Sandeep Shanbhag
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Can inherited property attract capital gains tax? If so, how does one calculate the amount involved?
As such, any transfer of a capital asset under a gift or will does not attract provisions of capital gains tax. In other words, you cannot be asked to pay capital gains tax just on account of the fact that you have inherited a property. However, if the inheritor were to eventually sell the property, capital gains tax would come into the picture. In such a situation, under Section 49(1), the cost and the date of acquisition to calculate this capital gains tax is to be taken as that of the “the previous owner”. For example, if you have inherited the property from say your father, you will have to adopt the cost that your father paid originally when he first purchased the property. But the previous section of the Income Tax Act — Section 48 — queers the pitch here. Explanation (iii) to Section 48 defines indexed cost of acquisition as “an amount which bears to the cost of acquisition the same proportion as the cost inflation index (CII) for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.” There is yet another component of cost — the cost of improvement of the asset. For indexing improvement cost, the CII for the year in which the improvement to the asset took place notwithstanding when the asset was inherited is to be used. In simple terms, for calculating long-term capital gains on sale of inherited property, the cost and date of acquisition would be that incurred by the original owner and not the inheritor, the law seems to suggest. However, indexation of the improvement cost, if any, has to be done from the year of improvement. Or is this the real intention of the law? The issue came up before the Delhi High Court in the case of Arun Shungloo Trust v Commissioner of Income tax. The brief facts of the case were that one Arun Shungloo had acquired property sometime before April 1, 1981. On January 5, 1996, he transferred the property to the trust managed by the appellant — the Arun Shungloo Trust. Sometime during 2000-01, the appellant Trust sold the acquired property to a third party. The contention of the appellant assessee was that it was entitled to the benefit of indexed cost of acquisition from April 1, 1981, i.e. for the period during which Arun Shungloo also held the property before it was transferred to the appellant Trust on January 5, 1996. The contention of the Revenue was that the appellant is entitled to indexed cost of acquisition for the period on or after January 5, 1996, i.e., the date on which the appellant Trust had acquired the property up to the date of sale. The court, however, did not agree with the Revenue. If the department’s contention is accepted, it will lead to a disconnect and contradiction between “indexed cost of acquisition” and “indexed cost of improvement” in the case of capital assets where Section 49 applies, the court held. This cannot be the intention of the law. There is no reason or ground why the legislature would want to deny or deprive an assessee the benefit of the previous holding for computing “indexed cost of acquisition” while allowing the said benefit for computing “indexed cost of improvement”. But how can the holding of the predecessor be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the purpose of computing the indexed cost of acquisition? Even for deciding whether the transaction is a short-term capital gain or a long-term capital gain, the holding by the predecessor is to be taken into consideration. The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the “real” or actual ‘gain’ and not on the increase in the capital value of the property due to inflation. This is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was by the previous owner. Consequently, the Court ruled that there is no justification or reason to not allow the benefit of indexation to the cost of acquisition in cases covered by Section 49. This is simply not the legislative intent. As per the court, the interpretation relied upon by the assessee was reasonable and in consonance with the object and purpose behind Sections 48 and 49 of the Act. Therefore, the argument of the Revenue which ran counter to the legislative intent was not accepted and indexation from the date the previous owner held the asset was allowed. The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com |
Published Date: May 04, 2012
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