. 1303/BANG/2013 PAGE 2 OF 14 THE PREVIOUS HOLDER SHOULD BE ADOPTED WHILE COMPUTI NG LTCG IN A SITUATION OF THE ASSESSEE HOLDING THE ASSET RECEI VED THROUGH A GIFT. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE PR OVISIONS OF SECTION 2(42A) AND 49(1) DEAL WITH ONLY THE COST OF ACQUISITION THAT HAS TO BE ADOPTED IN THE COMPUTATION OF CAPITA L GAINS BY THE DONEE BUT NOT WITH THE COST INFLATION INDEX THAT NE EDS TO BE ADOPTED. IN THE ABSENCE OF EXPRESS PROVISIONS IN T HIS REGARD, THE COST INFLATION INDEX RELEVANT TO THE FY IN WHICH TH E ASSESSEE BECAME THE OWNER CAN ONLY BE ADOPTED IN SUCH COMPUT ATION. 3. THE ASSESSEE IS AN INDIVIDUAL. DURING THE PREVI OUS YEAR (I.E. ON 3.9.2004) RELEVANT TO AY 05-06, THE ASSESSEE SOLD R ESIDENTIAL PROPERTY AND DECLARED LONG TERM CAPITAL GAIN ON SUCH SALE OF A S UM OF RS.5,25,540/-. THE ASSESSEE CLAIMED EXEMPTION FROM THE CHARGE OF C APITAL GAIN TAX ON THE GROUND THAT THE SALE PROCEEDS WERE INVESTED IN SECU RITIES MENTIONED IN SEC.54EC OF THE ACT VIZ., NABARD CAPITAL GAIN BONDS . THE ASSESSEE GOT THE PROPERTY UNDER A DEED OF GIFT DATED 24.3.2000 F ROM HER MOTHER. HER MOTHER HAD ACQUIRED THE PROPERTY IN THE YEAR 1986-8 7. IN THE COMPUTATION OF CAPITAL GAIN THE ASSESSEE CLAIMED INDEXATION ON COST OF ACQUISITION FROM 1986-87 THE YEAR IN WHICH THE PREVIOUS OWNER ACQUIR ED THE PROPERTY. THE ASSESSEES WHILE COMPUTING HER COST OF ACQUISITION, ALSO CLAIMED INDEXATION ON COST OF ACQUISITION FROM 1986-87. EXPLANATION ( III) TO SEC.48 DEFINES INDEXED COST OF ACQUISITION TO MEAN AN AMOUNT WHICH BEARS TO THE COST OF ACQUISITION THE SAME PROPORTION AS COST INFLATION I NDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRED BEARS TO THE COST INFLATIO N INDEX FOR THE FIRST YEAR IN WHICH THE ASSET WAS HELD BY THE ASSESSEE OR FOR THE YEAR BEGINNING ON THE ITA NO. 1303/BANG/2013 PAGE 3 OF 14 1ST DAY OF APRIL, 1981, WHICHEVER IS LATER. THE A O WHILE COMPLETING THE ASSESSMENT OF THE ASSESSEE ACCEPTED THE CLAIM OF TH E ASSESSEE IN THE ORDER OF ASSESSMENT DATED 11.7.2011. 4. THEREAFTER THE AO PASSED AN ORDER U/S.154 OF THE ACT DATED 20.6.2011 RECTIFYING THE AFORESAID ORDER IN SO FAR AS IT RELATES TO COMPUTATION OF CAPITAL GAIN. THE AO WAS OF THE VI EW THAT THE HIS ORDER DATED 11.7.2011 IN THE CASE OF THE ASSESSEE ALLOWI NG BENEFIT OF INDEXATION FROM 1986-87 WAS AN APPARENT ERROR ON THE FACE OF T HE RECORD BECAUSE AS PER EXPLANATION (III) TO SEC.48 OF THE ACT 'INDEXED COST OF ACQUISITION' MEANS AN AMOUNT WHICH BEARS TO THE COST OF ACQUISIT ION THE SAME PROPORTION AS COST INFLATION INDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRED BEARS TO THE COST INFLATION INDEX FOR THE FIRST YEAR IN WHICH THE ASSET WAS HELD BY THE ASSESSEE OR FOR THE YEAR BEGI NNING ON THE 1ST DAY OF APRIL, 1981, WHICHEVER IS LATER . ACCORDING TO THE AO, THE ASSET WAS HELD BY THE ASSESSEE ONLY FROM 24.3.2000 WHEN S HE GOT IT AS A GIFT FROM