Whether when assessee inherits property after demise of his mother, he is entitled to claim cost of improvement incurred by his mother for the purpose of computation of long-term capital gain - YES, rules ITAT

THE question before the Bench is - Whether when the assessee inherits property after the demise of his mother, he is entitled to claim cost of improvement incurred by his mother for the purpose of computation of long-term capital gain. And the verdict goes against the Revenue.

Facts of the case

The individual assessee had succeeded to a property on the demise of his mother in 1986. The property had been acquired by his deceased mother prior to April 1981. However due to a family dispute over the property, a family settlement was reached in September 2000, whereby the assessee sold the property in 2002-03. In his return, the assessee had offered long term capital gains. The return was processed but subsequently taken up for reassessment.

The AO observed that as a result of the family dispute, the assessee did not ‘hold’ the property until the date of the family settlement. Therefore, while computing long term capital gains, the AO held that the that assessee was not eligible for indexation of the cost of acquisition with effect from April 1981 as the assessee had become the owner consequent to a family settlement in September 2000.

In appeal the CIT(A) accepted the assessee’s claim and deleted the addition on account of long term capital gains. The CIT(A) held that in the case of acquisition of a property by inheritance, the cost of acquisition was deemed to be the cost at which the property was acquired by the previous owner. There was no distinction made in the Act on account of the year in which the assessee inherited the property. The provisions of section 49 were clear in this respect and relying on various decisions, the CIT(A) held that the cost of acquisition of the property sold by the assessee had to be worked out with reference to the cost inflation index of April 1981 and not the date of death of the mother, or the date of the family settlement. The addition was thus deleted.

In appeal before the Tribunal, the Revenue side submitted that the assessee’s share in the inherited property was determined by virtue of the family settlement whereby the indexed cost of acquisition had to be as per financial year 2000-01, when the assessee first held the property and not 1981-82.

The assessee submitted that once the assessee was held to be successor to a property by way of any mode prescribed under section 49(1), then the capital gains liability had to be computed by holding that the asset was held by the assessee on the date it was held by the previous owner.

Having heard the parties, the Tribunal held that,

++ the Bombay High court had held that where the capital asset had become the property of the assessee by any of the modes specified under section 49(1), not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner had to be deducted from the total consideration received by the assessee while computing the capital gains under Section 48. In the case of an assessee covered under section 49(1), the question of deduction of the cost of improvement incurred by the previous owner would arise only if the period for which the asset was held by the previous owner was included in determining the period for which the asset was held by the assessee. Therefore, it was reasonable to hold that for such an assessee, the capital gains liability had to be computed by considering that the assessee had held the asset from the date it was held by the previous owner and the same analogy had also to be applied in determining the indexed cost of acquisition.

++ it was not disputed that the assessee had succeeded to the property whereby the word ‘hold’ had to be interpreted as per this decision of the Bombay High Court. Following this decision, the CIT(A) order was upheld.