Defining the cost of acquisition in case of certain assets for computing capital gains – Budget 2023
The existing provisions of the section 55 of the Act, inter alia, defines the ‘cost of any improvement’ and ‘cost of acquisition’ for the purposes of computing capital gains. However, there are certain assets like intangible assets or any sort of right for which no consideration has been paid for acquisition. The cost of acquisition of such assets is not clearly defined as ‘nil’ in the present provision. This has led to many legal disputes and the courts have held that for taxability under capital gains there has to be a definite cost of acquisition or it should be deemed to be nil under the Act. Since there is no specific provision which states that the cost of such assets is nil, the chargeability of capital gains from transfer of such assets has not found favour with the Courts.
2. Therefore, to define the term ‘cost of acquisition’ and ‘cost of improvement’ of such assets, it is proposed to amend the provisions of sub-clause (1) of the Clause (b) of the subsection (1) and clause (a) of sub-section (2) of section 55 so as to provide that the ‘cost of improvement’ or ‘cost of acquisition’ of a capital asset being any intangible asset or any other right ( other than those mentioned in the said sub-clause or clause, as the case may be) shall be ‘Nil’.
3. This amendment is will take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.
[Clause 31]
Extract of relevant clause of Finance Bill 2023
Clause 31 of the Bill seeks to amend section 55 of the Income-tax Act relating to meaning of “adjusted”, “cost of improvement” and “cost of acquisition”.
The provisions of the said section, inter alia, defines the expressions ‘cost of any improvement’ and ‘cost of acquisition’ for the purposes of computing capital gains. However, there are certain assets like intangible assets or any other right for which no consideration has been paid for acquisition, and the transfer of which may result in generation of any income or could be converted into any profit or gain, but the cost of acquisition for such assets is not clearly defined as ‘nil’ in the present provision.
It is proposed to amend the said section to insert expression “or intangible asset or any other right” in the definitions of “cost of any improvement” and “cost of acquisition”.
This amendment will take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2023
31. Amendment of section 55.
In section 55 of the Income-tax Act, with effect from the 1st day of April, 2024,–
(a) in sub-section (1), in clause (b), in sub-clause (1),–
(i) after the word “goodwill”, the words “or any other intangible asset” shall be inserted;
(ii) after the word “profession”, the words “or any other right” shall be inserted;
(b) in sub-section (2), in clause (a),–
(i) for the words “profession, or a right”, the words “profession, or any other intangible asset or a right” shall be substituted;
(ii) for the word “hour,”, the words “hour, or any other right” shall be substituted.
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