Capital gains on transfer of asset acquired from previous owner

Introduction

Any profit or gain arising from transfer of a capital asset is taxable under the head capital gains. Such capital gain is computed in the following manner:

When a capital asset is acquired by a person under the operation of law in the specified circumstances, the period of holding and cost of acquisition of the asset so acquired shall be calculated with reference to its cost of acquisition to the previous owner and the period for which it was held by the previous owner.

1. About

Where a capital asset is acquired by the assessee from the previous owner, the capital gains shall be computed as per the provisions enumerated below.

2. Asset acquired from previous owner

In the following situation, a capital asset is deemed to be acquired from the previous owner:

(a) On partition of HUF;

(b) Under a Gift or Will from an Individual or HUF

(c) By succession, inheritance or devolution;

(d) Distribution of assets on dissolution of the firm, body of individuals, or other association of persons;

(e) Distribution of assets on liquidation of a company;

(f) Under a transfer to a revocable or an irrevocable trust;

(g) Transfer of a capital asset by a subsidiary to its holding and vice-versa if conditions specified in Section 70(1)(c)/(d) are satisfied;

(h) Transfer a capital asset in a scheme of amalgamation as defined in Section 70(1)(e)/(g)/(i)/(h);

(i) Transfer of a capital asset during demerger as defined in Section 70(1)(j)/(l)/(m);

(j) Transfer of a capital asset in business reorganization as defined in Section 70(1)(n)/(o);

(k) Transfer of a capital asset by a firm to a company as a result of its succession by that company as defined in Section 70(1)(zd);

(l) Transfer of a capital asset by a private company or unlisted public company to a LLP on its conversion as defined in Section 70(1)(ze);

(m) Transfer of a capital assets by a sole proprietorship concern to the company on its succession that company as defined in Section 70(1)(zf);

(n) Transfer at the time of relocation of the original fund to the resulting fund in IFSC as specified in Section 70(1)(t)/(u);

(o) Transfer of property by a member to his HUF.

The previous owner of the property means the last previous owner who acquired the property by means other than those discussed above.

3. Factors for computation of capital gains

3.1. Period of holding

Where an assessee does not purchase a capital asset but acquire it from the previous owner, the period of holding shall be reckoned from the date of holding of the asset by its last previous owner who acquired the asset by way of purchase. In other words, the period of holding of the last previous owner is also included for the purpose of determining the period of holding by the assessee.

3.2. Cost of acquisition

Where an assessee does not purchase a capital asset but acquires it from the previous owner, the cost of acquisition of such asset in the hands of the assessee shall be deemed to be the cost at which the previous owner acquired it. If the capital asset (excluding intangible assets) was acquired by the previous owner on or before 31-03-2001, the assessee can choose the higher of the following as the cost of acquisition:

(a) Actual cost of acquisition for the previous owner; or

(b) Fair market value (FMV) of the capital asset as on 01-04-2001.

Example, if Mr. A acquires a house property from his father under a will, the cost of property to the father shall be taken as the cost of acquisition of the property in the hands of Mr. A. If, however, the father of Mr. A had acquired the property from his father, cost to his father will be taken as the cost of acquisition of the property in the hands of Mr. A.

3.3. Cost of improvement

'Cost of Improvement' means all expenditure of a capital nature incurred on or after 01-04-2001 in making any addition or alterations to the capital asset. Therefore, all capital expenditure incurred on or after 01-04-2001 by the assessee himself or the previous owner, it shall be deducted while calculating the capital gains. However, if the capital asset is acquired by previous owner or assessee before 01-04-2001, any cost of improvement incurred prior to 01-04-2001 shall be ignored.

3.4. Indexed Cost of Acquisition or Improvement

3.4-1. In general

The benefit of indexation is not applicable on transfer of any capital asset.. As a result, the cost of acquisition or the cost of improvement of a capital asset shall not be indexed when calculating capital gains.

3.4-2. In case of land or building acquired by resident individual/HUF before 23-07-2024

Main article: Grandfathering of long-term capital gains from land or building acquired before 23-07-2024

Resident individuals and resident HUFs may opt to avail the benefit of indexation on land or building acquired before 23-07-2024, but only if the tax calculated without indexation results in a higher amount.

If the assessee (i.e., a resident individual or HUF) acquires land or a building before 23-07-2024 from a previous owner under the circumstances referred in Para 2, the cost of acquisition or cost of improvement shall be computed in the same manner as referred to in Para 3.2 or Para 3.3 above.

The indexed cost of acquisition is then calculated using the following formula:

It is to be noted that the assessee and revenue are in dispute on the issue of CII to be taken in denominator. Whether it should be of the tax year in which the previous owner has acquired it or of the tax year in which assessee acquires it by way of a mode as specified above.

The Courts

The indexed cost of improvement is calculated using the following formula:

References

Resident individuals and HUFs may opt for the benefit of indexation while computing long-term capital gains arising from the transfer of land or building acquired before 23-07-2024, where the tax without indexation exceeds the tax computed with indexation.

Resident individuals and HUFs may opt for the benefit of indexation while computing long-term capital gains arising from the transfer of land or building acquired before 23-07-2024, where the tax without indexation exceeds the tax computed with indexation.

Transfer of capital assets by persons (other than individuals or HUFs) under a gift, will, or irrevocable trust is taxable as such transaction is outside the purview of Section 70(1)(b). However, Section 73(1) [Table S. No. 1] still applies the previous owner's cost to all gifts or wills. To align both provisions, Section 73(1) [Table S. No. 1] should be amended to apply the previous owner's cost only to gifts or wills received from individuals or HUFs.

Arun Shungloo Trust v. CIT [2012] 205 Taxman 456 (Delhi), CIT v. Manjula J. Shah [2012] 204 Taxman 691 (Bom.), CIT v. Gautam Manubhai Amin [2013] 218 Taxman 319 (Guj.) and CIT v. Rajesh Vitthalbhai Patel [2013] 218 Taxman 301 (Guj.)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.