What is cost of acquisition?
Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition. You should note these points:
- Ground rent cannot be said to be expenditure incurred by the assessee for the acquisition of the capital asset and it cannot, therefore, be included in computing the actual cost to the assessee of the capital asset
- Interest on moneys borrowed to purchase asset is part of actual cost of asset.
- Expenses on suits for amending articles of association are of a capital nature and are a part of the cost of shares
- Litigation expenses incurred for compelling the company to register the shares in the name of the assessee would be of capital nature, forming a part of the cost of acquisition of the shares
- Estate duty paid in respect of inherited property can neither be treated as a part of the cost of acquisition of property nor as cost of improvement
NOTIONAL COST OF ACQUISITION - In the cases given below, the cost of acquisition is taken at notional figure:
|Different Situations||Notional Cost of acquisition|
|1. Additional compensation in the case of compulsory acquisition||NIL|
|2. Assets received by a member on liquidation of the company||Fair market value of such asset on the date of distribution|
|3. Stock or shares becoming property of the assessee on consolidation, conversion, etc.||Cost of acquisition of such stock or shares from which such asset is derived|
|4. Allotment of shares in an amalgamated Indian company to the shareholders of amalgamating company in a scheme of amalgamation of the two companies||Cost of acquisition of shares in the amalgamating company|
|5. Conversion of shares into debentures||That part of the cost of debentures in relation to which such asset is acquired by the assessee|
|6. Allotment of shares/securities by a company to its employees under Employees’ Stock Option Plan/Scheme approved by Central Government|
|7. Allotment of shares in Indian resulting company to the shareholders of demerged company||Cost of acquisition of shares in demerged company × Net book value of assets transferred in demerger ÷ Net worth of the demerged company immediately before demerger|
|8. Cost of acquisition of original shares in demerged company after demerger||Cost of acquisition of such shares minus amount calculated above|
|9. Depreciable assets covered by section 50||The opening balance of the block of assets on the first day of the previous year plus actual cost of the assets acquired during the year and which fall within the same block of assets|
|10. Depreciable assets of a power generating unit as covered by section 50A||The written down value of the asset minus terminal depreciation plus balancing charge|
|11. Undertaking/division acquired by way of slump sale as covered under section 50B||Net worth of such undertaking|
|12. New asset acquired for claiming exemption under section 54, 54B, 54D or 54G if it is transferred within three years||Actual cost of acquisition minus exemption claimed under these sections|
|13. Goodwill of business or trade mark or brand name associated with business or right to manufacture, produce or process any article or thing or right to carry on any business, tenancy right, stage permits or loom hours|
|14. Right shares||Amount actually paid by assessee|
|15. Right to subscribe to shares (i.e., right entitlement)||NIL|
|16. Bonus shares|
|17. Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualisation or corporatisation of stock exchanges in India as approved by SEBI|
|18. Any other capital asset|
|Cost of acquisition to the previous owner or fair market value as on April 1, 1981, whichever is higher|
|Cost of acquisition or fair market value as on April 1, 1981 whichever is more|
|Cost of acquisition to the previous owner|
|Actual cost of acquisition|
COST TO THE PREVIOUS OWNER [SEC. 49(1)] - The cost to the previous owner is deemed to be the cost of acquisition to the assessee in cases where a capital asset becomes the property of the assessee under any mode of transfer described below [sec. 49(1)]::
- acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided family;
- acquisition of property under a gift or will;
- acquisition of property
- by succession, inheritance or devolution, or
- 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
- on any distribution of assets on the liquidation of a company, or
- under a transfer to a revocable or an irrevocable trust, or
- on any transfer by a wholly-owned Indian subsidiary company from its holding company, or
- on any transfer, by an Indian holding company from its wholly-owned subsidiary company, or
- on any transfer, in a scheme of amalgamation, by the amalgamated company from the amalgamating company which comes under section 47(vi)/(via), or
- 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.
In the aforesaid circumstances, cost to the previous owner would be taken as cost to the assessee. Where the previous owner has acquired the property in the aforesaid manner, the previous owner of the property means the last previous owner who acquired the property by means other than those discussed above. Cost of any improvement of the asset borne by the previous owner, or the assessee, will be added to such cost.
COST OF ACQUISITION BEING THE FAIR MARKET VALUE AS ON APRIL 1, 1981 [SEC. 55(2)] - In the following cases, the assessee may take at his option, either the actual cost or the fair market value of the asset (other than a depreciable asset), as on April 1, 1981 as cost of acquisition :
- where the capital asset became the property of the assessee before April 1, 1981 ; or
- 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, 1981.
