If you receive capital assets either by way of gift or by way of inheritance through a will from your dear ones, the liability towards Capital Gains tax will arise at the time of sale of such assets. It is vital for tax payers to understand the tax calculation.
For an assessee who is covered under section 49(1) of the Income Tax Act, the capital gains liability has to be computed by taking into account that the assessee held the said asset from the date it was transferred by the erstwhile owner and the same theory should be applied in calculating the indexed cost of acquisition.
The asset may be land, building, jewellery, shares or any capital asset received by means of gift or by way of will. Fact remains that there will be a liability to pay Capital Gains tax when one sells such assets.
People often think that their cost for such assets would be nil as they receive such assets through gift or through will, without paying anything to the person from whom they receive such assets.
However, for the purpose of tax planning there are some provisions in the Income Tax Act, 1961, which provide tax saving to persons who received capital assets by way of gift or through the will executed by a person consequent to his death or by succession or by virtue of inheritance.
Provisions of Section 49 of the Income Tax Act:
Section 49 of the Income Tax Act deals with determination of cost for certain modes of acquisition in connection with capital assets which a tax payer sells later on.
In practical life many people generally presume that if they have gained capital assets by gift or by inheritance, as such, they would not be required to pay for such capital gains on the total sale consideration as they have not paid any amount for those assets and have virtually got such assets free of cost.
The recipients think that as they have not paid any cost towards the acquisition of the asset, no cost will be deducted from the sale consideration at the time of selling the assets.
However, the provisions of section 49 of the Income Tax Act state that where the capital asset is acquired by the assessee by a gift or a will or by succession or inheritance etc., then the cost of acquisition of the asset shall be considered to be the cost for which the previous owner of the property acquired it.
Thus, the provisions of section 49 of the Act, clearly mentions that the cost of the assets received by gift or by will, will be the cost of acquiring the same and will be deducted from the sale price.
Often the tax payers face huge problem regarding the computation of the cost of the previous owner.
How to determine the cost of acquisition of the Capital Asset?
The common question which comes in the minds of the tax payers is how to determine the cost of acquisition of the Capital Asset of the previous owner from whom they have received such asset. However, the cost of acquisition of the Capital Asset of the previous owner is the value at which the previous owner acquired such assets.
Moreover, Cost Inflation Index would also be applicable where the assets acquired through Gift or Will are being sold at a later stage.
In which year the Indexed Cost of acquisition should be considered?
Another common question that arises in the minds of the tax payers is the year regarding which the Indexed Cost of acquisition should be considered. There are views stating that the Indexed Cost of acquisition of the previous owner should be with reference to the year in which the Gift was made. While the other view says that the cost of acquisition with reference to the erstwhile owner would be that in which the erstwhile owner acquired the asset originally and it is not the year in which the assessee has acquired the asset.
There are two diverse views in the tax treatment of cost of acquisition of the previous owner. In the case of Commissioner of Income Tax vs. Manjula J. Shah (2013) 355 ITR 474, the question that was raised before the Honorable judges of the Bombay High Court that while computing the Capital Gains arising on transfer of a Capital Asset, whether the Indexed Cost of Acquisition should be computed with reference to the year in which the erstwhile owner held the asset or that in which the assessee acquired the property.
The Honorable judges held that in the present case, the capital asset was originally acquired by the previous owner and the same was acquired by the assessee without incurring any cost. It was also held that the words “asset was held by the assessee” should be construed according to the object of the statute.
The Bombay High Court held that the indexed cost of acquisition should be considered relating to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the same.