K.D. Ranjan, Accountant Member - This appeal by the Revenue for Assessment Year 2007-08 arises out of the order of the Commissioner of Income-tax (Appeals)-XXVI, New Delhi.

2. The grounds of appeal raised by the Revenue are reproduced as under:-

"1. The Ld. CIT(A) has erred in deleting the addition made by the AO by admitting the assessee's claim with regard to benefit of indexation available to him from the year it was acquired by the 1st owner as against the year it was held by the assessee.

2. The Ld. CIT(A) has further erred in allowing deduction u/s 54 in respect of the whole of the amount invested by the assessee in purchase of residential house in the absence of no provision in law to allow deduction u/s 54 to the assessee for the portion of the new residential property owned by his wife."

3. The first issue for consideration relates to deleting the addition made by the Assessing Officer with regard to benefit of indexation. The facts of the case stated in brief are that the assessee declared long term capital gain of Rs. 1,37,02,500/- on sale of residential property at Chandigarh (½ share) and after claiming deduction of Rs. 80,00,000/- under sec. 54 and Rs. 40,00,000/- under sec. 54EC, declared taxable long term capital gain at Rs. 17,02,500/-. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee became owner of the ½ share of property along with his brother as per Will of his father dated 4.04.1988. Later on, the father of the assessee expired on 6.04.1990, when the assessee became owner of the property to the extent of ½ share. Since the above property was built by his father in 1965 and was expanded in 1971, the assessee took cost of acquisition at Rs. 2,50,000/- being the fair market value of the property as on 1.04.1981. The assessee accordingly worked out the indexed cost of acquisition with reference to the acquisition of property as on 1.04.1981. However, the Assessing Officer interpreted the provisions of Explanation (iii) to section 48 of the Act in such a way that the assessee could get benefit of indexation only from the date when the asset was first held by him. The AO allowed benefit of indexation with reference to F.Y. 1990-91 and not for F.Y. 1980-81 as claimed by the assessee. The AO relied on the decision of ITAT, Delhi Bench in the case of Arun Shungloo Trust [IT Appeal No. 1336/Delhi/2005 dated 25th January, 2008]. The AO computed the cost of acquisition at Rs. 7,12,912/-.

4. The second issue for consideration is in relation to allowing deduction under sec. 54 of the Act in respect of the whole of the amount invested by the assessee in the purchase of residential house. The assessee purchased residential property at C-602, The Residency, Ardee City, Gurgaon in joint name with his wife Smt. Ritu Verma and claimed deduction under sec. 54 of the Act in respect of amount of Rs. 80,00,000/- invested in residential property. However, the AO restricted the deduction under sec. 54 to the extent of Rs. 40,00,000/- as the property was jointly held by the assessee with his wife.

5. Before the CIT(A) it was submitted that the Explanation 1 to sec. 2(42A) for the purpose of determination of period for which any capital asset is held by the assessee in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-sec.(1) of sec. 49, the period for which the asset was held by the previous owner referred to in section 49(1) of the Act is to be included. It was, therefore, submitted that in terms of provisions of sec. 2(42A), the period of holding by the previous owner has to be included for the purpose of working out cost of indexation. The learned Authorized Representative of the assessee relied on the decision of ITAT in the case of Dy. CIT v. Manjula J. Shah [2010] 35 SOT 105 (Mum.) (SB). As regards second ground, it was submitted that the whole purchase consideration in respect of property at C-602, The Residency,