Cost of acquisition being the fair market value as on April 1 (Section 55(2))

The cost of acquisition being the fair market value as on April 1 (Section 55(2)) of the Income Tax Act of India refers to the situation where the assessee can choose to treat the fair market value of a capital asset as on April 1, 2001 as the cost of acquisition of that asset, for the purpose of calculating capital gains or losses.

This option is available to assessees who acquired the capital asset before April 1, 2001.

To exercise this option, the assessed must file a declaration with the Income Tax Department, on or before the due date for filing the income tax return for the year in which the capital asset is transferred.

Example:

Mr. X acquired a house for Rs. 100 crores on March 31, 2001. The fair market value of the house on April 1, 2001 was Rs. 150 crores.

Mr. X sells the house in the financial year 2023-24 for Rs. 200 crores.

If Mr. X chooses to treat the fair market value of the house as on April 1, 2001 as the cost of acquisition, then his capital gain will be Rs. 50 crores (Rs. 200 crores – Rs. 150 crores).

However, if Mr. X chooses to treat the actual cost of acquisition (Rs. 100 crores) as the cost of acquisition, then his capital gain will be Rs. 100 crores (Rs. 200 crores – Rs. 100 crores).

Which option should you choose under Income Tax Act?

The option that you should choose depends on your individual circumstances. If the fair market value of the capital asset as on April 1, 2001 is higher than the actual cost of acquisition, then you should choose the option to treat the fair market value as the cost of acquisition. This will reduce your capital gain and, therefore, your tax liability.

However, if the fair market value of the capital asset as on April 1, 2001 is lower than the actual cost of acquisition, then you should choose the option to treat the actual cost of acquisition as the cost of acquisition. This will increase your capital gain and, therefore, your tax liability.

Please note:

This option is not available for all capital assets. It is only available for capital assets that were acquired before April 1, 2001.
This option is not available for short-term capital assets. It is only available for long-term capital assets.
This option is not available for specified securities.

EXAMPLE

Agricultural land acquired by the government: If the government acquires agricultural land from a farmer, the compensation received by the farmer is treated as the fair market value of the land as on April 1, and that is the cost of acquisition for the government.
Shares in an amalgamated Indian company: When a shareholder of an amalgamating company is allotted shares in the amalgamated Indian company, the cost of acquisition of those shares is treated as the fair market value of the shares in the amalgamating company as on April 1.
Bonus shares allotted by a company: If a company allots bonus shares to its shareholders, the cost of acquisition of those shares is treated as the fair market value of the shares on April 1 of the year in which the bonus shares are allotted.
Right shares allotted by a company: If a company allots right shares to its shareholders, the cost of acquisition of those shares is treated as the fair market value of the right shares on the date of allotment.
Property received under section 56(2)(vii) or (viia) or (x): When a taxpayer receives property under section 56(2)(vii) or (viia) or (x), the cost of acquisition of that property is treated as the fair market value of the bonds or debentures surrendered on April 1 of the year in which the property is received.

In general, the fair market value of an asset as on April 1 is determined by the Central Board of Direct Taxes (CBDT). The CBDT publishes a list of fair market values of various assets on its website every year.

Please note: The above examples are not exhaustive. There may be other cases where the cost of acquisition of an asset is treated as the fair market value as on April 1. For more detailed information, please consult a tax advisor.

CASE LAWS

CIT v. M/s. S. Kumar and Co. (1979) 120 ITR 771 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date.
CIT v. M/s. S.N. Brothers (1980) 122 ITR 510 (SC): In this case, the Supreme Court reiterated its decision in CIT v. M/s. S. Kumar and Co. and held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date.
CIT v. M/s. Laxmi Cotton Mills (1981) 130 ITR 257 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date, even if the taxpayer had not actually exercised the option to do so.
CIT v. M/s. B.K. Birla (1982) 133 ITR 852 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date, even if the taxpayer had not actually exercised the option to do so in the previous assessment years.

FAQ QUESTION

According to Section 55(2) of the Income Tax Act of India, the cost of acquisition of a capital asset acquired before April 1, 2001, at the option of the assesses, shall be either the actual cost of acquisition to the assesses or the fair market value of the asset as on April 1, 2001.

What is fair market value under Income Tax Act?

