26. When a property is received on inheritance or as a gift, it is not taxable for the received. When the inheritor or receiver of this property sells it, capital gain aspiring to the sale of that property is taxable to him.

1. Facts of the Case

• An individual (hereafter referred to as the assessee) has received an immovable property either by way of inheritance or as a gift.
• At the time of receiving the property, no tax was levied on the assessee under the Income Tax Act.
• Later, the assessee sells the inherited/gifted property for a consideration.
• The assessee seeks clarification on whether this sale is taxable, and how capital gains are calculated in such a situation.

2. Issues in the Case [Questions]

1. Is the receipt of property by way of inheritance or gift taxable under the Income Tax Act?
2. When the recipient of a gift or inherited property sells the property, is capital gain tax applicable?
3. What is the method of computation of capital gains in such cases?
4. How is the cost of acquisition and holding period determined for capital gain calculation?

3. Legal Principles Covered

A. Section 56(2)(x): Gift Taxation

• As per Section 56(2)(x) of the Income Tax Act, gifts received without consideration exceeding ₹50,000 are taxable as income from other sources.
• However, property received from:
  • A relative (including parents),
  • Under a will or inheritance, or
  • On the occasion of marriage
    is exempt from tax under this section.

Conclusion: The receipt of property by gift or inheritance is not taxable if it comes from a relative or by will/inheritance.

B. Section 49(1): Cost of Acquisition for Capital Gains

• When a capital asset becomes the property of the assessee through gift or inheritance, the cost of acquisition shall be deemed to be the cost to the previous owner.

C. Section 2(42A): Holding Period

• The holding period of the previous owner is also included to determine if the asset is long-term or short-term.

D. Section 48: Capital Gain Computation

• If the asset is long-term, the assessee is eligible for indexation benefit on the cost of acquisition.
• Capital Gain = Sale Price – Indexed Cost of Acquisition – Transfer Expenses

E. Judicial Support

1. CIT v. Manjula J. Shah (2011) 204 Taxman 691 (Bom HC)
   • Held that for calculating indexed cost of acquisition in case of gifted property, indexation benefit should be given from the year in which the previous owner acquired the asset.
2. CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC)
   • Established that cost of acquisition must be determinable for capital gains to arise. Section 49(1) addresses this in case of gifts and inheritance.

4. Possible Judgement

Based on the legal framework and precedents:

• The initial receipt of property by way of gift or inheritance is not taxable in the hands of the assessee if received from a relative or by will.
• However, when the assessee sells the property, the transaction is subject to capital gains tax.
• The cost of acquisition shall be taken as the cost to the previous owner, and the period of holding will include that of the previous owner.
• If the total holding period exceeds 24 months, the asset is treated as a long-term capital asset, and the assessee is eligible for indexation.
• The resulting long-term capital gain is taxable at 20% plus cess/surcharge as per the Income Tax Act.