Cost of Acquisition of Assets [Section 55(2)] under Capital Gain

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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. Similarly, Sum paid for Discharge of Mortgage debt shall be regarded as Cost of Acquisition under Section 48 read with Section 55(2) of the Act. Here we mentioned the various situations for determining the Cost of Acquisition of Assets for Computation of Capital Gain.

Cost of Acquisition of Capital Asset-Section 55(2)
Cost of Acquisition of Capital Asset-Section 55(2)

Table of Contents

1. Deemed Cost of Acquisition of Assets

(1). Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain [Section 49(1)]

If a person has acquired a capital asset in the circumstances specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the previous owner is taken as cost of acquisition. This rule is always applicable and does not have any exception. Circumstances specified by section 49(1) are as follows–

  1. acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided family;
  2. acquisition of property under a gift or will;
  3. acquisition of property —
    1. by succession, inheritance or devolution, or
    2. on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons where such dissolution had taken place before April 1, 1987, or
    3. on any distribution of assets on the liquidation of a company, or
    4. under a transfer to a revocable or an irrevocable trust, or
    5. by a wholly-owned Indian subsidiary company from its holding company, or
    6. by an Indian holding company from its wholly-owned subsidiary company, or
    7. under a scheme of amalgamation, or
    8. under a scheme of demerger; or
    9. under a scheme of conversion of private company/unlisted company into LLP;
    10. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or
  4. acquisition of property, by a Hindu undivided family where one of its members has converted his self-acquired property into joint family property after December 31, 1969.

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

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 5.11.2014. In 2015-16, 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). Cost of Acquisition in the case of Shares/Debentures acquired on Conversion of Bonds or Debentures or Debentures Stock or Deposit Certificates [Section 49(2A)]:

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 4.4.2015. On 5-2-2017, 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 6-8-2017, its period of holding shall be taken from 4-4-2015 to 5-8-2017.

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). Cost of specified security or sweat equity share already treated as perquisites under section 17(2)(vi) [Section 49(2AA)]:

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). Cost of the right of partner on conversion of company to Limited Liability Partnership [Section 49(2AAA)]:

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). Cost of acquisition of the units of the consolidated scheme acquired in lieu of units held in a consolidating scheme [Section 49(2AD)]

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). Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AE)]:

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 part of the cost of the preference share in relation to which such asset is acquired by the assessee.

(8). Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]:

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). Cost of acquisition of the shares in the resulting company [Section 49(2C)]:

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 :

Cost of Acquisitions Section 49(2C)
Cost of Acquisitions Section 49(2C)

“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). Cost of acquisition of the original share of the demerged company [Section 49(2D)]:

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). Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)]:

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)].

(12). 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.

(13). Cost of acquisition of the share in the project being land and building in a joint development agreement referred in section 45(5A) [Section 49(7)]:

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.

(14). Table showing Deemed Cost of Acquisition of Asset in a Summary view:

1. (a)Distribution of assets on total or partial partition of HUF, orCost of acquisition to the
previous owner
Sec. 49(1)
(b)Gift or Will, orCost of acquisition to the
previous owner
Sec. 49(1)
(c)Succession, inheritance or devolution, orCost of acquisition to the
previous owner
Sec. 49(1)
(ci)distribution of assets on liquidation of the company, orCost of acquisition to the
previous owner
Sec. 49(1)
(e)transfer to a revocable, or irrevocable trust, orCost of acquisition to the
previous owner
Sec. 49(1)
(f)transfer by holding company to wholly owned subsidiary company or vice versa. orCost of acquisition to the
previous owner
Sec. 49(1)
(g)transfer in a scheme of amalgamation of(s)
two Indian Companies (ii) two foreign
companies subject to certain conditions, or
Cost of acquisition to the
previous owner
Sec. 49(1)
(h)conversion of self-acquired individual property with HUF propertyCost of acquisition to the
previous owner
Sec. 49(1)
(i)succession by the company of a firm or a sole proprietary firmCost of acquisition to the
previous owner
Sec. 49(1)
(j)conversion of company into Limited Liability PartnershipCost of acquisition to the
previous owner
Sec. 49(1)
(k)conversion of self-acquired individual property to HUF propertyCost of acquisition to the
previous owner
Sec. 49(1)
2.Allotment of shares in the amalgamated company in the scheme of amalgamationCost of acquisition in the amalgamating companySec. 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 currencyCost of corresponding debentures or debentures stock or deposit certificateSec. 49(2A)
4.Cost of acquisition of specified security or sweat equity sharesFMV which has been taken into account for valuation of such perquisiteSec. 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 conversionSec. 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.
Sec. 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
Sec. 49(2AE)
8.Cost of acquisition of the units in the consolidated plan of mutual fund schemeIt 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.Sec. 49(2AF)
9.Cost of acquisition of shares in the resulting company/co-operative bank allotted due to demergerCost of acquisition of shares held by the assessee in the demerged companyNet book value of the assets transferred in a demerger Net book value of the assets transferred in a demerger Sec. 49(2C)
10.Cost of acquisition of original shares of demerged company/co-operative bankOriginal cost of acquisition minus the value arrived at point No. 5 aboveSec. 49(2D)
11.Cost of acquisition of property received without consideration or for inadequate considerationThe 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)
Sec. 49(4)
12.Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016The fair market value of the asset which has been taken into account for the purposes of the said SchemeSec. 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(SA)
It shall be the stamp duly 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 (he full value of the consideration received or accruing as a result of the transfer of the capital assetSec. 49(7)
14.Cost of acquisition of the capital asset where the inventory has been converted into or treated as capital assetIt 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 mannerSec. 49(9)
TABLE-1 : Summary View of Deemed Cost of Acquisition of Assets for Computation of Capital Gain