HER MOTHER AND THEREFORE THE BENEFIT OF INDEXA TION HAS TO BE ALLOWED ONLY FROM 24.3.2000. THE AO ACCORDINGLY COMPUTED THE CAPITAL GAIN AFTER ALLOWING INDEXATION BENEFIT ONLY FROM 24.3.2000 WHI CH RESULTED IN DETERMINING THE LTCG AT RS.5,63,590. THE SAME WA S COMPUTED BY THE AO AS FOLLOWS:- ITA NO. 1303/BANG/2013 PAGE 4 OF 14 INDEXED COST OF THE PROPERTY AS ON 3.9.2004 256800 X 480 389(YEAR OF ACQUIRING OWNERSHIP 24.3.200) RS.3,16,8 74 CLAIMED AND ALLOWED IN THE ORDER U/S.143(3) RS.8,80 ,460 EXCESS ALLOWED (8,80,460 3,16,874) = RS.5,63,58 6 R/O RS.5,63,590 5. THE ASSESSEE CHALLENGED THE ORDER OF THE AO BEFO RE CIT(A) WHO RELYING ON THE DECISION OF THE SPECIAL BENCH ITAT I N THE CASE OF DCIT VS. MANJULA J.SHAH 318 ITR (AT) 417 (BOM) CANCELLED THE ORDER PASSED U/S.154 OF THE ACT. IN THE CASE BEFORE THE SPECIAL BENCH, THE FACTS WERE THAT THE ASSESSEE TRANSFERRED A CAPITAL ASSET WHICH WAS RECEIVED BY HER BY WAY OF GIFT ON 1.2.2003. THE PREVIOUS OWNER HAD ACQ UIRED THE CAPITAL ASSET ON 29.1.1993. IN COMPUTING CAPITAL GAINS, THE ASSES SEE CLAIMED THAT THE INDEXED COST OF ACQUISITION HAD TO BE WORKED OUT BY TAKING THE DATE OF ACQUISITION BY THE PREVIOUS OWNER. THE AO REJECTED THE CLAIM THOUGH THE CIT(A) ACCEPTED IT. ON APPEAL BY THE REVENUE, THE I SSUE WAS REFERRED TO THE SPECIAL BENCH. THE SPECIAL BENCH HELD THAT :- EXPLANATION (III) TO S. 48 DEFINES THE TERM INDEX ED COST OF ACQUISITION TO MEAN THE AMOUNT WHICH BEARS TO THE COST OF ACQUISITION THE SAME PROPORTION AS THE . COST INFL ATION INDEX FOR THE FIRST YEAR IN WHICH THE ASSET WAS HELD BY THE A SSESSEE A LITERAL READING OF THE PROVISION SUGGESTS THAT ONE HAS TO GO BY THE YEAR IN WHICH THE ASSET WAS HELD BY THE ASSESSEE. H OWEVER, THIS WOULD BE INCONSISTENT WITH THE SCHEME OF THE ACT AS REFLECTED IN THE DEFINITION OF SHORT-TERM CAPITAL ASSET IN EXP L. 1(B) TO S. 2 (42A) WHICH PROVIDES THAT THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER ALSO HAS TO BE TAKEN INTO ACC OUNT. IT IS NOT LOGICAL THAT THE COST OF ACQUISITION AND THE PERIOD OF HOLDING IS ITA NO. 1303/BANG/2013 PAGE 5 OF 14 DETERMINED WITH REFERENCE TO THE PREVIOUS OWNER AND THE INDEXATION FACTOR IS DETERMINED WITH REFERENCE TO T HE DATE OF ACQUISITION BY THE ASSESSEE. SUCH AN INTERPRETATION WILL LEAD TO ABSURDITY AND UNJUST RESULTS AND DEFEAT THE PURPOSE OF THE CONCEPT OF INDEXED COST OF ACQUISITION. IN ACCORDANCE WIT H THE PRINCIPLES OF PURPOSIVE INTERPRETATION OF STATUTES, EXPL. (III ) TO S. 48 HAS TO BE READ TO MEAN THAT THE INDEXED COST OF ACQUISITION H AS TO BE COMPUTED BY TAKING INTO ACCOUNT THE PERIOD FOR WHIC H THE ASSET WAS HELD BY THE PREVIOUS OWNER. