Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Capital Gains under Income Tax Act. 1961 – LTCG & STCG

Cost of acquisition is the price which the Assessee has paid, or the amount which the Assessee has incurred, for acquisition of the asset. Expenses incurred for completing the title are a part of the cost of acquisition.

Interest on money borrowed for acquiring capital assets will form part of cost of asset: 

(1)          Interest on loan taken for acquiring a capital asset (other than house property) will become part of the cost of acquisition. [CIT v Mithlesh Kumari (1973) 92 ITR 9 (Del)]. In the case of house property, any interest (whether current or accumulated) is allowed as deduction under section 24(b) and thus will not form part of cost of acquisition.

(2)          Interest paid by the firm to its partner on capital contribution for the purchase of capital asset cannot be treated as part of cost of acquisition

(3)          Interest on the asset acquired by the Assessee carrying on business or profession till such asset is put to use, shall form part of the cost of acquisition but any interest paid for the period after the asset is put to use shall be treated as revenue expense and hence will not form part of cost of acquisition.

Cost of Acquisition of Capital Asset [Section 55(2)]
Cost of Acquisition of Capital Asset [Section 55(2)]
Sum paid for discharge of mortgage:

Where the property has been mortgaged by the previous owner during his lifetime and the Assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage shall be regarded as cost of acquisition under section 48 read with section 55(2) of the Act. [Arunachalam (RM) v CIT (1997) 227 ITR 222 (SC)] The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.  [Jagadish Chandran (V.S.M.R.) v CIT (1997) 227 ITR 240 (SC)].

Cost of acquisition includes deemed cost of acquisition.

Table of Contents

1.   [Section 49] – ‘Deemed Cost of Acquisition’ of Capital Assets for Computing Capital Gains

The cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the Assessee, as the case may be.

(1).  [Section 49(1)]- Cost to the Previous Owner of the Property acquired it:

Where the capital asset became the property of the Assessee in any of the manner mentioned below, the cost of acquisition of the asset shall be deemed to be cost for which the previous owner of the property acquired it:

(a)          on the distribution of the assets on total/partial partition of Hindu Undivided Family;

(b)          under a gift or will;

(c)           by succession, inheritance or devolution:

(d)          on any distribution of assets on the liquidation of a company;

(e)          on a transfer to a revocable or irrevocable trust:

(f)           on a transfer by a wholly owned Indian subsidiary company to its holding company or vice versa

(g)          on any transfer in a scheme of amalgamation of two Indian companies subject to certain conditions u/s 47(vi);

(h)          on any transfer, in a demerger, of a capital asset by the demerged company to the resulting company as per section 47(vib);

(i)            on transfer of a capital asset or intangible asset by a firm to a company as a result of succession, as per section 47(xiii) subject to certain conditions;

(j)            on any transfer by a private company or unlisted public company to a limited liability partnership firm as a result of conversion of the company into limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008;

(k)          on transfer of capital asset or intangible asset by a sole proprietary concern to a company as on result of succession as per section 47(xiv) subject to certain conditions:

(l)            on conversion of self-acquired property of a member of a Hindu Undivided Family to the joint family property.

(2).  [Section 49(2)]- Cost of Shares of Amalgamated Company:

Where the shareholder of an amalgamating company gets the shares of the amalgamated company in lieu of the shares held by him in an amalgamating company, the cost of acquisition of such shares of the amalgamated company shall be deemed to be the cost of acquisition to him of the shares of the amalgamating company.

For Example, X purchases 100 shares of R Company Ltd. for Rs.10 each on 5.11.2017. In 2018-19, R Company Ltd. amalgamates into S Company Ltd. and under the scheme of amalgamation, X receives 10 shares of S Company Ltd. in lieu of the 100 shares of R Company Ltd. The cost of acquisition of 10 shares of S Company Ltd. will be Rs. 1000 i.e., the cost of acquisition of the shares of R Company Ltd. in lieu of which he has received the shares of S Company Ltd.

