I sold a flat that was gifted to me. Do I index from the gift date or the original purchase?
From the previous owner's purchase. Under Explanation 1(i)(b) to s.2(42A) the previous owner's holding period is included, and the Bombay High Court held that the same fiction applies to clause (iii) of the Explanation to s.48, so the indexed cost of acquisition is computed from the year the previous owner first held the asset, not the year of the gift.
Decided by the High Court (Bombay High Court — J. P. Devadhar J and K. K. Tated J (judgment by Devadhar J)) on 2011-10-11, reported as (2013) 355 ITR 474 (Bom); (2012) 204 Taxman 691 (Bom); (2012) 249 CTR 270 (Bom); [2011] 16 taxmann.com 42 (Bom); ITA No. 3378 of 2010, AY 2004-05. It bears on section 48, section 48 Explanation (iii), section 2(42A), section 49(1), section 45 of the Income Tax Act 1961, in Capital Gains matters.
The department's usual position is to allow the previous owner's holding period for classifying the gain as long-term but to apply the index of the year of the gift, which inflates the gain sharply where the asset was held for a decade before it was gifted. The Court refused to split the fiction that way, holding the legislative object of taxing by reference to the previous owner's holding cannot be defeated when computing the indexed cost. It matters most on inherited or gifted immovable property.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The asset was flat No. 1202-A, Chaitanya Towers, Prabhadevi, Mumbai, bought by the assessee's daughter on 29 January 1993 for Rs 50,48,350 and gifted to the assessee by deed of 1 February 2003. The assessee sold it on 30 June 2003 for Rs 1,10,00,000 and, in a return for assessment year 2004-05 declaring total income of Rs 20,92,400, offered the gain as long-term capital gain, computing the indexed cost of acquisition by reference to the cost inflation index for the year in which the cost was incurred. The Assessing Officer held that under clause (iii) of the Explanation to s.48 the index for the first year in which the asset was held by the assessee applied, that being 2002-03. The Commissioner (Appeals) allowed the claim and a Special Bench of the Tribunal at Mumbai confirmed it. In the High Court the Revenue pressed only the last of the questions it had raised, which was reframed and admitted, and the appeal was taken up for final hearing by consent.
The question was answered in the affirmative, in favour of the assessee, and the appeal disposed of accordingly (para 25). Where a capital asset is acquired under a gift, the indexed cost of acquisition must be computed by reference to the year in which the previous owner first held the asset, not the year in which the assessee became owner (para 24). The Revenue did not dispute that the assessee was deemed to have held the asset from 29 January 1993 for the purpose of being taxed on a long-term gain; it disputed only the use of that deemed date in computing the indexed cost, and the Court held the same deemed holding must be applied to both (paras 14, 23). Note one arithmetical point in the judgment itself: the assessee had contended for the index for 1993-94, while the Court at para 17 says the index for 1992-93 would apply, the acquisition of 29 January 1993 falling in that financial year.
The expression 'held by the assessee' in clause (iii) of the Explanation to s.48 is not defined there, so it takes its meaning from s.2, which applies unless the context otherwise requires; Explanation 1(i)(b) to s.2(42A) requires the previous owner's period of holding to be included, so the assessee is deemed to have held the flat from 29 January 1993 (paras 17, 20). If the Revenue were right that the fiction cannot be carried into s.48, the assessee would not be liable to long-term capital gains tax at all, because it is only through that fiction and s.49(1)(ii) that she is deemed to have held the asset from 1993 and to have incurred the cost of acquisition; the legislature having used the fiction to bring the gain to tax, the fiction cannot be refused when computing the indexed cost (para 18). The words must be read against the object of the statute, which is to tax gains on assets acquired under a gift or will by including the previous owner's holding period; that object cannot be defeated by excluding the same period when computing the indexed cost (para 19). Two further supports: s.55(1)(b)(2)(ii) allows the previous owner's cost of improvement to be deducted in a s.49(1) case, which only makes sense if his period of holding counts (para 21); and CBDT Circular No. 636 of 31 August 1992 states that a fair method of giving relief by indexation is to link it to the period of holding, so if the holding period includes the previous owner's, the first year of his holding is the first year for the assessee (para 22).
if the object of the legislature is to tax the gains arising on transfer of a capital acquired under a gift or will by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot 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 assessee.