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE LEARNED CO UNSEL FOR THE ASSESSEE SOUGHT ADJOURNMENT ON THE GROUND OF SOME OTHER PROF ESSIONAL COMMITMENT. THE SAME WAS REFUSED AS THE ISSUE TO BE DECIDED HAS ALREADY BEEN DECIDED BY THE HONBLE BOMBAY HIGH COURT IN THE CAS E OF CIT VS. MANJULA J.SHAH (2012) 204 TAXMAN 691 (BOMBAY) . WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED DR WHO RELIED ON THE ORDER OF THE AO. 7. THE MODE OF COMPUTATION OF CAPITAL GAIN IS GIVEN IS SEC.48 OF THE ACT, WHICH READS AS FOLLOWS: SEC.48. MODE OF COMPUTATION. THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS ' SHALL BE COMPUTED, BY DEDUCTING FROM THE FULL VALUE OF THE C ONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS, NAMELY : (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER; (II) THE COST OF ACQUISITION OF THE ASSET AND THE C OST OF ANY IMPROVEMENT THERETO: ITA NO. 1303/BANG/2013 PAGE 6 OF 14 PROVIDED THAT IN THE CASE OF AN ASSESSEE, WHO IS A NON-RESIDENT, CAPITAL GAINS ARISING FROM THE TRANSFER OF A CAPITA L ASSET BEING SHARES IN, OR DEBENTURES OF, AN INDIAN COMPANY SHAL L BE COMPUTED BY CONVERTING THE COST OF ACQUISITION, EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AN D THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET INTO THE SAME FOREIGN CURRENCY AS WAS INITIALLY UTILISED IN THE PURCHASE OF THE SHARES OR DEBENTURES, AND THE CAPITAL GAINS SO COMPUTED IN SUCH FOREIGN CURRE NCY SHALL BE RECONVERTED INTO INDIAN CURRENCY, SO HOWEVER, THAT THE AFORESAID MANNER OF COMPUTATION OF CAPITAL GAINS SHALL BE APP LICABLE IN RESPECT OF CAPITAL GAINS ACCRUING OR ARISING FROM E VERY REINVESTMENT THEREAFTER IN, AND SALE OF, SHARES IN, OR DEBENTURES OF, AN INDIAN COMPANY: PROVIDED FURTHER THAT WHERE LONG-TERM CAPITAL GAIN ARISES FROM THE TRANSFER OF A LONG-TERM CAPITAL ASSET, OTHER THAN C APITAL GAIN ARISING TO A NON-RESIDENT FROM THE TRANSFER OF SHAR ES IN, OR DEBENTURES OF, AN INDIAN COMPANY REFERRED TO IN THE FIRST PROVISO, THE PROVISIONS OF CLAUSE (II) SHALL HAVE EFFECT AS IF FOR THE WORDS 'COST OF ACQUISITION' AND 'COST OF ANY IMPROVEMENT' , THE WORDS 'INDEXED COST OF ACQUISITION' AND 'INDEXED COST OF ANY IMPROVEMENT' HAD RESPECTIVELY BEEN SUBSTITUTED : PROVIDED ALSO THAT NOTHING CONTAINED IN THE SECOND PROVISO SHALL APPLY TO THE LONG-TERM CAPITAL GAIN ARISING FROM TH E TRANSFER OF A LONG-TERM CAPITAL ASSET BEING BOND OR DEBENTURE OTH ER THAN CAPITAL INDEXED BONDS ISSUED BY THE GOVERNMENT : PROVIDED ALSO THAT WHERE SHARES, DEBENTURES OR WARR ANTS REFERRED TO IN THE PROVISO TO CLAUSE (III) OF SECTION 47 ARE TRANSFERRED UNDER A GIFT OR AN IRREVOCABLE TRUST, THE MARKET VALUE ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF CO NSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER FOR TH E PURPOSES OF THIS SECTION: PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED IN COMPUTING, THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS ' IN RESPECT OF ANY SUM PAID ON ACCOUNT OF SECURITIES TRANSACTIO N TAX UNDER CHAPTER VII OF THE FINANCE (NO. 2) ACT, 2004.'.'