Inherited assets tax: ITAT bats for legal heir

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has settled in a recent order the contentious issue relating to determining the cost of acquisition and the indexed cost in case of inherited assets.

In this case of US resident Sohrab Fali Mehta, the ITAT bench disagreed with the tax department that the indexed cost of acquisition should be based on the year in which Mehta inherited his share following his mother’s death. The tax tribunal, which adjudicates income tax (I-T) disputes, held that the indexed cost of acquisition has to be computed with respect to the year in which the initial owner first held the asset.

Tax experts point out that litigation on the issue of the ‘cost of acquisition’ and also the ‘cost inflation index’ to be used in computing capital gains is common in cases of inheritance.

In simple terms, capital gains is the difference between the sale price and the indexed cost of acquisition.

In case of an inheritance, the cost of acquisition is nil as the inheritor has not paid anything for acquiring the asset.

However, according to the provisions of the I-T Act, for computing capital gains, the cost to the previous owner is considered as the cost of acquisition.