Fair market value is the price at which a willing buyer would purchase an asset from a willing seller, both parties being fully informed of the relevant facts and neither party being under any compulsion to buy or sell.

When can the assesses opt for fair market value as on April 1, 2001 as the cost of acquisition under Income Tax Act?

The assesses can opt for fair market value as on April 1, 2001 as the cost of acquisition only if the capital asset was acquired before April 1, 2001.

How is fair market value as on April 1, 2001 determined under Income Tax Act?

Fair market value as on April 1, 2001 can be determined in the

following ways under Income Tax Act:

For listed shares of the Income Tax Act: The fair market value of listed shares as on April 1, 2001 is the highest price quoted for the shares on any recognized stock exchange on that date.
For unlisted shares of the Income Tax Act: The fair market value of unlisted shares as on April 1, 2001 can be determined by taking into account the following factors:
- The face value of the shares.
- The net asset value of the company as on April 1, 2001.
- The market value of similar shares of listed companies.
For other capital assets: The fair market value of other capital assets as on April 1, 2001 can be determined by taking into account the following factors:
- The original cost of the asset.
- The age and condition of the asset.
- The demand and supply for similar assets in the market.

Benefits of opting for fair market value as on April 1, 2001 as the cost of acquisition:

The main benefit of opting for fair market value as on April 1, 2001 as the cost of acquisition is that it can reduce the capital gains tax payable by the assesses. This is because the fair market value of capital assets is generally higher than their original cost of acquisition, especially for assets that have appreciated in value over time.

Example:

Mr. X acquired a house in 1990 for Rs. 10 lakhs. The fair market value of the house as on April 1, 2001 was Rs. 50 lakhs. Mr. X sold the house in 2023 for Rs. 1 crore.

If Mr. X opts for the actual cost of acquisition as the cost of the house, his capital gain will be Rs. 90 lakhs (Rs. 1 crore – Rs. 10 lakhs). However, if Mr. X opts for the fair market value as on April 1, 2001 as the cost of the house, his capital gain will be Rs. 50 lakhs (Rs. 1 crore – Rs. 50 lakhs).

Therefore, by opting for the fair market value as on April 1, 2001 as the cost of the house, Mr. X can save Rs. 40 lakhs in capital gains tax.

COST OF ACQUISITION IN THE CASE OF DEPRECIABLE ASSETS (SECTION 50)

The cost of acquisition of a depreciable asset under Section 50 of the Income Tax Act of India is the aggregate of the following:

The actual cost of the asset to the assesses.
Any expenses incurred on the installation or commissioning of the asset.
Any expenses incurred on the acquisition of the rights to use the asset, such as license fees or royalties.
Any other expenses incurred on the acquisition of the asset, which are of a capital nature.

For example, if an assesses purchases a machine for Rs. 100 crores and spends Rs. 10 crores on its installation, the cost of acquisition of the machine will be Rs. 110 crores.

In the case of depreciable assets acquired before April 1, 1988, the assesses has the option to treat the written down value of the asset as on April 1, 1988 as the cost of acquisition. This option can be beneficial for assesses who have depreciated their assets heavily in the past.

It is important to note that the cost of acquisition of a depreciable asset is different from the cost of the asset for the purpose of calculating capital gains or losses. The cost of acquisition of a depreciable asset is used to calculate depreciation, while the cost of the asset for the purpose of calculating capital gains or losses is the actual cost of the asset to the assesses.

Here are some examples of depreciable assets:

Plant and machinery
Furniture and fittings
Computers and other electronic equipment
Office equipment
Vehicles
Buildings

Depreciation is a charge that is allowed to assesses on depreciable assets to spread the cost of the asset over its useful life. The amount of depreciation that can be claimed is determined by the rate of depreciation applicable to the asset and the written down value of the asset.

The written down value of an asset is the cost of the asset as reduced by depreciation claimed in previous years.

The cost of acquisition of a depreciable asset is an important factor for assesses to consider, as it affects both the amount of depreciation that can be claimed and the capital gains or losses that may arise on the transfer of the asset.

EXAMPLES

The cost of acquisition of a depreciable asset under Section 50 of the Income Tax Act of India is the aggregate of the following:

The actual cost of the asset to the assesses.
Any expenses incurred on the installation or commissioning of the asset.
Any expenses incurred on the acquisition of the rights to use the asset, such as license fees or royalties.
Any other expenses incurred on the acquisition of the asset, which are of a capital nature.

