PERSONAL TAX: Indexation is as per asset's payment dates

A non-resident taxpayer had filed his tax returns for assessment year 2013-14 showing income from capital gains and other sources. During the said year, the taxpayer had sold a residential property in Mumbai for Rs 7.32 crore on July 25, 2012. This property was purchased for Rs 4.19 crore in 2007 vide registered agreement dated October 18, 2007. The purchase price was construction-linked and paid to the builder in instalments between financial years 2006-07 and 2011-12.

When the taxpayer sold the property, he indexed the full cost of Rs 4.19 crore by applying index of FY 2007-08 and worked out the indexed cost of acquisition for the purpose of computing long-term capital gains (LTCG) as Rs 6.48 crore. For this purpose, the taxpayer had added the broker fees and tax advisor fees that he had paid while transferring the property to the total cost and indexed the same by applying the index for FY 2007-08.

Similarly, incidental expenses such as interest charges, legal, electric and water connection, maintenance, service tax, property tax, stamp duty, MVAT, etc, paid during FY 2011-12 were also indexed by applying the index for FY 2007-08. Accordingly, the taxpayer offered the net capital gains of Rs 83.61 lakh in the return of income as LTCG.

During assessment, the taxman was not convinced with the taxpayer's calculation. He indexed the cost and expenses incurred for the property purchase by applying the index of the respective years in which the payments were actually made. As a result of this change in method of indexation, LTCG was computed at Rs 1.48 crore. The taxman added the differential amount of Rs 64.5 lakh in the taxpayer's hands. Indexation against incidental expenses aggregating to Rs 8.8 lakh was denied to the taxpayer.

At the first appellate level the authority agreed with the tax officer's view and concluded that his computation of capital gains as per the dates of payments was correct. Further, the authority also observed that out of the total payments, two instalments were made during FY 2011-12, which are less than 36 months from the date of sale. Accordingly, the authority directed the tax officer not to allow indexation of these two payments.

Before the second appellate level, the Mumbai Tax Tribunal observed that the Income Tax Act ('the Act') permits indexing the cost of acquisition on the basis of cost inflation index notified by the department every year. Further, indexation is permissible from the first year in which the asset was held by the taxpayer.

The tribunal carefully noted that the definition has used the word 'held' as against 'acquired' or 'purchased', the latter two terms being used in other sections like Section 54/ 54F (capital gains exemptions). Likewise, the terms 'owned/ acquired' has not been used for allowing the indexation benefit to taxpayers. In the light of these arguments, the tribunal's job was to decide on the question whether the indexation benefit of even the future instalments would be allowed to taxpayers from the year in which the asset is first held.

Relying on a decision by Gujarat High Court, the tribunal held that the indexation benefit against the cost of acquisition shall be available to taxpayer on the basis of index of the year in which payments were actually made by the taxpayer. Accordingly, the case was decided against the taxpayer.

The writer is a Sebi-registered investment adviser