ITAT: Property Received on Family Trust Dissolution Qualifies as ‘Devolution’, Long-Term Capital Gains Tax Applies

Under income tax law, when a capital asset is acquired by way of succession, inheritance or devolution, the cost of acquisition is deemed to be the cost incurred by the previous owner. Additionally, the previous owner’s holding period is included when determining whether the asset is long-term or short-term.

In a recent ruling, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) held that property received upon dissolution of a private family trust falls within the ambit of succession, inheritance or devolution. Consequently, the beneficiary was allowed to include the trust’s holding period, resulting in long-term capital gains (LTCG) tax treatment on the sale of the asset.

Facts of the Case

The assessee received a share in an immovable property following the dissolution of a family trust. The property had earlier been vested in the trust by the assessee’s father. Upon selling his share, the assessee treated the gains as LTCG after including the holding period of the previous owners.

Revenue’s Contention

The Revenue argued that the assessee had held the property for only a few days – from the date of transfer by the trust to the date of sale. Accordingly, it treated the asset as short-term and sought to tax the gains as short-term capital gains.

Assessee’s Argument

The assessee contended that the property devolved upon him through the dissolution of the family trust, which squarely falls under succession, inheritance or devolution. Under the law, the previous owner’s cost of acquisition and holding period must be adopted in such cases.

Tribunal’s Decision

The ITAT upheld the findings of the CIT(A). It ruled that where a capital asset is acquired through succession, inheritance or devolution, the holding period of the previous owner must necessarily be included. Since the property originally belonged to the assessee’s father and thereafter vested in the family trust, it constituted a long-term capital asset. The gains were therefore taxable as LTCG.

Key Takeaway

The ruling reinforces that the benefit of the previous owner’s holding period cannot be disregarded merely because the assessee held the asset directly for a short time before transfer. It reiterates that for determining the nature of a capital asset, the holding period of the previous owner – as well as that of any intermediary fiduciary structure like a family trust – must be taken into account.