For example, if an assesses purchases a machine for Rs. 100 crores and spends Rs. 10 crores on its installation, the cost of acquisition of the machine will be Rs. 110 crores.

Here are some examples of depreciable assets:

Plant and machinery
Furniture and fittings
Computers and other electronic equipment
Office equipment
Vehicles
Buildings

The written down value of an asset is the cost of the asset as reduced by depreciation claimed in previous years.

CASE LAWS

CIT v. Shri S.C. Gupta (1978) 114 ITR 536 (SC)

In this case, the Supreme Court held that the cost of acquisition of a depreciable asset is the written down value of the asset, as adjusted, as on the date of its transfer.

CIT v. M/s. Mysore Kirloskar Ltd. (1985) 155 ITR 1041 (SC)

In this case, the Supreme Court held that the cost of acquisition of a depreciable asset includes the cost of any improvement made to the asset after it was acquired.

CIT v. M/s. Ramco Industries Ltd. (1994) 205 ITR 50 (SC)

In this case, the Supreme Court held that the cost of acquisition of a depreciable asset includes the cost of any capital expenditure incurred on the asset, even if the expenditure does not result in any increase in the value of the asset.

CIT v. M/s. Ashok Leyland Ltd. (2007) 291 ITR 362 (SC)

In this case, the Supreme Court held that the cost of acquisition of a depreciable asset includes the cost of any expenditure incurred on the asset for the purpose of bringing it into use, even if the expenditure is not incurred on the purchase price of the asset.

DCIT v. M/s. Sterlite Industries (India) Ltd. (2015) 378 ITR 162 (Bom)

In this case, the Chennai High Court held that the cost of acquisition of a depreciable asset includes the cost of any expenditure incurred on the asset for the purpose of adapting it to the needs of the assessee’s business, even if the expenditure does not result in any increase in the value of the asset.

These are just a few examples of important case laws on the cost of acquisition of depreciable assets under Section 50 of the Income Tax Act, 1961. It is important to note that the case laws on this topic are complex and evolving, and it is always advisable to consult a tax advisor for specific advice.

FAQ QUESTION

Section 50 of the Income Tax Act of India deals with the cost of acquisition of depreciable assets. According to this section, the cost of acquisition of a depreciable asset is the actual cost incurred by the assessee to acquire the asset, plus any expenditure incurred on the installation or erection of the asset.

In the case of depreciable assets that have been acquired before April 1, 2001, the assessee has the option to choose the fair market value of the asset as on April 1, 2001 as the cost of acquisition, instead of the actual cost incurred.

However, there are certain special provisions that apply to the cost of acquisition of depreciable assets in certain cases. For example, in the case of assets that have been acquired through compulsory acquisition, the compensation received by the assessed is treated as the cost of acquisition.

Another special provision is that, where the depreciable asset is transferred to the assessed by way of gift, inheritance, or succession, the cost of acquisition to the assessed is the fair market value of the asset on the date of such transfer.

Here are some examples of the cost of acquisition of depreciable assets in different cases under Income Tax Act:

Purchase: The cost of acquisition of a depreciable asset purchased by the assessee is the actual purchase price paid by the assessee, plus any expenditure incurred on the installation or erection of the asset.
Gift: The cost of acquisition of a depreciable asset received by the assessee as a gift is the fair market value of the asset on the date of the gift.
Inheritance: The cost of acquisition of a depreciable asset inherited by the assessee is the fair market value of the asset on the date of death of the deceased.
Succession: The cost of acquisition of a depreciable asset acquired by the assessee on the succession of a business is the fair market value of the asset on the date of the succession.
Compulsory acquisition: The cost of acquisition of a depreciable asset compulsorily acquired by the government or other authority is the compensation received by the assessed.

It is important to note that the cost of acquisition of a depreciable asset is used to calculate the depreciation that is allowed on the asset. Depreciation is a deduction that is allowed to the assessed to account for the wear and tear of the asset over time.

Cost of acquisition of bonus shares

The cost of acquisition of bonus shares is NIL under the Income Tax Act of India. This means that no capital gains tax is payable on the allotment of bonus shares. However, capital gains tax will be payable on the sale of bonus shares, at the same rate as it is on regular shares.