. ITA NO. 1303/BANG/2013 PAGE 7 OF 14 EXPLANATION : FOR THE PURPOSES OF THIS SECTION, (I) 'FOREIGN CURRENCY' AND 'INDIAN CURRENCY' SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN SECTION 2 OF THE FOREIGN EXCHANGE REGULATION ACT, 1973 (46 OF 1973); (II) THE CONVERSION OF INDIAN CURRENCY INTO FOREIGN CURRENCY AND THE RECONVERSION OF FOREIGN CURRENCY INTO INDIAN CU RRENCY SHALL BE AT THE RATE OF EXCHANGE PRESCRIBED IN THIS BEHALF; (III) 'INDEXED COST OF ACQUISITION' MEANS AN AMOUNT WHICH BEARS TO THE COST OF ACQUISITION THE SAME PROPORTION AS C OST INFLATION INDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRE D BEARS TO THE COST INFLATION INDEX FOR THE FIRST YEAR IN WHICH TH E ASSET WAS HELD BY THE ASSESSEE OR FOR THE YEAR BEGINNING ON THE 1S T DAY OF APRIL, 1981, WHICHEVER IS LATER; (IV) 'INDEXED COST OF ANY IMPROVEMENT' MEANS AN AMO UNT WHICH BEARS TO THE COST OF IMPROVEMENT THE SAME PROPORTIO N AS COST INFLATION INDEX FOR THE YEAR IN WHICH THE ASSET IS TRANSFERRED BEARS TO THE COST INFLATION INDEX FOR THE YEAR IN WHICH T HE IMPROVEMENT TO THE ASSET TOOK PLACE; (V) 'COST INFLATION INDEX', IN RELATION TO A PREVIO US YEAR, MEANS SUCH INDEX AS THE CENTRAL GOVERNMENT MAY, HAVING RE GARD TO SEVENTY-FIVE PER CENT OF AVERAGE RISE IN THE CONSUM ER PRICE INDEX FOR URBAN NON-MANUAL EMPLOYEES FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR TO SUCH PREVIOUS YEAR, BY NOTIFICATIO N IN THE OFFICIAL GAZETTE, SPECIFY, IN THIS BEHALF. 8. THE CONTROVERSY IN THE PRESENT CASE RELATES TO I NTERPRETATION OF EXPLANATION (III) TO SEC.48 OF THE ACT, WHICH DEFIN ES THE EXPRESSION INDEXED COST OF ACQUISITION. WE FIND THAT THE ISSUE OF AL LOWING INDEXATION ON IDENTICAL FACTS HAD COME FOR CONSIDERATION BEFORE T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MANJULA J.SHAH (2012) 204 TAXMAN 691 (BOMBAY) . THE QUESTION BEFORE THE HONBLE BOMBAY HIGH COUR T ITA NO. 1303/BANG/2013 PAGE 8 OF 14 WAS, 'WHILE COMPUTING THE CAPITAL GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIRED BY THE ASSESSEE UNDER A GIFT, WHETHE R THE INDEXED COST OF ACQUISITION HAS TO BE COMPUTED WITH REFERENCE TO TH E YEAR IN WHICH THE PREVIOUS OWNER FIRST HELD THE ASSET OR THE YEAR IN WHICH THE ASSESSEE BECAME THE OWNER OF THE ASSET ?'. THE FACTS OF THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT WAS THAT IN AY 04-05, THE ASSESSEE HAD DECLARED TOTAL INCOME OF RS. 20,92,400. THE SAID RE TURN OF INCOME INCLUDED LONG-TERM CAPITAL GAINS ARISING FROM THE SALE OF A RESIDENTIAL FLAT BEARING NO. 1202-A (CAPITAL ASSET FOR SHORT) AT CHAITANYA TOW ERS, PRABHADEVI, MUMBAI. THE SAID FLAT WAS ORIGINALLY PURCHASED BY T HE DAUGHTER OF THE ASSESSEE (PREVIOUS OWNER FOR EASY REFERENCE) ON 2 9TH JAN., 1993 AT A COST OF RS. 50,48,350. BY A GIFT DEED DT. 1ST FEB., 2003 , THE PREVIOUS OWNER GIFTED THE SAID CAPITAL ASSET TO THE ASSESSEE. ON 3 0TH JUNE, 2003, THE ASSESSEE SOLD THE SAID CAPITAL ASSET FOR A TOTAL CO NSIDERATION OF RS. 1,10,00,000 AND OFFERED THE LONG-TERM CAPITAL GAINS TO TAX. