BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Deemed Cost of Acquisition of Asset for Computing Capital Gain

Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain [Section 49(1)]
Cost of Acquisition of Shares of Amalgamated Company [Section 49(2)]:
Cost of Acquisition in the case of Shares/Debentures acquired on Conversion of Bonds or Debentures or Debentures Stock or Deposit Certificates [Section 49(2A)]:
Cost of specified security or sweat equity share already treated as perquisites under section 17(2)(vi) [Section 49(2AA)]:
Cost of the right of partner on conversion of company to Limited Liability Partnership [Section 49(2AAA)]:
Cost of acquisition of the units of the consolidated scheme acquired in lieu of units held in a consolidating scheme [Section 49(2AD)]
Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AE)]:
Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]:
Cost of acquisition of the shares in the resulting company [Section 49(2C)]:
Cost of acquisition of the original share of the demerged company [Section 49(2D)]:
Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)]:
Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016 [Section 49(5)] [Inserted w.e.f. A.Y. 2017-18]
Cost of acquisition of the share in the project being land and building in a joint development agreement referred in section 45(5A) [Section 49(7) inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19]:

1. Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain [Section 49(1)]

If a person has acquired a capital asset in the circumstances specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the previous owner is taken as cost of acquisition. This rule is always applicable and does not have any exception. Circumstances specified by section 49(1) are as follows–

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 —
1. by succession, inheritance or devolution, or
2. 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
3. on any distribution of assets on the liquidation of a company, or
4. under a transfer to a revocable or an irrevocable trust, or
5. by a wholly-owned Indian subsidiary company from its holding company, or
6. by an Indian holding company from its wholly-owned subsidiary company, or
7. under a scheme of amalgamation, or
8. under a scheme of demerger; or
9. under a scheme of conversion of private company/unlisted company into LLP;
10. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or
acquisition of property, by a Hindu undivided family where one of its members has converted his selfacquired property into joint family property after December 31, 1969.

Important Points :

The following points should be duly considered —

No option - If a capital asset was acquired in any one of the modes given above, then cost to the previous owner shall be taken as “cost of acquisition” for the purpose of calculating capital gain at the time of its transfer. There is no option in this regard.
Last previous owner - Where the previous owner has acquired the property in the aforesaid manner, the previous owner of the property means the last previous owner who had 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.
Period of holding of previous owner - In order to find out whether the capital asset is short-term or long-term in the above cases, the period of holding of the previous owner shall be taken into consideration.
Indexation - The benefit of indexation will be available from the year in which the asset was first held by the previous owner.

2. Cost of Acquisition of Shares of Amalgamated Company [Section 49(2)]:

Where the shareholder of an amalgamating company gets the shares of the amalgamated company in lieu of the shares held by him in an amalgamating company, the cost of acquisition of such shares of the amalgamated company shall be deemed to be the cost of acquisition to him of the shares of the amalgamating company.

For example...,

X purchases 100 shares of R Company Ltd. for Rs.10 each on 5.11.2014. In 2015-16, R Company Ltd. amalgamates into S Company Ltd. and under the scheme of amalgamation, X receives 10 shares of S Company Ltd. in lieu of the 100 shares of R Company Ltd. The cost of acquisition of 10 shares of S Company Ltd. will be Rs.1000 i.e. the cost of acquisition of the shares of R Company Ltd. in lieu of which he has received the shares of S Company Ltd.

3. Cost of Acquisition in the case of Shares/Debentures acquired on Conversion of Bonds or Debentures or Debentures Stock or Deposit Certificates [Section 49(2A)]:

As regards share or debenture of a company which became the property of the assessee in consideration of a transfer referred to in section 47(x) and (xa) i.e. bonds or debentures or debentures stock or deposit certificates are converted into shares or debentures, the cost of acquisition of the shares/ debentures issued on such conversion shall be deemed to be that part of the cost of the debenture/debenture stock/deposit certificate, in relation to which such an asset is acquired by the assessee.

For example...,

X has subscribed to 10 partly convertible debentures of Rs.100 each of R Co. Ltd. on 4.4.2015. On 5-2-2017, he receives 4 shares of Rs.10 each per debenture and the remaining value of the debenture is Rs.50 i.e. the 4 shares have been received by him in lieu of a part of the cost of the debenture which is Rs.50. Therefore, the cost of 4 shares shall be Rs.50.