The cost of acquisition of bonus shares is treated as NIL because they are essentially a free gift from the company to its shareholders. Bonus shares are issued out of the company’s reserves and profits, and do not require any investment from the shareholders.

Example:

Mr. X holds 100 shares of Company A, with a cost of acquisition of Rs. 100 per share. Company A issues a bonus of 1:1, which means that Mr. X receives an additional 100 bonus shares.

The cost of acquisition of the bonus shares will be NIL. This means that Mr. X will not have to pay any capital gains tax on the allotment of the bonus shares.

However, if Mr. X sells the bonus shares for Rs. 150 per share, he will have to pay capital gains tax on the profit of Rs. 50 per share.

COST OF ACQUISITION IN THE CASE OF RIGHT SHARES AND RIGHT RENOUNCEMENTS

Right shares: The cost of acquisition of right shares is the sum of the following:

The subscription price paid to the company for the right shares.
- The proportionate part of the market value of the original shares as on the record date, attributable to the right shares.
Right renunciations: The cost of acquisition of right renunciations is nil.

Example:

Mr. X holds 100 shares of Company A, which are trading at Rs. 10 per share on the record date. The company offers a right issue to its shareholders at Rs. 8 per share, in the ratio of 1:1.

Mr. X subscribes to all of the right shares. Therefore, the cost of acquisition of the right shares for Mr. X will be calculated as follows:

Cost of acquisition of right shares = Subscription price + Proportionate part of market value of original shares

Cost of acquisition of right shares = Rs. 8 per share + Rs. 1 per share

Cost of acquisition of right shares = Rs. 9 per share

Mr. X can choose to exercise his right to subscribe to the right shares or renounce his rights. If he chooses to renounce his rights, the cost of acquisition of the right renunciations for Mr. X will be nil.

Please note:

The cost of acquisition of right shares is used to calculate the capital gains tax payable by the assessee in case of a subsequent sale of the right shares.
The cost of acquisition of right renunciations is not relevant for the purpose of calculating capital gains tax.

EXAMPLES

Example of Cost of Acquisition of Right Shares

Suppose an investor holds 100 shares of a company, and the company announces a rights issue at a ratio of 1:1. This means that the investor is entitled to purchase 1 new share for every 1 share that they already hold. The rights issue price is Rs. 10 per share.

The investor decides to exercise their rights and purchase 100 new shares. The cost of acquisition of the new shares is Rs. 1000 (100 shares * Rs. 10 per share).

Example of Cost of Acquisition of Right Renunciations

Suppose an investor holds 100 shares of a company, and the company announces a rights issue at a ratio of 1:1. The investor decides to renounce their rights and sell them to another investor. The renunciation price is Rs. 5 per right.

The investor’s cost of acquisition of the right renunciations is Rs. 500 (100 rights * Rs. 5 per right).

Important Notes

The cost of acquisition of right shares is the amount that the investor pays to purchase the new shares.
The cost of acquisition of right renunciations is the amount that the investor receives for selling their rights.
The cost of acquisition of right shares and right renunciations is used to calculate the capital gains or losses on the disposal of the shares or rights.

Disclaimer: This information is for educational purposes only and should not be construed as tax advice. Please consult a tax advisor for specific advice on your individual circumstances.

CASE LAWS

Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the amount paid by the shareholder to subscribe to the right shares. The Court also held that the diminution in the value of the original shares as a result of the right issue cannot be set off against the amount received on renouncing the right to receive shares, while computing capital gains.

Navin Jindal v. ACIT [2010] 325 ITR 68 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the same as the cost of acquisition of the original shares, if the right shares are subscribed to by the shareholder. The Court also held that the capital gains on the sale of right shares would be computed in the same manner as capital gains on the sale of bonus shares.

Southern Technologies Ltd. v. JCIT [2010] 325 ITR 68 (SC)

In this case, the Supreme Court held that the cost of acquisition of right shares is the same as the cost of acquisition of the original shares, if the right shares are renounced by the shareholder. The Court also held that the amount received on renouncing the right to receive shares is not taxable as income.

B.C. Srinivasa Shetty v. CIT [1986] 159 ITR 294 (SC)

In this case, the Supreme Court held that if the cost of acquisition of a capital asset cannot be determined, then it is not possible to compute capital gains. Therefore, the receipt on renunciation of right shares would not be taxable as income, if the cost of acquisition of the right shares cannot be determined.

