The date of purchasing, and not physical ownership, will be considered.
Capital gains are quite a well-known concept in income tax and saving on capital gain tax involves a good part of tax-planning. Capital gains is not a regular source of income for tax-payers, and therefore paying taxes on the same is not very much favoured by them. While in simple terms, capital gains are understood as the difference between the sale and cost price of an asset, the calculations can sometimes make it complicated.
Long-term capital gains, that is gains on sale of capital assets beyond 36 months or even 12 months, as the case may be, have been the subject of a lot of disputes between the tax payers and the Income Tax department.
With reference to computing capital gains on sale of property, the tax laws enable the tax-payer to index their cost of buying the property using the ‘Cost Inflation Index’ (CII). Indexed cost means the cost of acquisition multiplied by the ratio of the CII of the year of sale and CII of the year of purchase. The CII is notified every year by the Ministry of Finance and is known to reflect the inflation levels in the economy. The use of CII to index the cost thus protects the tax-payer from paying taxes on gains due to inflation over the period for which the property is owned.
The indexation of the cost is allowed from the date of acquiring the property by the tax-payer till the date of sale. But what if there is a time lag between the date of making the payment for a property and the date of possession? Which date should be considered for the purpose of indexation? This exact question came up before the Honourable Mumbai tribunal in the case of Nita Patel not so long ago.
In the said case, the tax-payer sold a her property , a flat in Mumbai, for a total consideration of Rs . 1,68,00,000. The tax-payer had declared the date of buying the flat as 27 December 1990, on which date the entire payment for the flat, transfer fees and stamp duties were paid. The flat, at this time was in possession of a tenant of the original owner. On 6 January 1992, the tax-payer settled dues with the tenant (as per consent terms) and got possession of the property. In the returns filed by her, she offered the capital gains on the sale of this property and offered to index her cost from December 1990.
But during the assessment proceedings, the tax officer observed, as the tax-payer had got the possession only in January 1992, indexation could be claimed from this date only. By allowing Indexation benefits from a later date, Patel’s benefits would go down considerably. She naturally, appealed against the assessing officer’s decision.
At the fit appellate level, the taxpayer claimed that as the ownerhip rights were assigned in 1990, the cost of indexation should be allowed from the same date. In fact, she also pleaded that the amount paid to the tenant, be treated as cost of improvement for the property. Any amount spent by a tax-payer for the purpose of repair or alteration to the property is eligible to be claimed as cost of improvement and deducted from the capital gains so computed. The fit appellate authority, placed reliance on a few past judicial decisions and held that indexation shall be allowed only from the date of possession. It also did not allow the claim for the cost of improvement as pleaded by the tax payer.
Aggrieved by this order, the tax-payer filed a second appeal with the Tribunal. While deciding on this case, the Tribunal has made a very interesting observation in pointing out that as per law, the cost of an asset is indexed from the fit year in which the asset was held by the assessee. The Tribunal further held that the term ‘held’ should not be construed to mean physical ownerhip or possession of the property, but as ownerhip rights. The word ‘hold’ according to the dictionary means to possess, be the owner, holder or tenant.
The word ‘owner’ has not been used in the law. Even the definition of short-term capital asset, as given in the law, uses the words assets held by an assessee. In view of the same, the Tribunal accepted the contention of the tax payer that she was holding the rights in the property from December 1990 and accordingly, indexation should be allowed from that date. On similar lines, the amount paid to the tenant is also eligible to be claimed as cost of improvement and the same was allowed by the Tribunal.
The writer is a certified financial planner
