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Determination of Cost of Acquisition for Computing Capital Gain

The cost of acquisition means the price which an assessee has paid to purchase, construct or acquire an asset. No problem arises in finding out the cost of acquisition in case of assessee purchasing, constructing or acquiring the asset himself. But in other cases there are different rules to determine the cost of acquisition. They are

1.      In case of assets acquired without paying any price [49 (1)].

Where the asset has become e property of the assessee in any of the ways enumerated below, the cost of acquisition shall be deemed to be the cost at which previous owner had acquired the same plus cost of any improvement by the said previous owner and after deducing depreciation allowed by him. These cases are :

(i)         any division of assets by H.U.F. among its members on its partial or total partition;

(ii)        assets received under a gift or will;

(iii)       (a)        assets received under succession, inheritance or devolution; or

(b)        any distribution of assets on the dissolution of firm, body of individuals or other association of persons where such dissolution has taken place before 1 -4-1987; or

(c)        any distribution of assets on liquidation of a company; or

(d)       a transfer to a revocable or irrevocable trust; or

(e)        any such transfer from a parent company to its wholly owned subsidiary Indian Company or vice versa; or

(J)        any transfer, in a scheme of amalgamation, by the amalgamated company from the amalgamating company subject to the conditions prescribed u/s 47(vi), (via), (viaa); or

(g)       any transfer of a capital asset in a scheme of business reorganisation of a cooperative bank as per section 47 (vica), (vicb); or

(h)       any transfer by a private company or unlisted public company to a limited liability partnership (LLP) as a result of conversion of the company into LLP in accordance with the provisions of section 56 or section 57 of the LLP Act 2008; or

(i)         any transfer of capital asset or intangible asset by a firm to a company as a result of succession subject to conditions prescribed u/s 47(xiii); or

(j)         any transfer of capital asset or intangible asset by a sole proprietory concern to a company as a result of succession subject to conditions prescribed u/s 47(xiv).

(iv)       any transfer of asset by an individual into the common pool of H.U.F.—the cost to H.U.F. will be the cost borne by individual.

2.      Shares in amalgamated company [49 (2)].

In case of amalgamation of a company into an Indian company the cost of acquisition of shares of amalgamated company shall be taken to be the cost of acquisition to him of the shares of the amalgamating company.

3.      The cost of shares received on conversion of debentures, deposit certificates or debenture stock shall be the cost at which original asset was acquired [Section 49(2A)1

4.      Cost of Acquisition of Specified Security or Sweat Equity Shares [Section 49(2AA)].

With effect from assessment year 2010-11, where the capital gain arises from the transfer of specified security or sweat equity shares referred to in Section 17(2)(vi), the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of Section 17(2)(vi).

5.      Cost of shares of resulting company [Section 49(2C)].

The cost of acquisition of shares of resulting company as a result of merger shall be :

6.      Cost of original shares of demerged company [Section 49(2D)].

The cost of original shares held by assessee in the demerged company shall be deemed to have been reduced by the amount so arrived at u/s 49(2C))

7.      Cost on conversion of capital assets into trading assets or stock-in-trade.

When a capital asset is converted into a trading asset then the cost of the capital asset which is so converted into stockin-trade of assessee’s business may be taken as the market value of those assets on the date of such conversion. In a case [C.I. T. v. Bai Sirinbai K Kooka (1982) 461. T.R. 80]. Supreme Court held that

when the assessee converts his shares into a trading asset of his business on becoming a dealer in shares, the cost of the shares to the business was the market value on the date of conversion.

This decision has been reversed by Taxation Laws (Amendment) Act, 1984 and from assessment year 1985-86, the conversion of capital asset into stock-in-trade is deemed to be transfer and difference between market value and cost is deemed to be capital gain.

8.      Succession of a private company or unlisted public company by a limited liability partnership.

In case of a private company or unlisted public company is converted into Limited Liability Partnership (LLP), the cost of acquisition of such a LLP shall be the cost for which the predecessor company acquired the same.

9.      Cost in case of deemed capital gain u/s 47 A [Section 49 (3)].

Where the capital gain arising from the transfer of a capital asset is deemed to be income chargeable under the head capital gains as a result of operation of provisions of section 47A, the cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by it.