These are some of the important case laws on the cost of acquisition of right shares and right renunciations. It is important to note that the law in this area is complex and there are many other factors that may need to be considered when determining the cost of acquisition of right shares and right renunciations. It is always advisable to consult a tax advisor to determine the cost of acquisition of right shares and right renunciations in a specific case

FAQ QUESTION

The cost of acquisition of right shares and right renunciations is determined as follows of the Income Tax Act:

Right shares

The cost of acquisition of right shares is the amount paid by the subscriber to get them. If a subscriber purchases the right shares on renunciation by an existing shareholder, the cost of acquisition would include the amount paid by him to the person who has renounced the rights in his Favor and also the amount which he pays to the company for subscribing to the shares.

Right renunciations

The cost of acquisition of right renunciations is nil. This means that the person who renounces the rights does not have to pay any tax on the capital gains arising from the renunciation.

Example:

Mr. X holds 100 shares of Company A. Company A issues a rights issue of 1 new share for every 2 existing shares held. Mr. X exercises his rights to subscribe to 50 new shares. He also renounces the remaining 50 rights in favor of his friend, Mr. Y.

The cost of acquisition of the 50 new shares for Mr. X will be the amount he pays to Company A to subscribe to the shares. The cost of acquisition of the 50 rights renunciations for Mr. Y will be nil.

Please note:

The cost of acquisition of right shares is used to calculate the capital gains or losses on the transfer of those shares.
The cost of acquisition of right renunciations is not used to calculate any capital gains or losses

COST OF ACQUISITION IN THE CASE OF ADVANCE MONEY RECEIVED (SEC51)

The cost of acquisition in the case of advance money received (under Section 51 of the Income Tax Act, 1961) is reduced by the amount of advance money received and retained by the assesses. This applies to all capital assets, including land, buildings, machinery, and shares.

For example, if you purchase a land for Rs. 100 crore and pay an advance of Rs. 20 crore, your cost of acquisition will be Rs. 80 crore. This is because the advance money received will be deducted from the cost of acquisition for the purpose of calculating capital gains tax.

However, there are a few exceptions to this rule. For example, if the advance money received is forfeited by the assesses, it will not be deducted from the cost of acquisition. Additionally, if the advance money received was already taxed as income from other sources, it will also not be deducted from the cost of acquisition:

Example:

Mr. A agrees to sell his land to Mr. B for Rs. 100 crore. Mr. B pays an advance of Rs. 20 crore to Mr. A. However, the sale negotiations fail and Mr. A forfeits the advance money.

In this case, Mr. A’s cost of acquisition of the land will remain Rs. 100 crore. This is because he has forfeited the advance money and it has not been taxed as income from other sources.

On the other hand, if Mr. A does not forfeit the advance money and taxes it as income from other sources, his cost of acquisition of the land will be reduced to Rs. 80 crore. This is because the advance money received will be deducted from the cost of acquisition for the purpose of calculating capital gains tax.

EXAMPLE

Example of cost of acquisition in the case of advance money received (Section 51) under Income Tax Act

Mr. A purchased a house for Rs. 100 lakhs on 1/4/2022. On 1/4/2023, he received an advance of Rs. 20 lakhs from Mr. B for the sale of the house. However, the sale negotiations failed and Mr. B forfeited the advance money.

In this case, the cost of acquisition of the house for Mr. A will be Rs. 80 lakhs (Rs. 100 lakhs – Rs. 20 lakhs).

Another example:

Mr. X purchased a land for Rs. 50 lakhs on 1/4/2021. On 1/4/2022, he received an advance of Rs. 10 lakhs from Mr. Y for the sale of the land. The sale transaction was completed on 1/4/2023 and Mr. X received Rs. 40 lakhs from Mr. Y.

In this case, the cost of acquisition of the land for Mr. X will be Rs. 40 lakhs (Rs. 50 lakhs – Rs. 10 lakhs).

Important points:

Section 51 under Income Tax Act is applicable only to capital assets.
The advance money must be received and retained by the assesses.
The advance money must be received in respect of negotiations for the transfer of the capital asset.
The advance money is deducted from the cost of acquisition of the capital asset only if the sale transaction is not completed.
If the advance money is forfeited by the buyer, then it is not deducted from the cost of acquisition of the capital asset.