(3).  [Section 49(2A)]- Cost of Acquisition in the case of Shares / Debentures acquired on conversion of Bonds or Debentures or Debentures Stock or Deposit Certificates:

As regards share or debenture of a company which became the property of the Assessee in consideration of a transfer referred to in section 47(x) and (xa) i.e. bonds or debentures or debentures stock or deposit certificates are converted into shares or debentures, the cost of acquisition of the shares/debentures issued on such conversion shall be deemed to be that part of the cost of the debenture/debenture stock/deposit certificate, in relation to which such an asset is acquired by the Assessee.

See also  Tax Treatment of ‘Provident Fund’ for Income-tax Purposes - for Computing Salary Income

For example, X has subscribed to 10 partly convertible debentures of Rs.100 each of R Co. Ltd. on 4.4.2017. On 5.2.2019, he receives 4 shares of 10 each per debenture and the remaining value of the debenture is Rs. 50 i.e., the 4 shares have been received by him in lieu of a part of the cost of the debenture which is Rs. 50. Therefore, the cost of 4 shares shall be Rs. 50.

(4). [Section 49(2AA)]- Cost of Specified Security or Sweat Equity Share already treated as Perquisites Under Section 17(2)(vi):

Where the capital gain arises from the transfer of specified security or sweat equity share, which has already been taxed under the head salary as perquisite, the cost of acquisition of such security or share shall be the fair market value which has been taken into account for the purpose of valuation of perquisite.

(5).  [Section 49(2AAA)]- Cost of the Right of Partner on Conversion of Company to Limited Liability Partnership (LLP):

Where the capital asset being rights of a partner referred to in section 42 of the Limited Liability Partnership Act. 2008 became the property of the Assessee on conversion of company to Limited Liability Partnership, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the company immediately before its conversion.

(6).  [Section 49(2AD)]- Cost of Acquisition of the Units of the Consolidated Scheme acquired in lieu of Units held in a Consolidating Scheme

Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, acquired in lieu of units held in a consolidating scheme, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund.

(7). [Section 49(2AE)]- Cost of Acquisition of Equity Share on Conversion of Preference Share into Equity Share:

Where the capital asset, being equity share of a company, became the property of the Assessee on conversion of preference share into equity share, the cost of acquisition of the asset shall be deemed to be that pan of the cost of the preference share in relation to which such asset is acquired by the Assessee.

(8).  [Section 49(2AF)]- Cost of Acquisition of the Units in the Consolidated Plan of Mutual Fund Scheme:

Where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, acquired in consolidating plan, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating plan of the scheme of the mutual fund.

(9).  [Section 49(2C)]- Cost of Acquisition of the Shares in the Resulting Company:

 It shall be the amount which bears to the cost of acquisition of shares held by the Assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger.

In other words:

“Net worth” for this section shall mean the aggregate of the paid-up share capital and general reserves as appearing in the books of accounts of the demerged company immediately before demerger.

If the shares of the resulting company are later on transferred, then for computation of nature of capital gain, the period for which the shares were held in demerged company shall also be considered [Section 2(42A)].

(10). [Section 49(2D)]- Cost of Acquisition of the Original Share of the Demerged Company:

 It shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C) above i.e., original cost of acquisition — cost of acquisition of the shares in the resulting company.

(11). [Section 49(4)]- Cost of Acquisition of Property received without consideration or for inadequate consideration:

Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under section 56(2) (vii) [now 56(2)(x)], the cost of acquisition of such property shall be deemed to be value which has been taken into account for section 56(2) (vii) [now 56(2)(x)].

Similarly, cost of acquisition of shares acquired by a firm or a closely held company without consideration or for inadequate consideration will be the value which has been taken into account and has been subjected to tax under section 56(2) (viia) [now 56(2(x)].

Example:

(1)          R receives an immovable property without consideration from an unrelated person. The stamp duty value of the immovable property is Rs. 60 lakhs. In this case Rs. 60 lakhs will be taxable in the hands of R under the head “income from other sources and the cost of acquisition in the hands of R shall be Rs. 60,00,000.

(2)          A firm purchases shares of a closely held company for Rs. 1.40,000 whose fair market value is Rs. 2,90,000. In this case difference between the FMV and the purchase price i.e., Rs. 1,50,000 shall be treated as income of the firm under the head “income other sources

However, the cost of acquisition of such shares in the hands of the firm shall be 2,90,000 as per section 49(4) instead of 1,40,000 as the firm has already paid tax on 1,50,000.

