Section 55 | Income Tax Act, 1961 | Acquisition & Improvement Cost

Short Notes on Section 55 of Income tax act 1961.

(Opting for benefit of Section 55 )

1. Cost of acquisition of capital assets becoming property of the assessee before 01.04.1981/01.04.2001.

Where the capital assets has become property of the assessee before 01.04.1981, then the cost of acquisition of such an asset will be the actual cost to the assessee or fair market value as on 01.04.1981 at the option of the assessee.

The provision of section 55 as existed upto AY 2017-18 provided that for computation of capital gain ,an assesee shall be allowed deduction for cost of acquisition of the assest and also cost of improvement, if any. However, for computing capital gains in respect of an asset acquired before 01.04.1981, the assessee has been allowed as option of either to take the fair market value of the asset as on 01.04.1981 or the actual cost of the asset as cost of acquisition. The assessee was also allowed to claim deduction for cost of improvement incurred after 01.04.1981 if any.

As the base year for computation of capital gains has become more than three decades old, assessee were facing difficulties in computing the capital gain in respect of a capital asset, especially immovable property acquired before 01.04.1981 due to non-availability of relevant information for computation of fair market value of such asset as on 01.04.1981.

In order to revise the base year for computation of capital gains, section 55 of the Act has been amended by the Finance Act, 2017 from the assessment year 2018-19 so as to provide that the cost of acquisition of an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as on 01.04.2001 and cost of improvement shall include only those capital expenses which are incurred after 01.04.2001.

Consequential amendment has also been incorporated in section 48 so as to align for provisions relation to cost of inflation index to the new base year.

Accordingly from assessment year 2018-2019:

(a) “ Indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost of Inflation Index for the year in which the asset is transferred 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 01.04.2001, whichever is later;

(b) Cost of improvement in relation to any asset other than capital asset being goodwill of a business or right to manufacture, produce or process any article or thing or right to carry on any business or profession shall be determined as under, where the capital asset become the property of the previous owner or the assessee before 01.04.2001 means all expenditure of a capital nature incurred in making any addition or alterations to the capital asset on or after  the said date by the previous owner or the assessee.

(c) Cost of acquisition in relation to any asset other than specified under section 55(2)(a) to 55(2)(ab) shall be determined as under:

(i) where the capital asset became the property of the assessee before the 01.04.2001 means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on 01.04.2001 at the option of the assessee.

(ii)  where the capital asset became the property of the assessee by any of the modes specified in sub section (1) of section 49, and the capital asset became the property of the previous owner before the 01.04.2001 means the cost of capital asset to the previous owner or the fair market value of the asset on the 01.04.2001 at the option of the assessee.

A. Option to assessee to treat actual cost or fair market value as on 01.04.2001.

Section 55(2)(b)(i) provides that where the capital asset has became property of the assessee before 01.04.2001, then the cost of acquisition of such an asset will be the actual cost to the assessee  or fair market value as on 01.04.2001 at the option of the assessee. The assessee can opt for either value.

B. Other option to substitute the cost of acquisition of capital asset acquired from previous owner who acquired the same before 01.04.2001.

Section 55(2)(b)(ii) provides that where the capital asset, which became the property of the assessee by of the modes specified  U/s 49(1) and the previous owner as defined in section 49 had acquired it before 01.04.2001, then the cost of acquisition of such asset,in the hand of assessee, will be the cost to the previous owner or fair market value as on 01.04.2001 at the option of the assessee.

The assessee can opt for either value as the cost of acquisition of the assets.

Cost of Acquisition as per section 55

Intangible Assets.   

1. Self Generated Capital Assets.

a) Tenancy Right.

b) Route Permit.

c) Loom Hours.

d) Trade Mark.

e) Brand Name.

All the above self generated capital assets Cost of Acquisition is NIL

( In case of acquire then cost of acquisition shall be considered. )

Security.

Shares

1. Bonus Share 2. Right Share 3. Other Shares.

Bonus share: If bonus share purchased before 2001-02, cost acquisition is NIL.

Bonus Share: If bonus share purchased after 2001-02. Cost of acquisition is Market value of above share on 01.04.2001.

2. Right Shares :

Renouncer : Cost of acquisition is NIL

Renouncee :  Actual cost paid.

Right shares issue before 2001-2002, then cost of acquisition is Fair Market Value.

Right shares issue after 2001-2002, then cost of acquisition is Actual cost.

3. Debenture:-  

Cost of acquisition shall be actual cost (Indexation not allowed)

Other Asset:

Land, Building, Gold, purchase before 2001-2002 cost of acquisition will be fair market value of assets.

Land, Building, Gold, purchase after  2001-2002 cost of acquisition will be actual cost of assets.