The Hindu : Business : Role of cost inflation index in ascertaining capital gains

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Monday, Oct 08, 2007
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Role of cost inflation index in ascertaining capital gains

I am giving an extract from a book, which treats cost inflation index as a method of arriving at the cost for 1981 in respect of sale during 1998-99 by adopting the index backwards from the present value. The conclusi

on of the author reads as under: “Hence in order to work out a 1981 value it is quite correct to de-price the present value by 3.35 in the absence of any proper guidelines from the government for methods of valuation for April 1, 1981 computing capital gains as the incorrect rates of sub-registrar’s office when applied for land value, shall only give erroneous result. Such a course shall obviate the assessee from paying tax based on wrong values worked for a valuation during 24 years back”. Kindly comment.

Cost inflation index as defined under Explanation (v) to Sec. 48 reads as under:

“(v) “Cost inflation index”, in relation to a previous year, means such index as the Central Government may, having regard to 75 per cent of average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf”.

It may be seen from the above, that it is based on 75 per cent of the average price in consumer price index for urban non-manual employees. Even such consumer price is not the free market price, but largely based upon the administered price for public distribution system. It is not based on index for real estate price. It cannot, therefore, be used for backward valuation with reference to the current sale price for arriving on 1981 value. To take an example, if a person sells the property at Rs. 5.51 lakh during the financial year 2007-08, adoption of the index to arrive at the cost in 1981, as suggested in the query, such cost will be Rs. 1 lakh, irrespective of the market price ruling on that date. On this basis, capital gains will be zero. It is because the cost will have to be multiplied by 5.51, since 551 is the index for 2007-08, so that cost will be Rs. 5.51 lakh and capital gains will be nil. On such a conclusion, there will be no capital gains for any property acquired by the assessee before April 1, 1981, while it may result in loss or only nominal capital gains for property acquired after this date.

The proposition as canvassed may have to be dismissed even on the principle of reductio ad absurdum.

There is no other way except to find proper criteria for valuation as on April 1, 1981 taking into consideration the location, comparable sale, guidelines value and other relevant factors for valuation.

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