Section 55 – Cost of Acquisition and Improvement

Article explains What is meant by cost of acquisition (Section 55), Cost of Acquisition with Reference to Certain Modes of Acquisition (Section – 49), What is meant by cost of improvement, If the assessee acquires any asset by way of inheritance, partition of HUF or by any other mode specified in sec 49(1) and sec 47 then do the cost of acquisition of previous assessee shall be considered, Article answers whether  Mortgage & interest expenses forms part of cost of acquisition or not and also about inclusibility of Compensation paid for eviction in Cost of Acquisition and Improvement.

SECTION 55- COST OF ACQUISITION

1. What is meant by cost of acquisition?

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. expenses incurred on completing transfer.

2. Cost of Acquisition with Reference to Certain Modes of Acquisition (Section – 49)

1. Where the capital asset became the property of the assessee:

a. on any distribution of assets on the total or partial partition of a Hindu undivided family;

b. under a gift or will;

c. by succession, inheritance or devolution;

d. 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 at any time before 1.04.1987;

e. on any distribution of assets on the liquidation of a company;

f. under a transfer to a revocable or an irrevocable trust;

g. by transfer from its holding company or subsidiary company;

h. by transfer in a scheme of amalgamation;

i. by an individual member of a Hindu Undivided Family giving his separate property to the assessee HUF anytime after 31.12.1 969,

In all above cases, the cost of acquisition of the asset shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the assessee.

If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner, who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition.

2. Where shares in an amalgamated Indian company became the property of the assessee in a scheme of amalgamation the cost of acquisition of the shares of the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.

3. Where a share or debenture in a company, became the property of the assessee on conversion of bonds or debentures the cost of acquisition of the asset shall be the part of the cost of debenture, debenture stock or deposit certificates in relation to which such asset is acquired by the assessee.

4. Where shares, debentures or warrants are acquired by the assessee under Employee Stock Option Plan or Scheme and they are taken as perquisites u/s 1 7(2) the Cost of Acquisition would be the valuation done u/s 17(2).

5. Cost of Acquisition of shares in the Resulting Company, in a demerger.

The cost of acquisition of the original shares held by the share holder in the demerged company will be reduced by the above amount.

6. Where Capital Gains is not levied on a transfer of capital asset between a Subsidiary Company and a Holding Company or vice-versa but the conditions laid down are violated subsequently and Capital Gains is to be levied, the cost of acquisition to the transferee company would be the cost for which such asset was acquired by it.

7. Where the capital asset is goodwill of a business or a Trade Mark or Brand Name associated with a business, right to manufacture, produce or process any article or thing, right to carry on any business, tenancy rights, stage carriage permits or loom hours, the cost of acquisition is the purchase price paid by the assessee and in case no such purchase price is paid it is nil.

8. Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the Fair Market Value on the date on which the capital asset became the property of the previous owner.

9. Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation cost of acquisition of such asset is the Fair Market Value of the asset on the date of distribution.

10. Where share or a stock of a company became the property of the assessee on:

a. the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares;

b. the conversion of any shares of the company into stock;

c. the re-conversion of any stock of the company into shares;

d. the sub-division of any of the shares of the company into shares of smaller amount; or

e. the conversion of one kind of shares of the company into another kind. Cost of acquisition of the share or stock is as calculated from the cost of acquisition of the shares or stock from which it is derived.

11. The cost of acquisition of rights shares is the amount which is paid by the subscriber to get them. In case a subscriber purchases the right shares on renunciation by an existing share holder, the cost of acquisition would include the amount paid by him to the person who has renounced the rights in his favor and also the amount which he pays to the company for subscribing to the shares. The person who has renounced the rights is liable for capital gains on the rights renounced by him and the cost of acquisition of such rights renounced is nil.

12. The cost of acquisition of bonus shares is nil.

13. Where equity share(s) are allotted to a share holder of a recognised stock exchange in India under a scheme of demutualisation or corporotisation approved by SEBI, the cost of acquisition of the original membership of the exchange is the cost of acquisition of the equity share(s). The cost of acquisition of trading or clearing rights acquired under such scheme of demutualisation or corporatisation is nil.