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE CONTENDED THAT THOUGH THE CAPITAL ASSET IN QUESTION WAS ACQUIRED BY THE ASSESSEE UNDE R A GIFT DEED DT. 1ST FEB., 2003 AND TRANSFERRED ON 30TH JUNE, 2003, UNDE R S. 48 R/W S. 49 AND S. 2(42A) OF THE IT ACT, 1961 (THE ACT FOR SHORT), T HE GAINS ARISING THEREFROM WERE LIABLE TO BE COMPUTED AS LONG-TERM CAPITAL GAI N, BY DEDUCTING FROM THE TOTAL CONSIDERATION RECEIVED, INTER ALIA, THE AMOUN T OF INDEXED COST OF ACQUISITION. THE ASSESSEE CONTENDED THAT THE INDEXE D COST OF ACQUISITION HAS TO BE DETERMINED WITH REFERENCE TO THE COST INF LATION INDEX FOR THE YEAR ITA NO. 1303/BANG/2013 PAGE 9 OF 14 IN WHICH THE COST OF ACQUISITION WAS INCURRED. IN T HAT CASE, THE COST OF ACQUISITION WAS INCURRED ON 29TH JAN., 1993 AND, HE NCE, COST INFLATION INDEX FOR 1993-94 WOULD BE APPLICABLE. THE AO WAS OF THE OPINION THAT UNDER EXPLN. (III) TO S. 48 OF THE ACT, THE INDEXED COST OF ACQUISITION HAS TO BE DETERMINED WITH REFERENCE TO THE COST INFLATION IND EX FOR THE FIRST YEAR IN WHICH THE ASSET WAS FIRST HELD BY THE ASSESSEE. ACC ORDING TO THE AO, THE ASSET WAS HELD BY THE ASSESSEE FROM 1ST FEB., 2003 AND, THEREFORE, THE COST INFLATION INDEX FOR 2002-03 WOULD BE APPLICABL E IN DETERMINING THE INDEXED COST OF ACQUISITION. 9. THE HONBLE BOMBAY HIGH COURT HELD THE INDEXED C OST OF ACQUISITION HAS TO BE DETERMINED WITH REFERENCE TO THE COST INF LATION INDEX FOR THE FIRST YEAR IN WHICH THE CAPITAL ASSET WAS HELD BY THE AS SESSEE. SINCE THE EXPRESSION HELD BY THE ASSESSEE IS NOT DEFINED UN DER S. 48, THAT EXPRESSION HAS TO BE UNDERSTOOD AS DEFINED UNDER S. 2. EXPLANATION 1(I)(B) TO S. 2(42A) PROVIDES THAT IN DETERMINING THE PERIO D FOR WHICH AN ASSET IS HELD BY AN ASSESSEE UNDER A GIFT, THE PERIOD FOR WH ICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER SHALL BE INCLUDED. AS TH E PREVIOUS OWNER HELD THE CAPITAL ASSET FROM 29TH JAN., 1993, AS PER EXPL N. 1(I)(B) TO S. 2(42A), THE ASSESSEE IS DEEMED TO HAVE HELD THE CAPITAL ASSET F ROM 29TH JAN., 1993. BY REASON OF THE DEEMED HOLDING OF THE ASSET FROM 2 9TH JAN., 1993, THE ASSESSEE IS DEEMED TO HAVE HELD THE ASSET AS A LONG -TERM CAPITAL ASSET. IF THE LONG-TERM CAPITAL GAINS LIABILITY HAS TO BE COM PUTED UNDER S. 48 BY TREATING THAT THE ASSESSEE HELD THE CAPITAL ASSET F ROM 29TH JAN., 1993, THEN, ITA NO. 1303/BANG/2013 PAGE 10 OF 14 NATURALLY IN DETERMINING THE INDEXED COST OF ACQUIS ITION UNDER S. 48, THE ASSESSEE MUST BE TREATED TO HAVE HELD THE ASSET FRO M 29TH JAN., 1993 AND ACCORDINGLY THE COST INFLATION INDEX FOR 1992-93 WO ULD BE APPLICABLE IN DETERMINING THE INDEXED COST OF ACQUISITION. IF THE ARGUMENT OF THE REVENUE THAT THE DEEMING FICTION CONTAINED IN EXPLN. 