|
|||||
|
|
|||||
|
|||||
|
Benefit of Indexation when Capital Asset is transferred as per any of the modes specified u/s 49(1) [Submitted by Mr. Narayanan Balakrishnan, June 29, 2007 I am writing this article with the intention of putting this issue, which has been looming over for a long period of time, open to discussion. Section 49(1) of Income Tax Act, 1961 provides for modes of transfer of capital assets in which cases, cost of acquisition would be the cost incurred by the previous owner as increased by cost of improvement. It is clear that the period of holding, in such cases will be taken from the date on which the previous owner held the asset. However there is a lack of clarity as to period for which the benefit of indexation would be available to the assessee. Take a case where a house property was inherited through a will by the assessee from his father in the A.Y 2005-06.The asset was originally purchased by the assessee's father in the A.Y 1985-86 which the assessee sells in the A.Y 2006-07. A question arises here, as to whether the benefit of indexation should be available to the assessee from A.Y 1985-86 when the asset was first held by the previous owner or from A.Y 2005-06 when the capital asset was first held by the assessee. Explanation III to Section 48 states that the benefit of indexation will be available from the period in which the current owner (assessee) held the capital asset for the first time or 1981 whichever later. Going by the literal words of the Act, indexation would be available only from the assessment year in which the capital asset gets transferred by any means mentioned in Section 49(1). However one needs to look at the intention of legislature behind introduction of benefit of Indexation. Circular 636 dated 31.08.1992 provides us an insight into the intention of introducing the provision of indexation. The circular mentions that the indexation is introduced so as to link the adjustment of countering the inflation with the period of holding. Going by this intention of the legislature, indexation should be linked to the period of holding. If the period of holding is considered from the date from which the asset is held by the previous owner as expressly mentioned in the Act, then the indexation should also be provided from the date on which the asset was held by the previous owner. I would also bring in to picture a couple of case laws on this background. There have been two contradictory decisions in the light of this issue. In Pushpa Sofat vs. ITO (Chandigarh ITAT : 81 ITD 1), the Chandigarh tribunal had held in favour of the assessee ruling that the benefit of indexation should be considered from the Assessment Year in which the capital asset was held by the previous owner for the first time. However, there has been a contradictory judgement given by the bench of Mumbai Tribunal in the case of DCIT Vs. Kishore Kanungo (290 ITR 298) where it was held that the benefit of indexation will be available from the Assessment Year in which the asset was held by the current owner. The Mumbai Tribunal had resorted to the literal interpretation of the Explanation III to Section 48. On studying the case of Pushpat Soafat, it is observed that the ruling was done in the favour of the assessee owing to the fact that the capital asset was originally acquired by the previous owner, prior to 1981. As there is no express provision relating to period from which indexation will be available on cost of improvement, in cases mentioned in Section 49(1), it is commonly held view that indexation should be applied from the year in which the cost of improvement was incurred by the previous owner, if any. Thus in the above mentioned example, if the assessee's father had incurred any cost of improvement in A.Y 1992-93, then the indexation on such cost would be available to the assessee from A.Y 1992-93, even though the asset got transferred to the assessee by virtue of Section 49(1) in A.Y 2005-06. It seems that the Chandigarh Tribunal considered the fact that the asset was originally acquired prior to 1981 and treated it in par with Cost of Improvement for the purpose of indexation. The Tribunal may have ruled against the assessee if the asset was purchased after 1981 as held in the case of Kishore Kanungo by the Mumbai Tribunal. It is accepted that in light of the Explanation III to Section 48, it would be hard to argue in favour of the indexation being applied for the period held by the previous owner as per Section 49. The provisions of indexation has been unnecessarily complicated. It is very irrational in denying the benefit of indexation for the period in which the asset was held by the previous owner since it contradicts the very purpose of introducing the provision. One may note that prior to introduction of indexation, there was a standard deduction given on long term capital gains to offset the effect of the inflation. If indexation was introduced in place of the standard deduction then the benefit of indexation should definitely be extended to the period of the previous owner especially when the benefit is given for the purpose of period of holding. The reason for the double standards in the treatment of indexation for the purpose of cost of acquisition and cost of improvement seems baseless in the light of intention behind introducing indexation. It is hoped that the legislature looks in to this dichotomy and resolves the issue by extending the benefit of indexation for the period for which the capital asset was held by the previous owner for the purpose of transfers covered under Section 49(1).
|
|||||
|
Read our
disclaimer and
privacy policy |
|||||
