Tax Liability For Gifted Assets

For long-term capital gains made from capital assets received as gifts, assessees need to calculate the indexed cost of acquisition from the date of acquisition of the previous owner.

KEY POINTS

• For assets received as gifts, though the cost of acquisition for the assessee is nil, in accordance with the provisions of the Income Tax Act, 1961, the notional cost of acquisition will be the actual cost of acquisition to the immediate previous owner.
• Profit earned from a long term capital asset will be termed as long term capital gains and the owner is entitled to take indexation for the same. In case of gifted property, as per a recent ruling by the Mumbai High Court, indexation needs to be taken from the date of acquisition of the immediate previous owner who made the gift.

Q) My mother had purchased a residential flat for a sum of Rs 50 lakh in April 1998. She transferred the said flat to me in February 2003 by way of a gift.

Now, I propose to sell the flat in August-September, 2012 at a market price of about Rs 1.25 crore. What would my tax liability on the sale proceeds be and when do I have to pay the tax? Also, can I avoid paying the said tax on such sale? If so, how?

- Tejashri Rabse, Mumbai

A) At the outset, since the flat has been gifted to you, your actual cost of acquisition is nil. However, in accordance with the provisions of the Income Tax Act, 1961, your notional cost of acquisition will be the actual cost of acquisition to the immediate previous owner (in this case, your mother), that is Rs 50 lakh.

As the asset was purchased in 1998 and the period of holding of your mother and yourself is more than 36 months, the said flat is a long term capital asset and the profit earned therefrom will be termed as long term capital gains. Therefore, you will be entitled to take indexation.

However, whether you can take indexation for the period from your mother’s date of acquisition or your date of acquisition of the flat is controversial. The departmental view is that since you have acquired the property in 2003, you will be entitled to indexation from 2003 and not from 1998, which was the date of acquisition of your mother.

Recently, the Mumbai High Court, in its judgement in the case of CIT vs. Mrs Manjula Shah as reported in (2011) 16 Taxman 42 (Bom), has held that under Explanation 1(i)(b) to s. 2(42A) of the said Act, in determining the period for which any asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner has to be included. Accordingly, though the assessee acquired the capital asset on February 2003, she was deemed to have "held" the asset from April 1998 onwards. This fiction will apply to clause (iii) of the Explanation to s. 48 as well for determining the "indexed cost of acquisition". The object of the legislature is to tax the gains arising on the transfer of capital acquired under a gift or will by including the period for which the said asset was held by the previous owner. This object cannot be defeated by excluding the period for which they said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee.

In view of the above, you may calculate the indexed cost of acquisition as follows:

The cost of acquisition multiplied by the Cost of Inflation Index for the financial year 2012-13 (the Cost of Inflation Index for FY2012-13 has not been notified by the government till date) and divided by the Cost of Inflation Index for the FY1998-99, viz. 351.

You may refer to the citation of the above case law when you are filing your return of income. The law is not settled as yet, and will be resolved only after the matter is decided by the Supreme Court of India.