10.    Assets on which depreciation has been claimed [Section 50].

In case assets are sold during the previous year and some gain occurs, this capital gain is taxable under this head. Section 50 of the Income-tax Act provides the procedure for calculation of deemed capital gainlloss in case of depreciable assets. This section provides for two different situations

A.      Transfer of one or more assets in the block of assets [Section 50(1)].

Where the full value of the consideration received or accruing due to transfer of one or more assets belonging to same block of assets exceeds the aggregate of the following amounts

(i)         expenditure incurred in connection with such transfer;

(ii)        the W.D.V. of such block of assets at the beginning of previous year; and

(iii)       the actual cost of any asset falling within that block of assets acquired during the year.

Such excess shall be deemed to be the short-term capital gain.

B.      Transfer of all the assets within same block of assets and the block ceases to exist. [Section 50(2)].

In such event the written down value of such block plus cost of any new asset acquired during the year is taken as actual cost if it is less than total consideration received, the income, if any, as a result of such transfer or transfers shall be deemed to be short-term capital gain.

In case the W.D.V. of the block of assets and cost of new asset acquired during the year added together is more than the total consideration received, the difference is called as short-term capital loss.

In case of assets on which depreciation has been claimed on straight line method, the W.D.V. of such assets shall be determined by adjusting the amount of deemed profit u/s 4 1(2) and adjusted W.D.V. shall be considered as cost for adjustment u/s 48 and 49.

 

 
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Capital Gain , Capital Assets & Property for Computing Capital Gain
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Types of Capital Gains for Computing ‘Capital Gain’
Computation Of ‘Period Of Holding
 Transfer Of A Capital Asset [Section-2(47)]
Transactions Not regarded as ‘Transfer’ [Section-47]
Capital Gain is Deemed to be the Income of the Previous Year
Amount Received from insurer [Section-45(1A)] for Computing Capital Gain
Transfer of Capital Assets by a person to firm, AOP or Body Of Individuals (BOI) [Section 45(3)] for Computing Capital Gain
 Enhancement of Compensation on Compulsory Acquisition of Assets [Section-45(5)] for Computing Capital Gain
Sale of units Purchased for Deduction U/s 80 CCB [Section-45(6)]
Distribution of Assets by A Company in Liquidation for Computing Capital Gain
Capital Gain on Purchase by A Company of its Own Shares or Other  Securities [Section 46A]
DEEMED CAPITAL GAIN [Section 47A]
Method of Computing Capital Gain [Section 48]
Expenses Disallowed u/s Section 48 for Computing Capital Gain
Cases in which the Indexation of Cost is not to be done while Calculating long Term Capital Gain
 Computation of Capital Gain in Case of Non-Residents [Sec. 48 Proviso 1 ]
Determination of Cost of Acquisition for Computing Capital Gain.
Taxation of Gain on ‘Slump Sale’ for Computing Capital Gain

Special Provision for full Value of Consideration in certain cases (Section 50C] for Computing Capital Gain
Treatment of Advance Money Received and Forfeited (Section-51] for Computing Capital Gain
Cost of Acquisition of Goodwill [Section-55(2)(a)] for Computing Capital Gain
Cost of Acquisition of Shares [Section 55 (2) (v)] for Computing   Capital Gain
Capital Gains Exempted u/s 10
Capital Gains—Exempted u/s 54
 Capital Gain on Transfer of Self-Cultivated Agricultural Land in Urban   Areas [ Section 54 B]
Capital Gains on Compulsory Acquisition Of Land And Buildings [Section 54D]
 Capital Gain on Transfer of any Long Term Capital Asset [Section-54EC]
Exemption of Capital Gain on Transfer Of Long-Term Capital Assets in case of Investment In Residential House [Section 54F]
Capital Gain on Shifting of Industrial Undertaking from Urban Areas to Non-Urban Areas [Section 54G]
 Exemption of Capital Gain on transfer of assets in case of shifting of Industrial Undertaking from an urban area to any Special Economic Zone (SEZ) [Sec. 54GA]
Long term Capital Gain on Transfer of Residential Property if Net Consideration is Invested in the Equity Shares of an Eligible company [Section 54GB] [w.e.f. A.Y. 2013- 14 but upto A.Y. 201 7-1 8]
Reference to Valuation Officer [Section 55] towards Capital Gain
 TREATMENT OF CAPITAL LOSS [Section 74]
TAX ON CAPITAL GAINS

 
 
 
 
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