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Inherit Today, Sell Tomorrow, Still Keep Away Tax Sorrow!

ITAT Special Bench Grants Unique Tax Shelter

For Capital Gains On Gifted & Inherited Assets!

If your grandfather had acquired a plot of land for Rs.10 lakhs in late 1981, which you receive by way of inheritance on his death now in 2009 and you are planning to sell the same in early 2010 for a consideration of Rs.63 lakhs, what would be the income-tax you would be required to pay on your capital gains? Difficult to believe, but ‘zero tax’ is the correct answer.

Cost of Acquisition in Special Cases

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under Gift or Will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer.

In the case referred to hereinabove, if just the above two concessional provisions were taken into consideration, your taxable capital gains (deemed as long term) would still have worked out to Rs.53 lakhs, attracting a tax liability of Rs.10.92 lakhs (at 20.6%).

ITAT waves the Magic Wand of Indexation!

However, as per the recent ruling of the three member Mumbai Special Bench of the Income Tax Appellate Tribunal (ITAT), the benefit of computing ‘Indexed Cost of Acquisition’ (ICA) can also be availed in cases of transfer covered u/s. 49 such as assets received via gift or inheritance.

Considering the ‘Cost Inflation Index’ (CII) of 632 for 2009-10 with reference to the CII of 100 for 1981-82, the ICA of the plot of land inherited and proposed to be sold by you in the above mentioned case would work out to Rs.63,20,000. Since your sale consideration is expected to be Rs.63,00,000, you will end up with the good fortune of enjoying zero tax.

In its decision rendered on 16th October, 2009 in the case of ‘Manjula J. Shah v/s. DCIT,’ the Tribunal rejected the plea of the Revenue that the indexation factor in such cases was required to be determined only with reference to the date of  acquisition by the taxpayer selling such asset.

Logically relying on the ratio of a number of Supreme Court decisions, the ITAT held that in accordance with the principles of purposive interpretation of statutes, ICA has to be computed by taking into account the period for which the asset was held by the previous owner. The Special Bench also held that the contention of the revenue was clearly not in consonance with the underlying legislative intention. Moreover, the Departmental interpretation will only lead to absurdity and unjust results and defeat the very purpose of the concept of ‘indexed cost of acquisition.’

The Special Bench ruling of the ITAT, being binding on all Tribunals in the country, grants a unique tax shelter in all cases of capital gains arising on sale of gifted or inherited assets.

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