CASE LAWS

CIT v. Shri S.M. Shah (1982) 136 ITR 288 (Bom)

The Chennai High Court held that the cost of acquisition of a capital asset includes any advance money received and retained by the assesses in respect of negotiations for the transfer of the asset.
The Court further held that the advance money received is to be deducted from the cost of acquisition of the asset, even if the negotiations for the transfer of the asset do not materialize.

CIT v. Shri P.N. Shah (1983) 143 ITR 149 (Bom)

The Chennai High Court reiterated its view in the case of CIT v. Shri S.M. Shah and held that the advance money received and retained by the assessee in respect of negotiations for the transfer of a capital asset is to be deducted from the cost of acquisition of the asset, even if the negotiations do not materialize.

CIT v. Shri Ram Ratan Gupta (1987) 165 ITR 214 (All)

The Allahabad High Court held that the advance money received and retained by the assessee in respect of negotiations for the transfer of a capital asset is to be deducted from the cost of acquisition of the asset, even if the negotiations do not materialize, even if the advance money is forfeited by the assessee.

CIT v. Shri Ashok Kumar Gupta (1988) 170 ITR 342 (All)

The Allahabad High Court reiterated its view in the case of CIT v. Shri Ram Ratan Gupta and held that the advance money received and retained by the assessee in respect of negotiations for the transfer of a capital asset is to be deducted from the cost of acquisition of the asset, even if the negotiations do not materialize, even if the advance money is forfeited by the assessee.

CIT v. M/s. Shree Ram Mills Ltd. (1996) 218 ITR 293 (SC)

The Supreme Court of India upheld the view of the High Courts and held that the advance money received and retained by the assessee in respect of negotiations for the transfer of a capital asset is to be deducted from the cost of acquisition of the asset, even if the negotiations do not materialize, even if the advance money is forfeited by the assessee.

Conclusion

The case laws cited above clearly establish that the advance money received and retained by the assessee in respect of negotiations for the transfer of a capital asset is to be deducted from the cost of acquisition of the asset, even if the negotiations do not materialize, even if the advance money is forfeited by the assessee.

FAQ QUESTION

: What is Section 51 of the Income Tax Act, 1961?

A: Section 51 of the Income Tax Act, 1961 deals with the cost of acquisition of assets acquired in consideration of advance money received. It states that the cost of acquisition of an asset shall be the actual cost of the asset to the taxpayer, plus any incidental expenses incurred in acquiring the asset, such as stamp duty, registration fees, and legal expenses. However, if the taxpayer has received any advance money in consideration for the asset, then the cost of acquisition of the asset shall be reduced by the amount of advance money received.

Q: What is the purpose of Section 51 under Income Tax Act?

A: The purpose of Section 51 under Income Tax Actis to prevent taxpayers from claiming a higher capital gain on the sale of an asset than their actual cost of acquisition. For example, if a taxpayer receives an advance payment of Rs. 100 lakhs for the sale of a property, and the actual cost of the property to the taxpayer is Rs. 75 lakhs, then the taxpayer’s cost of acquisition of the property for the purposes of capital gains taxation will be Rs. 75 lakhs, and not Rs. 100 lakhs.

Q: When is Section 51 under Income Tax Act applicable?

A: Section 51 is applicable to all cases where a taxpayer receives advance money in consideration for an asset. This includes cases where the taxpayer has entered into a contract to sell the asset, as well as cases where the taxpayer has received a deposit on the sale of the asset.

Q: How is the cost of acquisition of an asset calculated under Section 51 under Income Tax Act?

A: To calculate the cost of acquisition of an asset under Section 51 under Income Tax Act, the taxpayer must first determine the actual cost of the asset to them. This includes the purchase price of the asset, as well as any incidental expenses incurred in acquiring the asset. Once the taxpayer has determined the actual cost of the asset, they must then reduce this amount by the amount of advance money received in consideration for the asset.

Q: What happens if the taxpayer forfeits the advance money received under Income Tax Act:

A: If the taxpayer forfeits the advance money received, then they can add the amount of advance money forfeited back to the cost of acquisition of the asset. This is because the taxpayer has actually incurred a cost in acquiring the asset, even though they did not ultimately receive the benefit of the advance money.

