Cost of Acquisition Section 55 – Income Tax Act 1961. In this article, we are going to provide information about Cost of Acquisition under section 55 of income Tax Act 1961. ost 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.
Cost of Acquisition Section 55 – Income Tax Act 1961
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For the purposes of Sections 48 and 49, ‘cost of acquisition’ of goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours is:
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, cost of acquisition means the amount of the purchase price; and
(ii) in any other case cost of acquisition shall be Nil.
Cost of an asset acquired before 1.4.1981:
(i) where the capital asset became the property of the assessee before 1.4.1981, cost of acquisition means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on 1.4.1981 at the option of the assessee and the indexation of cost will be available with reference to such actual cost of acquisition or the FMV as opted for by the assessee;
(ii) where the capital asset became the property of the assessee by any of the modes specified in Section 49(1) and the capital asset became the property of the previous owner before 1.4.1981 cost of acquisition means the cost of capital asset to the previous owner or the fair market value of the asset as on 1.4.1981 at the option of the assessee. However the indexation will commence from the year in which the asset became the property of the assessee and not 1981-82.
If a depreciable capital asset becomes the property of assessee under the circumstances mentioned in para 9, he has got an option to substitute the fair market value of the asset on April 1, 1981 in place of its cost of acquisition. If, however, an assessee acquires a depreciable asset in the circumstances, other than those mentioned in para 9, he cannot opt for fair market value on April 1, 1981 in the place of its cost of acquisition [Section 50(2) – Rajnagar Vaktapur Ginning, Pressing & Mfg. Co. Ltd. v. CIT (1975) 99 ITR 264 (Guj.) and India Jute Co. Ltd. v. CIT (1981) 6 Taxman 239 (Cal.)].
Unearned increase in value of land is not to be deducted while determining FMV (Fair Market Value) of property as on April 1, 1981. [CIT v. Rekha Mathur (2006) 152 Taxman 70 (Mag.) (Del.)].
The option given to the assessee to substitute the fair market value of the asset on 1.4.1981 is to ensure that capital gains are not computed with reference to some historical cost; and thus mitigate the hardship to some of the assessees who would have acquired the asset at cheaper cost, fifteen or even twenty years back. Keeping in view this, the Finance Act, 1992 has introduced the system of indexation which has already been discussed elsewhere in this chapter.
Cost of assets acquired on liquidation of a company
(iii) where the capital asset became the property of the assessee on the distribution of capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head ‘capital gains’ in respect of that asset under Section 46, ‘cost of acquisition’ means the market value of the asset on the date of distribution.
Cost of Securities
Cost of original shares, acquired directly from a company or otherwise, shall be deemed to be the actual price paid therefor just as the cost of rights shares shall be deemed to be the actual price paid therefor to the company plus any amount to the renouncer. Cost of bonus shares shall be deemed to be Nil. Cost of renunciation of rights shall also be deemed to be Nil.
Cost on consolidation or conversion of shares
`(iv) where the capital asset, being a share or a stock of a company, became the property of the assessee on –
- the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares;
- the conversion of any shares of company into stock;
- the reconversion of any stock of company into shares;
- the sub-division of any of the shares of the company into shares of smaller amount; or
- the conversion of one kind of shares of the company into another kind,
the ‘cost of acquisition’ means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.
In relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for corporatisation approved by the Securities and Exchange Board of India Act, 1992 (15 of 192), shall be the cost of acquisition of his original membership of the exchange.
Example : X bought 100 shares of
10 each fully paid @ 15 per share. The company sub-divided shares into shares of
5 each (fully paid). X later on sold 50 of the shares @ 8 each.
Sale proceeds or consideration received 50 x ` 8 400
Less : Cost of acquisition: 50 shares now sold by X have
been derived from 25 shares which he had originally acquired 375
@ ` 15 per share. Cost of acquisition of these 50 shares will be
25 x ` 15.
Circular: No. 31 (LXXVII-5)-D, dated 21.9.1962
This circular of the department on the “cost of acquisition” is also worth noting:
Where an assessee acquires an asset by inheritance from a person who in turn had also acquired the same by inheritance before 1.1.1954 (now 1.4.1981) the assessee has the option of substituting the fair market value of the asset as at 1.1.1954 (now 1.4.1981) in place of the original cost, if it is to his advantage. On the basis of this a view could be taken as follows:
(i) the fair market value of original shares on 1.4.1981 can be adopted if such shares have been substituted or consolidated after that date, and
(ii) the indexation should be made with reference to either the year of acquisition of original shares or 1.4.1981, whichever is later
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