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Handle my notice → Ask a CA on WhatsAppFrom the previous owner's purchase. Under Explanation 1(i)(b) to s.2(42A) the previous owner's holding period is included, and the Bombay High Court held that the same fiction applies to clause (iii) of the Explanation to s.48, so the indexed cost of acquisition is computed from the year the previous owner first held the asset, not the year of the gift. This was decided by the High Court (Bombay High Court — J. P. Devadhar J and K. K. Tated J (judgment by Devadhar J)) and bears on section 48, section 48 Explanation (iii), section 2(42A), section 49(1), section 45 of the Income Tax Act 1961. It is reported as (2013) 355 ITR 474 (Bom); (2012) 204 Taxman 691 (Bom); (2012) 249 CTR 270 (Bom); [2011] 16 taxmann.com 42 (Bom); ITA No. 3378 of 2010, AY 2004-05. The department's usual position is to allow the previous owner's holding period for classifying the gain as long-term but to apply the index of the year of the gift, which inflates the gain sharply where the asset was held for a decade before it was gifted. The Court refused to split the fiction that way, holding the legislative object of taxing by reference to the previous owner's holding cannot be defeated when computing the indexed cost. It matters most on inherited or gifted immovable property. If it applies to you, the first step is this: Compute the indexed cost from the year the previous owner first held the asset, and show that year and cost on the face of the working.
The asset was flat No. 1202-A, Chaitanya Towers, Prabhadevi, Mumbai, bought by the assessee's daughter on 29 January 1993 for Rs 50,48,350 and gifted to the assessee by deed of 1 February 2003. The assessee sold it on 30 June 2003 for Rs 1,10,00,000 and, in a return for assessment year 2004-05 declaring total income of Rs 20,92,400, offered the gain as long-term capital gain, computing the indexed cost of acquisition by reference to the cost inflation index for the year in which the cost was incurred. The Assessing Officer held that under clause (iii) of the Explanation to s.48 the index for the first year in which the asset was held by the assessee applied, that being 2002-03. The Commissioner (Appeals) allowed the claim and a Special Bench of the Tribunal at Mumbai confirmed it. In the High Court the Revenue pressed only the last of the questions it had raised, which was reframed and admitted, and the appeal was taken up for final hearing by consent. The matter was decided on 2011-10-11 by the High Court (Bombay High Court — J. P. Devadhar J and K. K. Tated J (judgment by Devadhar J)). On those facts the High Court held as follows. The question was answered in the affirmative, in favour of the assessee, and the appeal disposed of accordingly (para 25). Where a capital asset is acquired under a gift, the indexed cost of acquisition must be computed by reference to the year in which the previous owner first held the asset, not the year in which the assessee became owner (para 24). The Revenue did not dispute that the assessee was deemed to have held the asset from 29 January 1993 for the purpose of being taxed on a long-term gain; it disputed only the use of that deemed date in computing the indexed cost, and the Court held the same deemed holding must be applied to both (paras 14, 23). Note one arithmetical point in the judgment itself: the assessee had contended for the index for 1993-94, while the Court at para 17 says the index for 1992-93 would apply, the acquisition of 29 January 1993 falling in that financial year.
The expression 'held by the assessee' in clause (iii) of the Explanation to s.48 is not defined there, so it takes its meaning from s.2, which applies unless the context otherwise requires; Explanation 1(i)(b) to s.2(42A) requires the previous owner's period of holding to be included, so the assessee is deemed to have held the flat from 29 January 1993 (paras 17, 20). If the Revenue were right that the fiction cannot be carried into s.48, the assessee would not be liable to long-term capital gains tax at all, because it is only through that fiction and s.49(1)(ii) that she is deemed to have held the asset from 1993 and to have incurred the cost of acquisition; the legislature having used the fiction to bring the gain to tax, the fiction cannot be refused when computing the indexed cost (para 18). The words must be read against the object of the statute, which is to tax gains on assets acquired under a gift or will by including the previous owner's holding period; that object cannot be defeated by excluding the same period when computing the indexed cost (para 19). Two further supports: s.55(1)(b)(2)(ii) allows the previous owner's cost of improvement to be deducted in a s.49(1) case, which only makes sense if his period of holding counts (para 21); and CBDT Circular No. 636 of 31 August 1992 states that a fair method of giving relief by indexation is to link it to the period of holding, so if the holding period includes the previous owner's, the first year of his holding is the first year for the assessee (para 22). In the words reproduced by the source cited on this page: "if the object of the legislature is to tax the gains arising on transfer of a capital acquired under a gift or will by including the period for which the said asset was held by the previous owner in determining the period for which the said asset was held by the assessee, then that object cannot 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 assessee."
It was decided by the High Court on 2011-10-11 and is reported as (2013) 355 ITR 474 (Bom); (2012) 204 Taxman 691 (Bom); (2012) 249 CTR 270 (Bom); [2011] 16 taxmann.com 42 (Bom); ITA No. 3378 of 2010, AY 2004-05. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 48, section 48 Explanation (iii), section 2(42A), section 49(1), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative, in favour of the assessee, and the appeal disposed of accordingly (para 25). Where a capital asset is acquired under a gift, the indexed cost of acquisition must be computed by reference to the year in which the previous owner first held the asset, not the year in which the assessee became owner (para 24). The Revenue did not dispute that the assessee was deemed to have held the asset from 29 January 1993 for the purpose of being taxed on a long-term gain; it disputed only the use of that deemed date in computing the indexed cost, and the Court held the same deemed holding must be applied to both (paras 14, 23). Note one arithmetical point in the judgment itself: the assessee had contended for the index for 1993-94, while the Court at para 17 says the index for 1992-93 would apply, the acquisition of 29 January 1993 falling in that financial year. It arises in Capital Gains matters, on section 48, section 48 Explanation (iii), section 2(42A), section 49(1), section 45 of the Income Tax Act 1961, and was decided by Bombay High Court — J. P. Devadhar J and K. K. Tated J (judgment by Devadhar J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the gift deed and the previous owner's purchase documents on record, since the deemed holding period rests entirely on them. Confirm the transaction actually falls within s.49(1), because the fiction only runs where the cost of the previous owner is adopted. Check what indexation is available for the year of sale before you build a computation on this case.