14. Where any other capital asset has become the property of the assessee before 1st day of April, 1981, the cost of acquisition of the asset to the assessee or the previous owner (depending upon the mode of acquisition) or the fair market value of the asset on 1.4.1981, at the option of the assessee would be its cost of acquisition.

15. Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of the respective fringe benefit.

16. Where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of transfer of bonds or debentures or Global Depository Receipts purchased in foreign currency, the cost of acquisition shall be deemed to be that part of the cost of debentures or bond or deposit certificate in relation to which such asset is acquired by the assessee.

Important Note:

As per Amendment in Finance Act, 2018, w.e.f 1^st April, 2018, a 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 before the 1st day of February, 2018, shall be higher of—

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

(ii) 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.

Also for the purposes of this clause —

 (a) “fair market value” means-

(i) in a case where the capital asset is listed on any recognised stock exchange as on the 31st day of January, 2018, the highest price of the capital asset quoted on such exchange on the said date, where there is no trading in such asset on such exchange on the 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value

(ii) in a case where the capital asset is a unit which is not listed on a recognised stock exchange as on the 31st day of January, 2018, the net asset value of such unit as on the said date

(iii) in a case where the capital asset is an equity share in a company which is—

(A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer;

(B) listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47,

an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later

(b) “Cost Inflation Index” shall have the meaning assigned to it in clause (v) of the Explanation to section 48;

(c) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43

3. What is meant by cost of improvement?

Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title. In other words, cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset. However, any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and Gains from Business or Profession or Income from Other Sources (Interest on Securities) would not be taken as cost of improvement.

–    Cost of Improvement in relation to below mention shall be taken to be nil.

i)    Goodwill.

ii)   Right to manufacture, produce or process any article or thing.

iii) Right to carry on any business.

–  Any other capital asset.

i) In case asset acquired before 01/04/1981 – Cost of Improvement incurred since 01/04/1981 either by previous owner or assessee.

ii) In case asset acquired after 01/04/1981 – All cost incurred by previous owner and assessee.

4. If the assessee acquires any asset by way of inheritance, partition of HUF or by any other mode specified in sec 49(1) and sec 47 then do the cost of acquisition of previous assessee shall be considered?

When a capital asset is acquired by an assessee by gift, inheritance, or partition of Hindu Undivided Family or under any of the modes specified in Sec 49(1), or some other mode specified in certain clauses of Sec 47 under explanation 1 to Sec 2(42A), the period for which the asset was held by the earlier owner or in the earlier form is also to be included as part of the holding period of the assessee for determining whether the capital asset is a long term capital asset or a short term capital asset.

U/s 49(1), where the capital asset became the property of the assessee on the distribution on partition of an HUF, under a gift or will, by succession, inheritance or devolution, on distribution on dissolution of a firm to 1st April 1987, on distribution of assets on liquidation of a company, under transfer to a revocable or irrevocable trust, or under transfers referred to in Sec 47(iv), (v), (vi), (via), (viaa), (vica) or (vicb), the cost of acquisition of the previous owner is deemed to be the cost of acquisition of the assessee.

U/s 55(2)(b)(ii), where a capital asset became the property of the assessee by any of the modes specified in Sec 49(1), and the capital asset was acquired by the previous owner prior to 1^St April, 1981, the assessee is entitled to substitute the fair market value of the asset as on 1^ST April, 1981 for the actual cost.

5. Some Practical Issues

ISSUE 1 – Mortgage & interest expenses to form part of cost of acquisition.

Where assessee purchased a property and on same day mortgage it to raise loan to pay part consideration of property, mortgage expenses incurred in connection with the acquisition of the property and the interest payable on the mortgage amounts, which had been utilized as part of the consideration, would form part of the COA of the property for the purpose of computation of cpital gain.[CITV. K. Raja Gopala Rao 252 ITR 459 (MAD) (2001)].

ISSUE 2 – Compensation paid for eviction.

Compensation paid for eviction of hutment dwellers from land which is sold would be allowable as Cost of improvement. [CIT V. Miss Piroja C. Patel 242 ITR 582 (BOM) (2000)].

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Replaced With Amendments