(12). [Section 49(5)]- Cost of Acquisition of an Asset declared under the Income Declaration Scheme, 2016

Where the capital gain arises from the transfer of an asset declared under the Income Declaration Scheme. 2016, and the tax, surcharge and penalty have been paid in accordance with the provisions of the Scheme on the fair market value of the asset as on the date of commencement of the Scheme (i.e., on 1.6.20 16), the cost of acquisition of the asset shall be deemed to be the fair market value of the asset which has been taken into account for the purposes of the said Scheme.

(13). [Section 49(7)]- Cost of Acquisition of the Share in the Project being Land and Building in a Joint Development Agreement referred in Section 45(5A):

Where the capital gain arises from the transfer of a capital asset, being share in the project, in the form of land or building or both, referred to in section 45(5A), not being the capital asset referred to in the proviso to the said subsection, the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.

(14). [Section 49(9)]- Cost of Acquisition of the Capital Asset where the Inventory has been Converted into or treated as Capital Asset

Where the capital gain arises from the transfer of a capital asset referred to in section 28(via), the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.

(15) Summarised Table – Deemed Cost of Acquisition of Capital Asset

 

SI. No. Mode of acquisition of
Capital Asset
Cost of acquisition
to the assessee
Relevant
Sections
1. (a) Distribution of assets on total or partial partition of HUF. or Cost of acquisition to the
previous owner 
Section 49(1)
(b) Gift or will, or
(c) Succession, inheritance or devolution, or
(d) distribution of assets on liquidation of the company, or
(e) transfer to a revocable, or irrevocable trust, or
(f) transfer by holding company to wholly owned subsidiary company or vice versa, or
(g) transfer in a scheme of amalgamation of

(i)   two Indian Companies

(ii)  two foreign companies subject to certain conditions, or

(h) conversion of self-acquired individual property with HUF property
(i) succession by the company of a firm or a sole proprietary firm
(j) conversion of company into Limited Liability Partnership
(k) conversion of self-acquired individual property to I1UF property
2. Allotment of shares in the amalgamated company in the scheme of amalgamation Cost of acquisition in the amalgamating company Section 49(2)
3. Shares or debentures acquired on conversion of debentures or debenture stock or deposit certificate or notified debentures bought by the non-resident in foreign currency Cost of corresponding debentures or debentures stock or deposit certificate Section 49(2A)
4. Cost of acquisition of specified security or sweat equity shares FMV which has been taken into account for valuation of such perquisite Section
49(2AA)
5. Cost of acquisition of right of partner on conversion of company to a limited liability partnership Cost of acquisition of shares in the company immediately before conversion Section
49(2AAA)
6. Cost of acquisition of a unit or units in a
consolidated scheme of a mutual fund,
which became the property of the assessee
in consideration of a transfer referred to in section 47(xviii)
It shall be deemed to be the
cost of acquisition to him of
the unit or Units in the
consolidating scheme of the mutual fund.
Section
49(2AD)
7. Cost of acquisition of equity share on conversion of preference share into equity share It shall be deemed to be that part of the cost of the reference share in relation to which such asset is acquired by the assessee Section
49(2AE)
8. Cost of acquisition of the units in the consolidated plan of mutual fund scheme It shall be deemed to be the cost of acquisition to him of the unit or Units in the consolidating plan of the scheme of the mutual fund. Section
49(2AF)
9. Cost of acquisition of shares in the resulting company/co-operative bank allotted due to demerger Cost of acquisition of shares held by the assessee in the demerged company Net book value of the assets transferred in a demerger
Net worth of the
demerged company
immediately before
demerger
Section 49(2C)
10. Cost of acquisition of original shares of demerged company/co-operative bank Original cost of acquisition minus the value arrived at point No. 5 above Section 49(2D)
11. Cost of acquisition of property received without consideration or for inadequate consideration The value which has been
taken into account for taxation of income under the head income from other sources as per section 56(2)(vii) or (viia)
Section 49(4)
12. Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016 The fair market value of the asset which has been taken into account for the purposes of the said Scheme Section 49(5)
13. Cost of acquisition of the share in the project being land and building in a joint development agreement referred in section 45(5A) It shall be the stamp duty value, on the date of issue of the said certificate, of his share. being land or building or both in the project. as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset Section 49(7)
14. Cost of acquisition of the capital asset where the inventory has been converted into or treated as capital asset It shall be deemed to be the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner Section 49(9)

2.   [Section 55(2)(b)]- Cost of Acquisition of Assets acquired before 1.4.2001

In the following cases, the Assessee has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be the cost of acquisition for computation of capital gains:

(i)            where an asset has been acquired by the Assessee himself before April 1, 2001, he has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be cost of acquisition for computation of capital gain. (For availing the option, the Assessee will obviously opt for that value which is more.)