COST OF ACQUISITION IN THE CASE OF DEPRECIABLE ASSETS [SEC. 50] - Under the new system of providing depreciation on block of assets, written down value of any block of assets may be reduced to nil for any of the following two reasons :
- Situation one [Sec. 50(1)] - The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of assets acquired during the previous year.
- Situation two [Sec. 50(2)] - All the assets in the relevant block may be transferred during the year.
Capital gains in the aforesaid two cases will be determined as under :
- Situation one [Sec. 50(1)] - In a case where any block of assets does not cease to exist but full value of the consideration received or accruing as a result of transfer of the depreciable asset by the assessee during the previous year exceeds the following amounts, namely :
- expenditure incurred wholly or exclusively in connection with such transfer or transfers ;
- the written down value of the block of assets at the beginning of the previous year ; and
- the actual cost of any asset falling within the block of assets acquired during the previous year,
Such excess shall be deemed to be short-term capital gain.
- Situation two [Sec. 50(2)] - Sub-section (2) of section 50 is applicable only where any block of assets ceases to exist because all assets in that block are sold during the previous year. The cost of acquisition in such a case shall be the aggregate of the following :
- written down value of block of assets at the beginning of the previous year ; and
- actual cost of any asset falling within that block of assets acquired by the assessee during the previous year.
If the consideration received falls short of the cost of acquisition (as computed supra) and expenditure incurred wholly and exclusively in connection with such transfer by virtue of section 48(i), the shortfall will be short-term capital loss. On the other hand, if consideration so received exceeds the cost of acquisition and expenditure incurred wholly and exclusively in connection with the transfer, the excess will be chargeable to tax as short-term capital gain.
COST OF ACQUISITION IN THE CASE OF BONUS SHARES
Section 55 has been amended with effect from the assessment year 1996-97 so as to specify that the cost of acquisition of any additional financial asset as bonus shares or security or otherwise which is received without any payment by the assessee on the basis of his holding any financial asset shall be taken to be nil.
|Different Situations||Cost of acquisition if original and bonus shares are transferred after March 31, 1995|
|If original shares and bonus shares are acquired before April 1, 1981||Original shares - Actual cost or fair market value on April 1, 1981, whichever is more|
Bonus shares - Fair market value on April 1, 1981
|If original shares are acquired before April 1, 1981 but bonus shares are allotted after April 1, 1981||Original shares - Actual cost or fair market value on April 1, 1981, whichever is more|
Bonus shares - Nil
|If original and bonus shares are acquired after April 1, 1981||Original shares - Actual cost|
Bonus shares - Nil
Moreover, in the case of a capital asset being a share, security or unit which is allotted without any payment on the basis of holding of any other financial asset, the period for treating such share, security or unit as a short-term capital asset shall be calculated from the date of allotment of such share, security or unit as the case may be.
COST OF ACQUISITION IN THE CASE OF RIGHT SHARES AND RIGHT RENOUNCEMENTS
Cost of acquisition in different situations will be as follows:
|Different Situations||Cost of acquistion|
|Original shares (on basis of which the taxpayer becomes entitled to right shares)||Amount actually paid for acquiring shares|
|Rights entitlement (which is renounced by the assessee in favour of a person)||NIL|
|Rights shares acquired by the taxpayer by exercising his rights entitlement||Amount actually paid by the taxpayer for acquiring asset|
|Rights shares purchased by the person in whose favour the rights entitlement has been renounced||Purchase price paid to renouncer of rights entitlement plus amount paid to the company which has allotted the rights shares.|
COST OF ACQUISITION IN THE CASE OF ADVANCE MONEY RECEIVED [SEC. 51] - In computing the cost of acquisition, where any capital asset was, on any previous occasion, subject to negotiations for its transfer, any advance, or other money received and forfeited by the assessee in respect of such negotiation is to be deducted from the cost for which the asset was acquired.
COST OF ACQUISITION WHEN DEBENTURES ARE CONVERTED INTO SHARES [SEC. 49(2A)] - Any transfer by way of conversion of debentures, debenture-stock, or deposit certificates in any form, of a company into shares or debentures of that company will not be regarded as a transfer giving rise to any capital gains. Further, it is also provided that on the sale of shares or debentures received on such conversion, the capital gain shall be computed by taking the cost of acquisition as that part of the cost of debentures, debenture-stock or deposit certificates which has been appropriated towards the shares or debentures.
INDEXED COST OF ACQUISITION
Explanation (iii) to section 48 defines the term “indexed cost of acquisition” as the amount which bears to the cost of acquisition, the same proportion as the cost 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 April 1, 1981, whichever is later.