Case Note & Summary
The case involves an appeal by the Commissioner of Income Tax against an order of the Income Tax Appellate Tribunal (ITAT) regarding the computation of long-term capital gains on the sale of an immovable property by the respondent-assessee, Ms. Janhavi S. Desai. The property was originally acquired by the respondent's father in 1942. The father died in 1988, bequeathing the property equally to his wife and the respondent. The mother died on 21.02.2000, bequeathing her 50% share to the respondent. The respondent sold the entire property in the assessment year 2005-2006 for Rs. 9.50 crores and declared a long-term capital gain of Rs. 38,44,247/-, treating the holding period from 01.04.1981 for indexation purposes. The Assessing Officer (AO) rejected this, holding that the holding period for the 50% inherited from the mother should start from 21.02.2000, and thus the gain was short-term. The ITAT directed the AO to compute long-term capital gain by treating the holding period from 01.04.1981 for the entire property. The Revenue appealed, raising the question whether Explanation 1 to Section 2(42A) applies only to short-term capital gains. The respondent filed cross-objections regarding the holding period of the inherited share. The High Court allowed the Revenue's appeal, holding that Explanation 1 to Section 2(42A) determines the holding period for both short-term and long-term capital gains, and the assessee is entitled to indexation only if the asset is held for more than 36 months. The court also allowed the cross-objections, holding that for the 50% inherited from the mother, the holding period should start from 21.08.1988 (the date of the mother's acquisition) and not from 01.04.1981. The matter was remanded to the AO to recompute the capital gains accordingly.
Headnote
A) Income Tax - Capital Gains - Holding Period - Section 2(42A) Explanation 1 of the Income Tax Act, 1961 - The court held that Explanation 1 to Section 2(42A) determines the holding period of an asset for the purpose of both short-term and long-term capital gains, and the assessee is entitled to indexation benefit only if the asset is held for more than 36 months. The Tribunal erred in directing the Assessing Officer to calculate long-term capital gain without appreciating that Explanation 1 applies to long-term capital gains as well. (Paras 2, 5-6) B) Income Tax - Capital Gains - Inherited Property - Holding Period - Section 2(42A) Explanation 1(i)(b) of the Income Tax Act, 1961 - The court held that for property inherited under a will, the period of holding of the assessee includes the period for which the asset was held by the previous owner. Therefore, the 50% share inherited by the respondent from his mother on 21.02.2000 should be deemed to have been held from 21.08.1988 (the date of acquisition by the mother) and not from 01.04.1981. The Tribunal's direction to compute capital gains by taking the holding period from 01.04.1981 was erroneous. (Paras 3-6)
Issue of Consideration
Whether Explanation 1 to Section 2(42A) of the Income Tax Act, 1961 applies only for determining short-term capital gains or also for long-term capital gains for indexation purposes; and whether the period of holding of inherited property starts from the date of inheritance or from the date of acquisition by the previous owner.
Final Decision
The appeal by the Revenue is allowed. The cross-objections are allowed. The order of the ITAT is set aside. The matter is remanded to the Assessing Officer to recompute the capital gains in accordance with the law, considering that Explanation 1 to Section 2(42A) applies to both short-term and long-term capital gains, and the holding period for the 50% inherited from the mother shall be from 21.08.1988.
Law Points
- Section 2(42A) Explanation 1 determines holding period for both short-term and long-term capital gains
- Indexation benefit available only if asset held for more than 36 months
- Inherited property's holding period includes period of previous owner