(ii)           where the assets were acquired by the Assessee through a mode given under section 49(1) (Deemed Cost of Acquisition) and the previous owner acquired that asset before 1.4.2001.  In this case, the Assessee has an option to take the cost of acquisition as the cost to the previous owner or the fair market value of that asset as on 1.4.2001 for the purpose of the computation of Capital Gains.

3.   [Section 55(2)(a)]- Cost of Acquisition of ‘Goodwill’ of a business or a ‘Trade Mark’ or ‘Brand Name’ associated with business or ‘Right to Manufacture, Produce or Process any Article or Things’ or ‘Right to Carry on any Business or Profession’, ‘Tenancy Rights’, ‘Stage Carriage Permits’ or ‘Loom Hours’:

It shall be as under:

(i)            in case it is acquired in any mode given under clause (i) to (iv) to section 49(1)

it will be cost to the previous owner if the previous owner paid for it but where it was self-generated by the previous owner, it will be taken as Nil.

(ii)           in case such Asset is purchased by the Assessee

it means the amount of purchase price.

(iii) in any other case

it shall be taken as nil as it will be self-generated.

4.   [Section 55(2) (aa)]- Cost of Acquisition of Right Shares:

Where an Assessee, by virtue of holding certain shares, becomes entitled to subscribe to any additional shares then:

(a)          the cost of acquisition of the original shares shall remain unchanged i.e., it shall be the amount actually paid for acquiring the original shares;

(b)          the cost of acquisition of the right shares, when the Assessee subscribes to the shares on the basis of the said entitlement, shall be the amount actually paid for acquiring the right shares;

(c)           the cost of acquisition of the right to acquire such shares, when such a right is renounced in favor of any other person, shall be taken to be nil;

(d)          as regards, the person in whose favors the right to subscribe to the shares has been renounced, the cost of acquisition of such right share shall be the amount paid by him to the company for acquiring the shares plus the amount paid to the person renouncing the right.

Example:

1.   Mr. X holds 100 shares of ABC Ltd., a listed company which were acquired by him in 1997 for Rs. 10 per share. The market value of the shares as on 1.6.2019 is Rs. 250 per share. The company offers him a right to subscribe to 100 additional shares at the rate of Rs. 160 per share. If he subscribes to the shares then his cost of acquisition will be as under:

(a)          for the original 100 shares                                            Rs. 10 per share

(b)          for the additional 100 right shares                            Rs. 160 per share

2.   In the above example, if R does not subscribe to the additional shares but renounces the right in favour of Mr. Y at the rate of Rs. 50 per share, then the entire amount of Rs. 5,000 received by him would be treated as capital gains, as the cost of acquisition of the right is Nil.

3.   If Mr. Y, in favour of whom the right was renounced, subscribes to the 100 shares then his cost of acquisition will be as under:

Particulars Amount (Rs.)
(a) amount paid to the company 16,000
(b) amount paid to X for acquiring the right to subscribe to the shares 5,000
Total 21,000

5.   [Section 55(2) (aa)(iiia)]- Cost of Acquisition of Bonus Shares or any other Financial Asset allotted without payment:

(A) Bonus Shares or Financial Asset allotted without payment after 1.4.2001:

The cost of acquisition in relation to the financial assets (i.e., share or any other security) allotted to the Assessee on or after 1.4.2001 without any payment and on the basis of holding of any other financial asset, shall be taken to be Nil.

Therefore, the cost of bonus shares/security shall be taken to be Nil and the entire sale consideration received on the transfer of the bonus shares/security shall be treated as capital gains.

