What is cost index in case of gifted property

All of us know capital gains tax and cost index more or less. But one need to know in more depth to take the benefits of tax saving in this regard. There are several cases where opinion different comes in the cases lawyer to lawyer and assessee to assessee. In these conditions matter often go to courts which resolve the matter. It’s better to know what law compare to appeal in the courts is.

In the one recent case, assesse sold the property which is gifted to him. The law is the holding time will decide either the property is long term assets or short term. Also law gives the benefit of cost index by which the capital gain liability will reduce. Cost inflation index is released by the government every year.
According to the law, the assesse can index the cost of acquisition from the year in which he becomes the owner of the property. For example, if the assesse purchased the property in 1990 and sale it in 2011, the assesse can index the cost of the hold property from 1990-2011 periods and will tax on the amount of sale consideration and indexed cost of the property of capital gains.

If the property is held by way of gift, there is no capital gain arises. The capital gain arises only when the property is sold. In this case the cost of the property is treated as the cost of the donor of the gift and indexation will be the year in which the assessee becomes the owner of such property. But there is a recent case in the Mumbai High Court which changes the law somehow. The case law is as under.

In that case, the tax-payer filed her income tax return with the capital gain of the property in assessment year 2004-05. She sold a residential flat and attracts capital gain. The flat was purchased by her daughter on January 29 1993 with the cost of 50.48 lakhs. She gifted the flat to her mother by a gift deed on 1 February 2003. The mother sold that residential flat on 30 June 2003 with the consideration of 1.1 crore.

The assessee filed her income tax return with the capital gain tax calculation of cost index 1993-94. But income tax authority wasn’t satisfied as the assesse becomes the owner of the property in 2002-03, and it should be indexed to the data of 2002-03. So the income tax officer disallowed the claim of the assessee and the matter goes to the tribunal.

The Tribunal at the first level gives the decision to the favor of tax payer as the cost to be indexed from the year 1993-94. The case goes to the second level tribunal which also gave the decision to the favor of tax payer as the assesse must be treated that she is holding the property from the year 29-1-1993 and the tax payer can cost the index from the same financially year.

 The High Court further said the words used in the Act had to be understood in the background of the object of the provisions. Thus, although the term ‘held by der a gift or will. The object could not be allowed to be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the tax payer.

This decision comes as a major relief for tax payers. Indexing the cost for the period for which the property or asset was held by the previous owner extends the indexation period. This would offer taxpayers a substantial relief from capital gain taxes
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