1(I)(B ) TO S. 2(42A) CANNOT BE APPLIED IN COMPUTING THE CAPITAL GAINS UNDER S. 48 IS ACCEPTED, THEN, THE ASSESSEE WOULD NOT BE LIABLE FOR LONG-TERM CAPITAL GAINS TAX, BECAUSE, IT IS ONLY BY APPLYING THE DEEMED FICTION CONTAINED IN EX PLN. 1(I)(B) TO S. 2(42A) AND S. 49(1)(II), THE ASSESSEE IS DEEMED TO HAVE HE LD THE ASSET FROM 29TH JAN., 1993 AND DEEMED TO HAVE INCURRED THE COST OF ACQUISITION AND ACCORDINGLY MADE LIABLE FOR THE LONG-TERM CAPITAL G AINS TAX. THEREFORE, WHEN THE LEGISLATURE BY INTRODUCING THE DEEMING FICTION SEEKS TO TAX THE GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIRED UND ER A GIFT OR WILL AND THE CAPITAL GAINS UNDER S. 48 HAS TO BE COMPUTED BY APP LYING THE DEEMED FICTION, IT IS NOT POSSIBLE TO ACCEPT THE CONTENTIO N OF REVENUE THAT THE FICTION CONTAINED IN EXPLN. 1(I)(B) TO S. 2(42A) CANNOT BE APPLIED IN DETERMINING THE INDEXED COST OF ACQUISITION UNDER S. 48. 10. THE HONBLE COURT FURTHER OBSERVED THAT IT IS T RUE THAT THE WORDS OF A STATUTE ARE TO BE UNDERSTOOD IN THEIR NATURAL AND O RDINARY SENSE UNLESS THE OBJECT OF THE STATUTE SUGGESTS TO THE CONTRARY. THU S, IN CONSTRUING THE WORDS ASSET WAS HELD BY THE ASSESSEE IN CL. (III) OF EX PLN. TO S. 48, ONE HAS TO SEE THE OBJECT WITH WHICH THE SAID WORDS ARE USED IN TH E STATUTE. IF ONE READS EXPLN. 1(I)(B) TO S. 2(42A) TOGETHER WITH SS. 48 AN D 49, IT BECOMES ITA NO. 1303/BANG/2013 PAGE 11 OF 14 ABSOLUTELY CLEAR THAT THE OBJECT OF THE STATUTE IS NOT MERELY TO TAX THE CAPITAL GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIR ED BY AN ASSESSEE BY INCURRING THE COST OF ACQUISITION, BUT ALSO TO TAX THE GAINS ARISING ON TRANSFER OF A CAPITAL ASSET INTER ALIA ACQUIRED BY AN ASSESS EE UNDER A GIFT OR WILL AS PROVIDED UNDER S. 49 WHERE THE ASSESSEE IS DEEMED T O HAVE INCURRED THE COST OF ACQUISITION. THEREFORE, IF THE OBJECT OF TH E LEGISLATURE IS TO TAX THE GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIR ED UNDER A GIFT OR WILL BY INCLUDING THE PERIOD FOR WHICH THE SAID ASSET WAS H ELD BY THE PREVIOUS OWNER IN DETERMINING THE PERIOD FOR WHICH THE SAID ASSET WAS HELD BY THE ASSESSEE, THEN THAT OBJECT CANNOT BE DEFEATED BY EX CLUDING 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 AS SESSEE. IN OTHER WORDS, IN THE ABSENCE OF ANY INDICATION IN CL. (III) OF THE E XPLANATION TO S. 48 THAT THE WORDS ASSET WAS HELD BY THE ASSESSEE HAS TO BE CO NSTRUED DIFFERENTLY, THE SAID WORDS SHOULD BE CONSTRUED IN ACCORDANCE WITH T HE OBJECT OF THE STATUTE, THAT IS, IN THE MANNER SET OUT IN EXPLN. 1 (I)(B) TO S. 2(42A). IF THE MEANING GIVEN IN S. 2(42A) IS NOT ADOPTED IN CONSTR UING THE WORDS USED IN S. 48, THEN THE GAINS ARISING ON TRANSFER OF A CAPI TAL ASSET ACQUIRED UNDER A GIFT OR WILL, WILL BE OUTSIDE THE PURVIEW OF THE CA PITAL GAINS TAX WHICH IS NOT INTENDED BY THE LEGISLATURE. THEREFORE, THE ARGUMEN T OF THE REVENUE WHICH RUNS COUNTER TO THE LEGISLATIVE INTENT CANNOT BE AC CEPTED. 