22. A bequeathed his property to B under his last will. Does this amount to a transfer for the purpose of charging capital gains?

1. Facts of the Case

• Mr. A, an individual taxpayer, bequeathed his property (movable or immovable) to Mr. B through a valid last will and testament.
• This transfer occurred upon A’s death, and the ownership of the property passed to B as per the terms of the will.
• The question arises whether this passing of property from A to B constitutes a “transfer” for the purpose of charging capital gains tax under the Income Tax Act.

2. Issues in the Case

1. Does the bequest of property through a will constitute a “transfer” under Section 2(47) of the Income Tax Act, 1961?
2. Can capital gains be levied in the hands of the deceased (A) or the recipient (B) at the time of inheritance?
3. At what point, if any, does the capital gains tax apply in case of inherited property?

3. Legal Principles Covered

A. Definition of “Transfer” – Section 2(47) of the Income Tax Act, 1961

“Transfer” in relation to a capital asset includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, etc.

However, the Act explicitly excludes certain transfers from the definition of transfer.

B. Section 47(iii) – Transactions Not Regarded as Transfer

As per Section 47(iii):

“Any transfer of a capital asset under a gift or will or an irrevocable trust is not regarded as a transfer for the purposes of Section 45 (capital gains).”

Thus, no capital gains tax is attracted at the time of bequest of a property under a will.

C. When Does Capital Gains Arise in Case of Inherited Property?

• Although inheritance is not a transfer, if the recipient (B) sells the inherited property later, then capital gains are taxable in his hands.
• As per Explanation 1 to Section 2(42A) and Section 49(1):
  • The cost of acquisition shall be deemed to be the cost to the previous owner (A).
  • The holding period of A is also included to determine if the gain is short-term or long-term.

D. Judicial Precedents

1. CIT v. Kya Sand Ltd. (1983) 140 ITR 216 (Kar HC)
   • Confirmed that bequest under a will is not a taxable transfer under the Act.
2. Mrs. B.T. Patil v. CIT (1988) 173 ITR 416 (Kar HC)
   • Held that transfer by way of inheritance or gift is not liable to capital gains tax under Section 45 due to Section 47(iii).

4. Possible Judgement

Based on the above legal provisions and precedents, it is clearly established that:

• The transfer of property by Mr. A to Mr. B under a will is not a “transfer” within the meaning of Section 2(47).
• By virtue of Section 47(iii), such a transfer is specifically excluded from the scope of capital gains taxation.
• No capital gains tax is payable at the time of inheritance.
• However, if Mr. B sells the inherited property, capital gains tax shall apply at that time based on:
  • Cost to A (the previous owner) as cost of acquisition, and
  • Combined holding period of A and B to determine long-term or short-term nature.