(B) Bonus Shares or Financial Asset allotted without payment before 1.4.2001:

If bonus shares have been allotted to the Assessee before 1.4.2001, although the cost of such bonus shares is Nil, the Assessee may opt for market value as on 1.4.2001 as the cost of acquisition of such bonus shares.

The cost of acquisition of original shares shall be the amount actually paid to acquire the original shares.

6.   [Section 55(2) (ac)]- Cost of Acquisition for purpose of computing Long-Term Capital Gain under Section 112A

The cost of acquisition for the purposes of computing capital gains in relation to a long-term capital asset, being

(a)           an equity shares in a company; or

(b)          a unit of an equity-oriented fund; or

(c)           a unit of a business trust

referred to in section 112A, acquired by the Assessee before 1.2.2018, shall be higher of—

(i)            the actual cost of acquisition of such asset; and

(ii)           the lower of—

(a)           the fair market value of such asset;

and

(b)          the full value of consideration received or accruing as a result of the transfer of the capital asset.

7.   [Section 50]- Cost of Acquisition of Depreciable Assets:

As already discussed under the chapter on Profits and gains of business and profession’, all depreciable assets except in case of electricity companies are part of block of assets.

Where the full value of the consideration as a result of the transfer of any part or entire block of asset exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain, which will always be a short-term capital gain. The cost of acquisition of a block of depreciable assets is the written down value of the block at the beginning of the year plus actual cost of any asset falling within the same block, acquired during the year.

In other words, the excess of the sale consideration over the aggregate of the following three amounts shall be the short-term capital gain:

(a)           expenditure in connection with the transfer;

(b)          the written down value of the block of assets in the beginning of the year; and

(c)           the actual cost of any asset falling within the block of asset acquired during the previous year.

Such an excess shall be deemed to be the capital gain arising from the transfer of short-term capital assets.

8.   Summarized Table of Cost of Acquisition:

SL No. Type of Capital Asset Cost of acquisition to the
assessee
Relevant section
applicable
I. Goodwill of a business, trademark or brand name associated with a business, right to manufacture or produce or process any article or thing or right to carry on any business or profession or tenancy rights, state carriage permits or loom hours purchased from previous owner Amount of purchase price (FMV on 1.4.2001 not allowed even if acquired before 1.4.2001) 55(2)(a)(i)
2. Same assets as above but self-generated Nil (FMV on 1.4.2001 not allowed) 55(2)(a)(ii)  
3. (a) Allotment of additional financial asset. i.e., share or security Amount actually paid 55(2) (aa)
(b) Financial asset allotted without any payment Nil

(But if acquired before 1.4.2001 F.M.V. as on 1.4.2001 allowed)

55(2) (aa)
4. (a) Equity share(s) allotted to a shareholder on demutualisation or corporatisation of stock exchanges Cost of acquisition of his original membership of the stock exchange 55(2) (ab)
(b) Trading or clearing rights, acquired by shareholder mentioned in clause (a) above Nil Proviso to section 55(2) (ab)
5. Long-term capital asset, being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust referred to in section 112A, acquired by the assessee before 1.2.2018 It shall be higher of —

(i) the actual cost of acquisition of such asset: and

(ii) the lower of—

(a) the fair market value of such asset and

(b) the full value of
consideration received or accruing as a result of the transfer of the capital asset.

55(2) (ac)
6. Any other asset becoming the property of the assessee before 1.4.2001 Cost of acquisition to the assessee or its F.M.V. as on 1.4.2001 at the option of the assessee 55(2)(b)(i)
7. Capital asset becoming the property of the assessee in any of the modes specified in section 49(1) and it became the property of the previous owner before 1.4.2001. Cost of acquisition to the previous owner or its F.M.V. as on 1.4.2001 at the option of the assessee 55(2)(b)(ii)
8. Capital asset becoming the property of the
assessee on distribution by the company on liquidation provided capital gain tax has been assessed under section 46(2)
F.M.V. of the asset on date of distribution 55(2)(b)(iii)  
9. Share or stock of company becoming assessee’s property by consolidation, conversion, etc., of shares or stock Cost of acquisition calculated with reference to cost of acquisition of shares or stock from which asset is derived. 55(2)(b)(v)

Cost of Acquisition included Deemed Cost of Acquisition.

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