Still good law. Followed by the same Court in CIT-16 v. Smt. Nita Kamlesh Tanna [2013] 40 taxmann.com 542 (Bom), decided 6 August 2013 by Mohit S. Shah CJ and M.S. Sanklecha J, which reproduced paras 17 and 19 of this judgment, recorded that the Revenue could point to no distinguishing feature that would justify not following this Court's binding decision, and declined to entertain the appeal. The Gujarat High Court in PCIT v. Prakash Krishnalal Bhagwati (2018) 254 Taxman 132 (Guj) computed the indexed cost by reference to the year the previous owner acquired the property and is recorded as following this decision, and the Madras High Court in CIT v. Saroja Naidu (2021) 281 Taxman 305 (Mad) reached the same result without citing it, which is concurrence rather than following. Nothing overruling or doubting it was found. The appellate history is now on record from the Supreme Court's own order. In Commissioner of Income Tax-12 v. Manjula J. Shah (Dead) through LRs, decided 18 September 2018 by A. K. Sikri and Ashok Bhushan, JJ., leave was granted and the resulting civil appeals - those arising out of SLP(C) No. 19924/2012 and SLP(C) No. 8184/2014 - were dismissed because 'the tax effect is less than Rs. 1 crore and it also appears that they do not come under any exception provided in Para 10 of the Circular dated 11.07.2018 as amended by Circular dated 20.08.2018', with liberty to the Department to seek revival if it finds a case is covered by an exception. The same order records that two further petitions in the batch, SLP(C) No. 30889/2013 and SLP(C) No. 31162/2012, were directed to 'List in the usual course as the tax effect is more than Rs. 1 Crore', and what became of those two has not been traced. So the dismissal is on the monetary limits and not an affirmance on the merits: it adds nothing to the authority of this judgment, and it must not be read as the Supreme Court having disposed of the whole challenge to it. What the order does establish, which the earlier note did not record, is that the decision was carried to the Supreme Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read against the reported judgment, which closes every gap the earlier record left open. Bombay High Court, J. P. Devadhar J and K. K. Tated J, 11 October 2011, ITA No. 3378 of 2010 for assessment year 2004-05, on appeal from a Special Bench of the Mumbai Tribunal. The citation confusion is resolved: the correct references are (2013) 355 ITR 474, (2012) 204 Taxman 691 and (2012) 249 CTR 270; '16 Taxman 42' was a misreading of 16 taxmann.com 42, and the ITR volume and page the Gujarat digest gave were right, only its year was wrong. On the merits, the pivot of the reasoning is that the Revenue accepted the deemed holding from 1993 for the purpose of charging a long-term gain and asked the Court to disregard it only for indexation; the Court held the fiction cannot be used to tax and then refused when computing. The judgment also rests on s.55(1)(b)(2)(ii) and on CBDT Circular No. 636 of 31 August 1992. The Department has not accepted the decision, though the same Court followed it as binding in CIT-16 v Smt Nita Kamlesh Tanna (Bom, 6 August 2013). This case decides whose holding period counts, not whether indexation is available at all; indexation was changed by the Finance Act 2023 and the Finance (No. 2) Act 2024, so verify what is available for the year of transfer. The judgment specifies the cost inflation index for 1992-93 at para 17 while the assessee had contended for 1993-94; the acquisition of 29 January 1993 falls in financial year 1992-93. Whether any special leave petition was filed against the decision was not established. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative, in favour of the assessee, and the appeal disposed of accordingly (para 25). Where a capital asset is acquired under a gift, the indexed cost of acquisition must be computed by reference to the year in which the previous owner first held the asset, not the year in which the assessee became owner (para 24). The Revenue did not dispute that the assessee was deemed to have held the asset from 29 January 1993 for the purpose of being taxed on a long-term gain; it disputed only the use of that deemed date in computing the indexed cost, and the Court held the same deemed holding must be applied to both (paras 14, 23). Note one arithmetical point in the judgment itself: the assessee had contended for the index for 1993-94, while the Court at para 17 says the index for 1992-93 would apply, the acquisition of 29 January 1993 falling in that financial year.
TaxSphere, “CIT v Manjula J. Shah”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-manjula-j-shah-indexation/ (validity last checked 2026-08-20)
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