2. Cost of Acquisition being the Fair Market Value as on April 1, 2001 –

In the following cases, the assessee may take, at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost of acquisition:

  1. where the capital asset became the property of the assessee before April 1, 2001; or
  2. where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the property of the previous owner before April 1, 2001.

The following points should be duly considered —

  1. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may (or may not) opt for it.
  2. The option is available only when an asset was acquired by the assessee [or by the previous owner in case section 49(1) is applicable] before April 1, 2001.
  3. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is taken as the cost of acquisition.
  4. The option is not available in the case of depreciable assets.
  5. Further option is not available in respect of transfer of a capital asset being goodwill of a business; trade mark/ brand name associated with a business; right to manufacture, produce or process any article or thing; right to carry on business/profession; tenancy right; route permits or loom hours (whether self generated or otherwise).
What is Fair Market Value [Section 2(22B)]:
Fair market value in relation to the capital market means—
1. the price which the capital asset would ordinary fetch if sold in the open market on the relevant date; and
2. where the price referred to in (i) is not ascertainable, such price as may be determined in accordance with the rules made under the Income-tax Act.

3. Cost of Acquisition of goodwill or a trade mark or brand name, tenancy rights, stage carriage permits or loom hours of a Business [Section 55(2)(a)]:

It shall be as under:

  1. 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.

  1. in case such asset is purchased by the assessee —

it means the amount of purchase price.

  1. in any other case —

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

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

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

  1. 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;
  2. 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;
  3. the cost of acquisition of the right to acquire such shares, when such a right is renounced in favour of any other person, shall be taken to be nil;
  4. as regards, the person in whose favour 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.

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

(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 (1.4.1981 upto A.Y. 2017-18) 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 (1.4.1981 upto A.Y. 2017-18), 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.

6. Cost of Acquisition of Depreciable Assets [Section 50]:

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:

  1. expenditure in connection with the transfer;
  2. the written down value of the block of assets in the beginning of the year; and
  3. 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.

7. Cost of Acquisition in case of Compulsory Acquisition of a Capital Asset –

The special rules given below are applicable where the Government has acquired an asset of a person by way of compulsory acquisition. These rules are also applicable when consideration is approved or determined by the Central Government or RBI (even if there is no compulsory acquisition).

Initial compensation –

Initial compensation† is taken as full value of consideration. Capital gain is chargeable to tax in the year in which the initial compensation (or part thereof) is first received. Indexation benefit is, however, available up to the year in which the asset is compulsorily acquired.

Additional compensation –

If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in which enhanced compensation or additional compensation is received. For this purpose cost of acquisition and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining additional compensation is deductible.

If the enhanced compensation is received by any other person (because of the death of the transferor or for any other reason), it is taxable as income of the recipient.

8. Table showing Cost of Acquisition of Asset in a Summary View:

SI No. Type of Capital Asset Cost of acquisition to the
assessee
Relevant section
applicable
1.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 ownerAmount of purchase price (FMV on 1.4.2001 not allowed even if acquired before 1.42001)55(2)(a)(i)
2.Same assets as above but self-generatedNil (FMV on 1.4.2001 not allowed)55(2)(a)(ii)
3.(a) Allotment of additional Financial asset, i.e., share or securityAmount actually paid55(2)(aa)
(h) Financial asset allotted without any paymentNil (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 demutualization or corporatization of stock exchangesCost of acquisition of his original
membership of the stock exchange
SS(2)(ab)
(h) Trading or clearing rights, acquired by shareholder mentioned in clause (a) aboveNilProviso 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 1 12A, acquired by the assessee before l.2.201HIt 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 (For meaning of FMV sec below); and (b) the full value of
consideration received or accruing as a result of the transfer of the capital asset. For meaning of fair market value sec para 7.8g above
55(2)(ac)
6.Any other asset becoming the property of the assessec before 1.4.2001Cost of acquisition to the assessee or its F.M.V. as on 1.4.2001 at the option of the assessee55(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 assessee55(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 distribution55(2)(b)(iii)
9.Share or Stock of company becoming assessee’s property by consolidation, conversion, etc. of shares or stockCost of acquisition calculated with reference to cost of acquisition of shares or stock from which asset is derived.55(2)(b)(v)
TABLE-2 : Summary View of Cost of Acquisition of Assets for Computation of Capital Gain

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