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Indexed cost of improvement in capital gains

sagar (CA FINAL) (115 Points)

12 September 2008

Case1: A capital asset (non financial asset) purchased on 1-4-1999 is sold on 30-8-2007. An improvement was made to that asset on 1-4-2003.

It is sure that the transfer results in long term capital gains and indexation benifit can be taken for calculating cost of acquisition and cost of improvement.

Case2: If the improvement to the capital asset in case1 above is made on 1-4-2006,we can claim indexation benifit on cost of acquisition. But can we claim indexation benifit on improvement made to the asset ??? Pls explain with reasons.

(My doubt is that in case2 the gap between date of improvement and date of transfer is less than 36 months (17 months in this case) and it is not apt to claim indexation benifit on improvement made to the asset)

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4 Replies

CA.E.Deepan Chakravarthy (CA and CS Executive) (462 Points)
Replied 12 September 2008

Hello Sagar Kotta,

First of all I like your question, cost of indexation and cost of improvement are available to the Long term capital asset

What the second provision of Section 48 says “Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted”

By the above provision it is clear that long term capital asset have the benefit of indexation irrespective of the fact that even it had the improvement within the period of 36 months of before transfer

Section 2(29A) - long-term capital asset” means a capital asset which is not a short-term capital asset

Section 2(42A) - short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer

By the above sections, it is clear that to qualify as long term capital assets the holding period of that asset taken into account not any improvement made during the period of holding. So, we can avail indexation benefit for both cost of acquisition and cost of improvement.

Regards

Deepan Chakravarthy.E