This article provides an in-depth exploration of the provisions under Section 49(1) of the Income Tax Act, which deals with the determination of the cost of acquisition (COA) in cases where the assessee acquires a capital asset through a mode not regarded as a transfer. Normally, the cost incurred by the assessee is considered as the COA, but certain cases allow the assessee to acquire the asset without any cost. Section 49(1) outlines the specific scenarios in which the COA is determined. This Article covers all cases where Assessee acquires the Capital Asset through a mode not regarded as transfer-
- Section 49(1) and its relation to Section 47: Section 49(1) covers instances where the assessee acquires the asset through a mode not regarded as a transfer, as specified in Section 47. The COA for the assessee in these cases is deemed to be the cost to the previous owner.
- Examples of non-transfer modes: The article provides examples of non-transfer modes covered under Section 49(1), including gifts, distribution of assets on partition of HUF (Hindu Undivided Family), assets distributed on dissolution of a partnership, and assets acquired through inheritance or a will.
- Computation of capital gains: The three requirements for computing capital gains are fair market value consideration, cost of acquisition, and the holding period. Section 49(1) specifically addresses the COA, while the holding period is defined under Section 2(42A) Explanation 1.
- Inclusion of previous owner’s holding period: If the assessee acquired the capital asset through a mode specified under Section 47, the period for which the asset was held by the previous owner is also included. This inclusion affects the determination of short-term or long-term capital gains.
- Clarification of “previous owner“: The article clarifies the meaning of “previous owner” in cases involving multiple transfers under Section 47. The last previous owner of the capital asset who acquired it through a mode other than those specified in Section 49(1) is considered the previous owner.
Indexed COA and indexation benefit: Section 48 discusses indexed COA, which determines the indexed cost of acquisition. The article explains the availability of indexation benefit from the date when the assessee held the capital asset and presents a Bombay High Court case that supports considering the date the previous owner first held the asset.
Section 49(1) : Cost of acquisition in certain cases
- Normally Cost incurred by Assessee is considered as COA. However in certain cases , the Assessee may get the CA free of Cost
- In above cases , cost is determined as per Section 49
- Key Points:
- The Section 49(1) covers those cases where the Assessee acquires the Asset by a mode which is not regarded as transfer . Such Cases are covered by Section 47
- Hence this Section says that if Assessee acquires any asset by any mode laid down u/s 47, then COA for Assessee will be deemed to be the cost to the previous owner
- Examples of such cases are Gift, Distribution of Assets on Partition of HUF, Assets distributed on dissolution of Partnership, Assets acquired under Inheritance or will
- Normally there are 3 requirements for Computation of Capital Gains :
- Cost of Acquisition and
- Holding period to determine LTCA or STCA
- Section 49(1) prescribes Cost of Acquisition
- Holding Period is defined u/s 2(42A) Explanation 1
- Section 2(42A) Expn 1 : HP is the period for which the CA is held by the Assessee
- Further it says that in case Assessee has acquired the CA by any mode specified u/s 47 , the period for which CA is held by the previous owner will also be included
- Example : Father acquires CA on 2.04.2022 for Rs.2Lakhs and gifts it to son on 03.04.2009.
- Son sells it on 03.04.2010, then the period for which son has held CA is only 1 year.
- But period for which previous owner(Father) has held is 7 years. Hence Holding Period for determining STCA or LTCA will be considered as 8 years making it LTCA
- Now important point to consider is meaning of previous owner
- In the above example, Father is the previous owner
- However there may be a case of multiple transfers under section 47. i.e. Great Grandfather trf to Grandfather, Grandfather to Father and then Father to Son. In such case Whether Father is previous owner or Great Grandfather is previous owner ?
- Explanation to Section 49(1) clarifies this. It says “previous owner of the property” means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or (ii) or (iii) or (iv) of this sub-section.
- Hence in above case, except Great Grandfather, everyone acquired the CA by modes prescribed u/s 47. Hence Great Grandfather will be taken as previous owner.
- Section 48 deals with Indexed COA :
- In respect of COA for Section 49(1),what will be Indexed COA??
- Section 48 states that Indexation benefit will be available from the date when Assessee held the CA i.e. for when he receives the gift
- So it would be Cost * CII of year of Transfer/CII of Year acquired by Assessee(and not the previous owner)
- However this position is reversed by Bombay High court in Manjula Shah vs C.I.T. In this case, the court clearly says that as holding period is considered from date when previous owner acquired the property, the Assessee is deemed to be holding the Asset from that date as well.
- Hence in line with Holding period benefit, indexation benefit will also be available from the date previous owner first held the CA
- Hence Indexed cost in case of Section 49(1) cases will be :
- Cost * CII of year of Transfer/CII of Year acquired by the Previous Owner
- “No cost – No capital gains” ~ This is the basic concept underlying the chargeability of capital gains
- If COA is not ascertainable then no capital gains is chargeable to tax.
- If COA is Nil then it will be chargeable to capital gains
- Rights renunciation under Section 55(2)(aa) of the Income Tax Act, 1961- When a shareholder renounces their rights to subscribe to additional shares issued by a company, it is considered a transfer for tax purposes. The capital gains tax on this transfer is calculated by treating the COA as nil. The computation of capital gains in this scenario involves taking the fair market value of the rights renunciation as the sale consideration, deducting the COA (which is considered nil), and applying the applicable provisions of the Income Tax Act to determine the taxable capital gains.
- Bonus Shares- Regarding bonus shares, the issuance of bonus shares does not result in any immediate tax liability for the shareholder. Bonus shares are issued to existing shareholders without any cost. However, when these bonus shares are eventually sold or transferred, capital gains tax may apply based on the acquisition cost of the original shares held by the shareholder. The COA of the original shares would need to be considered for the calculation of capital gains when the bonus shares are sold.
Conclusion: The determination of the cost of acquisition and the computation of capital gains in cases where the assessee acquires a capital asset through a mode not regarded as a transfer require a thorough understanding of the provisions outlined in Section 49(1) of the Income Tax Act. This article has provided key points and explanations related to these provisions, covering examples of non-transfer modes, the inclusion of the previous owner’s holding period, and the availability of indexation benefit. By gaining clarity on these aspects, taxpayers can ensure accurate computation of capital gains and compliance with the applicable tax laws.
For further clarifications or inquiries, readers are encouraged to comment or reach out via email at firstname.lastname@example.org.
Qualification: CA in Practice
Company: Amit Y Parekh & Co
Location: Navi Mumbai , Maharashtra, India
: 17 Mar 2023 | Total Posts
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