11. THE HONBLE COURT FURTHER HELD THAT APART FROM THE ABOVE, S. 55(1)(B)(2)(II) PROVIDES THAT WHERE THE CAPITAL ASS ET BECAME THE PROPERTY OF ITA NO. 1303/BANG/2013 PAGE 12 OF 14 THE ASSESSEE BY ANY OF THE MODES SPECIFIED UNDER S. 49(1), NOT ONLY THE COST OF IMPROVEMENT INCURRED BY THE ASSESSEE BUT AL SO THE COST OF IMPROVEMENT INCURRED BY THE PREVIOUS OWNER SHALL BE DEDUCTED FROM THE TOTAL CONSIDERATION RECEIVED BY THE ASSESSEE WHILE COMPUTING THE CAPITAL GAINS UNDER S. 48. THE QUESTION OF DEDUCTING THE CO ST OF IMPROVEMENT INCURRED BY THE PREVIOUS OWNER IN THE CASE OF AN AS SESSEE COVERED UNDER S. 49(1) WOULD ARISE ONLY IF THE PERIOD FOR WHICH T HE ASSET WAS HELD BY THE PREVIOUS OWNER IS INCLUDED IN DETERMINING THE PERIO D FOR WHICH THE ASSET WAS HELD BY THE ASSESSEE. THEREFORE, IT IS REASONAB LE TO HOLD THAT IN THE CASE OF AN ASSESSEE COVERED UNDER S. 49(1), THE CAP ITAL GAINS LIABILITY HAS TO BE COMPUTED BY CONSIDERING THAT THE ASSESSEE HEL D THE SAID ASSET FROM THE DATE IT WAS HELD BY THE PREVIOUS OWNER AND THE SAME ANALOGY HAS ALSO TO BE APPLIED IN DETERMINING THE INDEXED COST OF AC QUISITION. 12. THE HONBLE COURT EXPLAINED THAT THE OBJECT OF GIVING RELIEF TO AN ASSESSEE BY ALLOWING INDEXATION IS WITH A VIEW TO O FFSET THE EFFECT OF INFLATION. AS PER THE CBDT CIRCULAR NO. 636 DT. 31S T AUG., 1992 A FAIR METHOD OF ALLOWING RELIEF BY WAY OF INDEXATION IS T O LINK IT TO THE PERIOD OF HOLDING THE ASSET. THE SAID CIRCULAR FURTHER PROVID ES THAT THE COST OF ACQUISITION AND THE COST OF IMPROVEMENT HAVE TO BE INFLATED TO ARRIVE AT THE INDEXED COST OF ACQUISITION AND THE INDEXED COST OF IMPROVEMENT AND THEN DEDUCT THE SAME FROM THE SALE CONSIDERATION TO ARRI VE AT THE LONG-TERM CAPITAL GAINS. IF INDEXATION IS LINKED TO THE PERIO D OF HOLDING THE ASSET AND IN THE CASE OF AN ASSESSEE COVERED UNDER S. 49(1), THE PERIOD OF HOLDING THE ITA NO. 1303/BANG/2013 PAGE 13 OF 14 ASSET HAS TO BE DETERMINED BY INCLUDING THE PERIOD FOR WHICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER, THEN OBVIOUSLY IN A RRIVING AT THE INDEXATION, THE FIRST YEAR IN WHICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER WOULD BE THE FIRST YEAR FOR WHICH THE SAID AS SET WAS HELD BY THE ASSESSEE. 13. THE HONBLE COURT FINALLY CONCLUDED THAT WHILE COMPUTING THE CAPITAL GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIR ED BY THE ASSESSEE UNDER A GIFT, THE INDEXED COST OF ACQUISITION HAS TO BE C OMPUTED WITH REFERENCE TO THE YEAR IN WHICH THE PREVIOUS OWNER FIRST HELD THE ASSET AND NOT THE YEAR IN WHICH THE ASSESSEE BECAME THE OWNER OF THE ASSET. 14. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONOUNC EMENT OF THE HONBLE BOMBAY HIGH COURT, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THIS APPEAL BY THE REVENUE. CONSEQUENTLY THE SAME IS DISMISSED . 15. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF OCTOBER , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 10 TH OCTOBER , 2014 . /D S/ ITA NO. 1303/BANG/2013 PAGE 14 OF 14 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.