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Cost of Acquisiton of Assets for Computation of Capital Gain [Section 55(2)]

  1. Cost of Acquisition being the Fair Market Value as on April 1, 2001 -

  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)]:

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

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

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

  6. Compulsory Acquisition of a Capital Asset -

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 capital assets will form part of cost of asset. Similary, Sum paid for Discharge of Mortgage debt shall be regarded as Cost of Acquisition under Section 48 read with Section 55(2) of the Act. Here we mentioned the various situations for determining the Cost of Acquision of Assets for Computation of Capital Gain.

1. Cost of Acquisition being the Fair Market Value as on April 1, 2001 -

In the following cases, the assessee may take, at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost of acquisition:

  1. where the capital asset became the property of the assessee before April 1, 2001; or

  2. 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, 2001.

The following points should be duly considered —

  1. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may (or may not) opt for it.

  2. The option is available only when an asset was acquired by the assessee [or by the previous owner in case section 49(1) is applicable] before April 1, 2001.

  3. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is taken as the cost of acquisition.

  4. The option is not available in the case of depreciable assets.

  5. Further option is not available in respect of transfer of a capital asset being goodwill of a business; trade mark/ brand name associated with a business; right to manufacture, produce or process any article or thing; right to carry on business/profession; tenancy right; route permits or loom hours (whether self generated or otherwise).

What is Fair Market Value [Section 2(22B)]:

Fair market value in relation to the capital market means—

  1. the price which the capital asset would ordinary fetch if sold in the open market on the relevant date; and
  2. where the price referred to in (i) is not ascertainable, such price as may be determined in accordance with the rules made under the Income-tax Act.

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:

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

  2. 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.

  3. in case such asset is purchased by the assessee —

  4. it means the amount of purchase price.

  5. 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:

  1. 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;

  2. 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;

  3. the cost of acquisition of the right to acquire such shares, when such a right is renounced in favour of any other person, shall be taken to be nil;

  4. as regards, the person in whose favour 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.

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 (1.4.1981 upto A.Y. 2017-18) 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 (1.4.1981 upto A.Y. 2017-18), 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.

5. 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:

  1. expenditure in connection with the transfer;

  2. the written down value of the block of assets in the beginning of the year; and

  3. 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.

6. Compulsory Acquisition of a Capital Asset -

The special rules given below are applicable where the Government has acquired an asset of a person by way of compulsory acquisition. These rules are also applicable when consideration is approved or determined by the Central Government or RBI (even if there is no compulsory acquisition).

Initial compensation -

Initial compensation† is taken as full value of consideration. Capital gain is chargeable to tax in the year in which the initial compensation (or part thereof) is first received. Indexation benefit is, however, available up to the year in which the asset is compulsorily acquired.

Additional compensation -

If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in which enhanced compensation or additional compensation is received. For this purpose cost of acquisition and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining additional compensation is deductible.

If the enhanced compensation is received by any other person (because of the death of the transferor or for any other reason), it is taxable as income of the recipient.

Cost of Acquisiton of Assets for Computation of Capital Gain [Section 55(2)]
 

Related Topics....Under the head 'Capital Gain'

Capital Assets, Capital Gain & Transfer of Capital Assets for Taxation of 'Capital Gain'
Types of Capital Assets for Computing ‘Capital Gain’
Computation Of ‘Period Of Holding of an Asset' for Computing Gapital Gain [Explanation 1(i) to Section 2(42A)]
Transfer Of A Capital Asset [Section 2(47)] for Computing Capital Gain
Transactions Not regarded as ‘Transfer’ for Computing Capital Gain [Section 46 and 47]
Method of Computing Capital Gain [Section 48]
Deemed Cost of Acquisition of Asset for Computing Capital Gain
[Section 55(2)] : Cost of Acquisiton of Assets for Computation of Capital Gain
Capital Gains Accounts Scheme, 1988.
Types of Capital Gain
Tax on Long-Term Capital Gain in certain Cases (Section 112A)
Exemption of Capital Gains under Section 10 and 115JG

Exemption of Capital Gains under Sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GB anf 54H

(Section 54) : Exemption of Capital Gains from the Transfer of Residential House Property
(Section 54B) : Exemption of Capital Gain on Transfer of Land used for Agricultural Purposes
(Section 54D) : Exemption of Capital Gains on Compulsory Acquisition Of Land And Buildings forming part of Industrial Undertaking
(Section-54EC) : Exemption of Capital Gain on Transfer of any Long Term Capital Asset on the basis of Investment in certain Bonds
(Section 54EE) : Capital Gain not to be charged on Investment in Units of a Specified Fund
[Section 54F] : Exemption of Capital Gain on Transfer Of Long-Term Capital Assets other than a House Property
[Section 54G] : Capital Gain on Shifting of Industrial Undertaking from Urban Areas to Non-Urban Areas :
[Section 54GA] : 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)
(Section 54GB) : Exemption of Long term Capital Gain Tax on Transfer of Residential Property if Net Consideration is Invested in the Equity Shares of a new Start-up SME Company :
(Section 54H) : Extension of time limit for acquiring new Asset or Depositing or Investing amount of Capital Gain, in case of Compulsory Acquisition :

Capital Gain in various Special Cases - How to Find Out or Calculate

  1. Capital Gain from Zero Coupon Bonds

  2. Capital Gain in case of amount Received from an Insurer on account of Damage or Destruction of any Capital Asset [Section 45(1A)]:

  3. Capital Gain in the case of Transfer of Depreciable Assets [Section 50] -

  4. Capital Gain on Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]-

  5. Capital Gain on Transfer of Capital Asset by a Partner/Memeber to a Firm/AOP/BOI as Capital contribution [Section 45(3)]-

  6. Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time of Dissolution [Section 45(4)]-

  7. Capital Gain on Compulsory Acquisition of a Capital Asset [Section 45(5)]-

  8. Computation of Capital Gains in case of Joint Development Agreement [Section 45(5A)] [W.e.f. A.Y. 2018-19]

  9. Capital Gain on Conversion of Debentures / Bonds into Shares [Section 47(x), 49(2A) and rule 8AA] :

  10. Capital Gain on Transfer of Shares / Debentures in the hands of Non-Residents (Proviso 1 to Section 48 and Rule 115A) :

  11. Capital Gain on Transfer of Self-Generated Capital Assets :

  12. Capital Gain on Transfer of Bonus Shares -

  13. Capital Gain on Transfer of Right Entitlement -

  14. Capital Gain on Transfer of Securities in Demat Form -

  15. Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]:

  16. Computation of Capital Gains in the case of Transfer of Land and Building or in Real Estate Transactions [Section 50C] -

  17. Capital Gains on Purchase by Company of its Own Shares or Other Specified Securities [Section 46A]:

  18. Capital Gain on Sale of Land and Building to be computed separately in case of Building Constructed by the Assessee:

 

 

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