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Computation of capital gains on inherited property

We inherited an immovable property from our mother, who died in 1996 and the property is sold in January 2007.

Our mother herself had inherited the property, so that we are entitled to have the property valued as on April 1, 1981 which is Rs. 1 lakh. For purposes of indexation of this amount, I feel that the cost of our share of capital gains should be indexed on 5.19 times with reference to the index number of 519 for 2006-07.

But we understand, that there is some difference among the auditors, whether the benefit of indexation should be available even from April 1, 1981 and whether it should not be limited from 1996, when we became owners, so that the indexation would only be 519:305 on the basis that 305 is index number for 1996-97. Since the latter view would considerably increase our liability for capital gains, your advice is solicited.

The mode of computation of capital gains has been prescribed under Sec. 48 of the Income-tax Act. It allows, inter alia, the cost of acquisition of the asset and the cost of any improvement.

The second proviso to the section provides that, cost of acquisition should be understood as indexed cost of acquisition for long-term capital gains, except for non-residents, who are given a different concession by way of neutralisation of fall in foreign exchange value under the first proviso.

Sec. 2(42A) defining short term capital asset read with Sec. 2(29A) defining long-term capital asset would require the period of holding to include "the period for which the asset was held by the previous owner referred to in the said section".

It follows that, in view of the reference to the indexation benefit available for long term capital assets vide second proviso, long term capital asset has to be understood vide these definitions.

Further, Sec. 47 would not regard inheritance as a transfer, while Sec. 49 (1)(iii)(a) would treat the cost to the predecessor as successor's cost in a case of sale by an assessee of an asset received by succession, inheritance or devolution.

The statute itself is, therefore, clear that, the reader is entitled to indexation with reference to the date of acquisition by the predecessor. Where there is successive devolution, the cost will be that of the earliest predecessor, who had paid for the asset. Option as on April 1, 1981 is valid, if the acquisition for consideration was prior to this date. The issue has also been clarified by a Board Circular, as under:

"Where Sec. 49 applies, the provisions of Sec. 55(2) also become applicable and in the context, the expression "the previous owner" need not be taken to mean the immediately preceding owner but may be considered as including "the previous owners".

In such a case, where an assessee acquires an asset by inheritance before January 1, 1954, the assessee has the option of substituting the fair market value of the asset as on January 1, 1954, in place of the original cost, if it is to his advantage."

The position of law has not changed after the substitution of specified date from 1954 to 1974 and 1981, since relevant sections 49 and 55 continue to be the same.

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