Deemed Cost of Acquisition of Capital Asset for Computing Capital Gain

Cost of Acquisition includes Deemed Cost of Acquisition Capital Asset is the Price which the assessee has paid, or the amount which the assessee has incurred, for acquisition of the Assets.

(1) [Section 49(1)]: Cost to the Previous Owner

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.

Note.—There are few other cases also, where the cost of the asset is taken as cost of the previous owner. These have not been discussed as they are not relevant for CA Intermediate.

(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 5.11.2019. In 2020-21, 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. 1,000, 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.

For example :

X has subscribed to 10 partly convertible debentures of Rs. 100 each of R Co. Ltd. on 4.4.2020. On 5-2-2022, he receives 4 shares of Rs. 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.

In case of a capital asset, being a share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in section 47(x) of the Act, there shall be included the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion [Rule
8AA(2)].

Example:

In the above case if these 4 shares are sold on 6-8-2022, its period of holding shall be taken from 4-4-2020 to 5-8-2022.

Similarly, cost of acquisition of shares received upon exchange of Foreign Currency Exchangeable Bond shall be the price at which corresponding bond was acquired.

(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 ‘salaries’ 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

 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 in consideration of a transfer referred to in section 47(xb), the cost of acquisition of the asset shall be deemed to be that part 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, became the property of the assessee in consideration of a transfer referred to in clause (xix) of section 47, 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(2A)]: Cost of Acquisition of a Unit or Units in the Segregated Portfolio

The cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears, to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios. In other words, it shall be as under:

[ Cost of acquisition of a unit or units held by the assessee in the total portfolio x Net asset value of the asset transferred to the segregated portfolio /
Net asset value of the total portfolio immediately before the segregation of portfolios ] i.e

(10) [Section 49(2AH)]: Cost of Acquisition of the Original Units held by the Unit Holder in the main Portfolio

The cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under section 49(2AG).

(11) [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 tip 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)].

(12) [Section 4 9(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.

(13) [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)1.

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 lakh 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 from other sources” as per section 56(2)(viia) [now 56(2)(x)].

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

(14) Cost of Acquisition of an Asset Declared under the Income Declaration Scheme, 2016 [Section 49(5)] :

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 1.6.2016), 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.

(15) [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 sub-section, the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.

(16)  [Section 49(9)] : Cost of Acquisition of the Capital Asset where the Inventor has been converted into or treated as Capital Asset

Where the capital gain arises from the transfer of a capital asset 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.