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'Cost of Acquisition' of Capital Asset for Computing Capital Gains [Section 55(2)]

Cost of acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquisition of the Asset . Expenses incurred for completing the title are a part of the cost of acquisition.

 

Interest on money borrowed for acquiring a Capital Assets will form part of the Cost of Assets :

 

1.            Interest on loan taken for acquiring a Capital Asset (other than House Property) will become part of the Cost of Acquisition.

In the case of  house property, any interest (whether current or accumulated) is allowed as deduction under section 24(b) and thus will not form part of cost of acquisition.

2.            Interest paid by the firm to its partner on capital contribution for the purchase of capital asset cannot be treated as part of cost of acquisition

3.            Interest on the asset acquired by the assessee carrying on business or profession till such asset is put to use, shall form part of the cost of acquisition but any interest paid for the period after the asset is put to use shall be treated as revenue expense and hence will not form part of cost of acquisition.

Sum paid for discharge of mortgage:

Where the property has been mortgaged by the previous owner during his lifetime and the assessee, after inheriting the same, has discharged the mortgage debt, the amount paid by him for the purpose of clearing off the mortgage shall be regarded as cost of acquisition under section 48 read with section 55(2) of the Act.

The position is, however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction under section 48 of the

Cost of acquisition includes deemed cost of acquisition.

 

1.   Cost of Acquisition of Assets acquired before 1.4.2001 [Section 55(2)(b)]


In the following cases, the assessee has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be the cost of acquisition for computation of capital gains:


(i)            where an asset has been acquired by the assessee himself before April 1, 2001, he has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be cost of acquisition for computation of capital gain. (For availing the option the assessee will obviously opt for that value which is more.)


(ii)           where the assets were acquired by the assessee through a mode given under section 49(1) (Deemed Cost of Acquisition) and the previous owner acquired that asset before 1.4.2001.  In this case, the assessee has an option to take the cost of acquisition as the cost to the previous owner or the fair market value of that asset as on 1.4.2001 for the purpose of the computation of Capital Gains.

2.   Cost of Acquisition of 'Goodwill' of a business or a 'Trade Mark' or 'Brand Name' associated with business or 'Right to Manufacture, Produce or Process any Article or Things' or 'Right to Carry On any Business or Profession', 'Tenancy Rights', 'Stage Carriage Permits' or 'Loom Hours' [Section 55(2)(a)]:

It shall be as under:

(i)            in case it is acquired in any mode given under clause (i) to (iv) to section 49(1)

it will be cost to the previous owner if the previous owner paid for it but where it was self generated by the previous owner, it will be taken as Nil.

(ii)           in case such Asset is purchased by the assessee

it means the amount of purchase price.

(iii) in any other case

it shall be taken as nil as it will be self generated.

3.   Cost of Acquisition of Right Shares [Section 55(2)(aa)]:

Where an assessee, by virtue of holding certain shares, becomes entitled to subscribe to any additional shares then:

(a)          the cost of acquisition of the original shares shall remain unchanged i.e. it shall be the amount actually paid for acquiring the original shares;

(b)          the cost of acquisition of the right shares, when the assessee subscribes to the shares on the basis of the said entitlement, shall be the amount actually paid for acquiring the right shares;

(c)           the cost of acquisition of the right to acquire such shares, when such a right is renounced in favor of any other person, shall be taken to be nil;

(d)          as regards, the person in whose favors the right to subscribe to the shares has been renounced, the cost of acquisition of such right share shall be the amount paid by him to the company for acquiring the shares plus the amount paid to the person renouncing the right.

Example:

1.            Mr. X  holds 100 shares of ABC Ltd., a listed company which were acquired by him in 1997 for Rs. 10 per share. The market value of the shares as on 1.6.2019 is Rs. 250 per share. The company offers him a right to subscribe to 100 additional shares at the rate of Rs. 160 per share. If he subscribes to the shares then his cost of acquisition will be as under:

(a)          for the original 100 shares                                            Rs. 10 per share

(b)          for the additional 100 right shares                            Rs. 160 per share

2.            In the above example, if R does not subscribe to the additional shares but renounces the right in favour of Mr. Y at the rate of Rs. 50 per share, then the entire amount of Rs. 5,000 received by him would be treated as capital gains, as the cost of acquisition of the right is Nil.

3.            If Mr. Y, in favour of whom the right was renounced, subscribes to the 100 shares then his cost of acquisition will be as under:

Particulars

Amount (Rs.)

(a) amount paid to the company

16,000

(b) amount paid to X for acquiring the right to subscribe to the shares

5,000

Total

21,000

4.   Cost of Acquisition of Bonus Shares or any other Financial Asset allotted without payment [Section 55(2)(aa)(iiia)]:

 

(A) Bonus Shares or Financial Asset allotted without payment after 1.4.2001:

The cost of acquisition in relation to the financial assets (i.e., share or any other security) allotted to the assessee on or after 1.4.2001 without any payment and on the basis of holding of any other financial asset, shall be taken to be Nil.

Therefore, the cost of bonus shares/security shall be taken to be Nil and the entire sale consideration received on the transfer of the bonus shares/security shall be treated as capital gains.

(B) Bonus Shares or Financial Asset allotted without payment before 1.4.2001:

If bonus shares have been allotted to the assessee before 1.4.2001, although the cost of such bonus shares is Nil, the assessee may opt for market value as on 1.4.2001 as the cost of acquisition of such bonus shares.

The cost of acquisition of original shares shall be the amount actually paid to acquire the original shares.

5.   Cost of Acquisition for purpose of computing Long-Term Capital Gain under Section 112A [Section 55(2)(ac)]

The cost of acquisition for the purposes of computing capital gains in relation to a long-term capital asset, being

(a)           an equity share in a company; or

(b)          a unit of an equity oriented fund; or

(c)           a unit of a business trust

referred to in section 112A, acquired by the assessee before 1.2.2018, shall be higher of—

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

(ii)           the 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.

6.   Cost of Acquisition of Depreciable Assets [Section 50]:

As already discussed under the chapter on Profits and gains of business and profession', all depreciable assets except in case of electricity companies are part of block of assets.

Where the full value of the consideration as a result of the transfer of any part or entire block of asset exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain, which will always be a short-term capital gain. The cost of acquisition of a block of depreciable assets is the written down value of the block at the beginning of the year plus actual cost of any asset falling within the same block, acquired during the year.

In other words, the excess of the sale consideration over the aggregate of the following three amounts shall be the short-term capital gain:

(a)           expenditure in connection with the transfer;

(b)          the written down value of the block of assets in the beginning of the year; and

(c)           the actual cost of any asset falling within the block of asset acquired during the previous year.

Such an excess shall be deemed to be the capital gain arising from the transfer of short term capital assets.

 

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