In case of a capital asset, being a share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in section 47(x) of the Act, there shall be included the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion [Rule 8AA(2)].

Example:

In the above case if these 4 share are sold on 6-8-2017, its period of holding shall be taken from 4-4-2015 to 5-8-2017.

Similarly, cost of acquisition of shares received upon exchange of Foreign Currency Exchangeable Bond shall be the price at which corresponding bond was acquired.

4. Cost of specified security or sweat equity share already treated as perquisites under section 17(2)(vi) [Section 49(2AA)]:

Where the capital gain arises from the transfer of specified security or sweat equity share, which has already been taxed under the head salary as perquisite, the cost of acquisition of such security or share shall be the fair market value which has been taken into account for the purpose of valuation of perquisite.

5. Cost of the right of partner on conversion of company to Limited Liability Partnership [Section 49(2AAA)]:

Where the capital asset being rights of a partner referred to in section 42 of the Limited Liability Partnership Act, 2008 became the property of the assessee on conversion of company to Limited Liability Partnership, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the company immediately before its conversion.

6. Cost of acquisition of the units of the consolidated scheme acquired in lieu of units held in a consolidating scheme [Section 49(2AD)]

Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, acquired in lieu of units held in a consolidating scheme, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund.

7. Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AE)]:

Where the capital asset, being equity share of a company, became the property of the assessee on conversion of preference share into equity share, the cost of acquisition of the asset shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assessee.

8. Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]:

Where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, acquired in consolidating plan, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating plan of the scheme of the mutual fund.

9. Cost of acquisition of the shares in the resulting company [Section 49(2C)]:

It shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger.

In other words :

"Net worth" for this section shall mean the aggregate of the paid up share capital and general reserves as appearing in the books of accounts of the demerged company immediately before demerger.

If the shares of the resulting company are later on transferred, then for computation of nature of capital gain, the period for which the shares were held in demerged company shall also be considered [Section 2(42A)].

10. Cost of acquisition of the original share of the demerged company [Section 49(2D)]:

It shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C) above i.e. original cost of acquisition — cost of acquisition of the shares in the resulting company.

11. Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)]:

Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under section 56(2)(vii) [now 56(2)(x)], the cost of acquisition of such property shall be deemed to be value which has been taken into account for section 56(2)(vii) [now 56(2)(x)]. Similarly, cost of acquisition of shares acquired by a firm or a closely held company without consideration or for inadequate consideration will be the value which has been taken into account and has been subjected to tax under section 56(2)(viia) [now 56(2)(x)].

12. Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016 [Section 49(5)] [Inserted w.e.f. A.Y. 2017-18]

Where the capital gain arises from the transfer of an asset declared under the Income Declaration Scheme, 2016, and the tax, surcharge and penalty have been paid in accordance with the provisions of the Scheme on the fair market value of the asset as on the date of commencement of the Scheme (i.e. on 1.6.2016), the cost of acquisition of the asset shall be deemed to be the fair market value of the asset which has been taken into account for the purposes of the said Scheme.

13. Cost of acquisition of the share in the project being land and building in a joint development agreement referred in section 45(5A) [Section 49(7) inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19]:

Where the capital gain arises from the transfer of a capital asset, being share in the project, in the form of land or building or both, referred to in section 45(5A), not being the capital asset referred to in the proviso to the said sub-section, the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.

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 :

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Deemed Cost of Acquisition of Asset for Computing Capital Gain

Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain [Section 49(1)]

Cost of Acquisition of Shares of Amalgamated Company [Section 49(2)]:

Cost of Acquisition in the case of Shares/Debentures acquired on Conversion of Bonds or Debentures or Debentures Stock or Deposit Certificates [Section 49(2A)]:

Cost of specified security or sweat equity share already treated as perquisites under section 17(2)(vi) [Section 49(2AA)]:

Cost of the right of partner on conversion of company to Limited Liability Partnership [Section 49(2AAA)]:

Cost of acquisition of the units of the consolidated scheme acquired in lieu of units held in a consolidating scheme [Section 49(2AD)]

Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AE)]:

Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]:

Cost of acquisition of the shares in the resulting company [Section 49(2C)]:

Cost of acquisition of the original share of the demerged company [Section 49(2D)]:

Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)]:

Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016 [Section 49(5)] [Inserted w.e.f. A.Y. 2017-18]

Cost of acquisition of the share in the project being land and building in a joint development agreement referred in section 45(5A) [Section 49(7) inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19]: