The definition of 'previous owner' in the Explanation to section 49(1) is crucial in determining the period for which the asset is held by the assessee.

(PER S.J. VAZIFDAR, J.) :

1. With the consent of the parties, we proceed to hear the appeal filed under section 260A of the Income Tax Act, 1961 and the cross-objections finally.

2. The appeal is admitted on the following substantial question of law :-

“Whether on the facts and circumstances of the case the ITAT was right in directing the A.O. to calculate the long term capital gain without appreciating that section 2(42A) of the Act explanation 1 only determines the holding period of an asset for the purpose of short term capital gains and has no application to long term capital gain for which the assessee gets the benefit of indexation?”

The cross-objections are admitted on the following substantial question of law :-

“Whether, on the facts and in the circumstances of the case the Tribunal erred in holding that in respect of the 50% of the property inherited by the respondent from his mother the period of holding will start from 21.08.1988 and not from 01.04.1981 ?

3. In or about the year 1942, the respondent’s father acquired the entire immovable property from his father i.e. the respondent’s grand-father. The respondent’s father expired in the year 1988, leaving behind a will bequeathing the property to his wife and the respondent in equal shares.

The respondent's mother expired on 21.02.2000 leaving behind a will bequeathing her 50% share in the property to the respondent.

4. The respondent sold the property during the assessment year 2005-2006 for Rs.9.50 corers and declared a long term capital gain of Rs.38,44,247/-. The respondent considered the date of acquisition of the property for the purpose of calculating the capital gains to be prior to 1.4.1981.

The AO however, held that the actual date of acquisition must be considered for calculating the capital gains. He held the date on which the respondent inherited the property to be the relevant date and accordingly recomputed the capital gains. The recomputation was on the basis of 50% of the property having been inherited by the respondent from his father on 21.8.1988 and the other 50% thereof having been inherited by him from his mother on 21.2.2000 and accordingly applied the cost inflation index.

5. The CIT (A) allowed the respondent's appeal by an order dated 23.6.2008. It was held in the respondent's favour that the period of holding for determining the long term capital gain included the period for which the original owner held the assets that devolved upon the legal heir.

6. The appellant challenged the order of the CIT (A) before the Income Tax Appellate Tribunal (ITAT). The ITAT held that the period for holding 50% of the property inherited by the respondent from his father would start from 1.4.1981, whereas in respect of 50% of the property inherited by the respondent from his mother, the period for holding would start from 21.8.1988, as she became the owner of her 50% share in the property only from that date. The Tribunal ordered accordingly.

7. The respondent's grievance is only with regard to the finding of the Tribunal that the period of holding in respect of 50% of the property inherited by him from his mother would start from 21.8.1988 and not from 1.4.1981.

8. Section 2(42A) of the Income Tax Act, 1961 reads as under :-

“2. Definitions — In this Act, unless the context otherwise requires,—

(42-A) “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:

Provided that in the case of a share held in a company [or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 or a unit of a Mutual Fund specified under clause (23D) of Section 10] [or a zero coupon bond], the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted.

(Explanation 1.) -(i) In determining the period for which any