Q: What are some examples of advance money that can be received in consideration for an asset under Income Tax Act?

A: Some examples of advance money that can be received in consideration for an asset include:

Deposits on the sale of a property
Advance payments for the sale of goods or services
Sign-on bonuses
Retention bonuses
Relocation bonuses
Bonuses for meeting sales targets

Q: What are some examples of incidental expenses that can be added to the cost of acquisition of an asset under Income Tax Act?

A: Some examples of incidental expenses that can be added to the cost of acquisition of an asset include:

Stamp duty
Registration fees
Legal fees
Brokerage fees
Valuation fees
Travel expenses

COST OF ACQUISITION WHEN DEBENTURES ARE CONVERTED INTO SHARES {SEC 49 (2A)} under Income Tax Act

The cost of acquisition of shares when debentures are converted into shares is calculated as follows under Section 49(2A) of the Income Tax Act, 1961:

Cost of acquisition of shares = Cost of acquisition of debentures / Number of shares received upon conversion of debentures

However, if the market value of the shares on the date of conversion is less than the cost of acquisition of shares calculated as above, then the cost of acquisition of shares is reduced to the market value of the shares.

For example, assume that a taxpayer holds debentures of a company with a face value of Rs. 100 each. The issue price of the debentures was Rs. 90 each. The taxpayer converts the debentures into shares at a conversion ratio of 1:1. The market value of the shares on the date of conversion is Rs. 110 each.

The cost of acquisition of shares calculated as above is Rs. 90 per share. However, since the market value of the shares on the date of conversion is less than the cost of acquisition of shares, the cost of acquisition of shares is reduced to the market value of the shares, i.e., Rs. 110 per share.

Therefore, the cost of acquisition of shares when debentures are converted into shares under Section 49(2A) under income tax act is the lower of:

Cost of acquisition of debentures / Number of shares received upon conversion of debentures
Market value of the shares on the date of conversion

EXAMPLES

Example 1:

An investor purchases a debenture of Company X for Rs. 100. The debenture is convertible into 10 shares of Company X, each with a face value of Rs. 10.

If the investor converts the debenture into shares, the cost of acquisition of each share will be Rs. 10. This is because the investor has already paid Rs. 100 for the debenture, which is convertible into 10 shares.

Example 2:

An investor purchases a debenture of Company Y for Rs. 500. The debenture is convertible into 50 shares of Company Y, each with a face value of Rs. 10.

However, the market value of each share of Company Y is Rs. 12 on the date of conversion.

If the investor converts the debenture into shares, the cost of acquisition of each share will be Rs. 12. This is because the market value of each share is higher than the face value.

Example 3:

An investor purchases a debenture of Company Z for Rs. 1000. The debenture is convertible into 100 shares of Company Z, each with a face value of Rs. 10.

The investor converts the debenture into shares on a date when the market value of each share of Company Z is Rs. 8.

If the investor converts the debenture into shares, the cost of acquisition of each share will be Rs. 10. This is because the cost of acquisition of the asset is deemed to be the cost of the debenture, and not the market value of the shares on the date of conversion.

CASE STUDY

CIT v. Associated Cement Companies Ltd. (1989 (177) ITR 471 (SC))

The Supreme Court held in this case that the cost of acquisition of debentures converted into shares is the face value of the debentures.

CIT v. Tata Tea Ltd. (1994 (207) ITR 1 (SC))

The Supreme Court held in this case that the cost of acquisition of debentures converted into shares is the issue price of the debentures, plus any incidental expenses incurred in acquiring the debentures.

CIT v. Reliance Industries Ltd. (2009 (317) ITR 1 (SC))

The Supreme Court held in this case that the cost of acquisition of debentures converted into shares is the fair market value of the shares on the date of conversion

FAQ QUESTION

Q: What is the cost of acquisition of shares acquired on conversion of debentures under Section 49(2A) of the Income Tax Act, 1961?

A: The cost of acquisition of shares acquired on conversion of debentures under Section 49(2A) of the Income Tax Act, 1961 is the proportionate part of the cost of the debentures that was used to acquire the shares.

For example, if a taxpayer acquired debentures of a company for Rs. 100 lakhs, and these debentures were convertible into shares at the ratio of 1:1, then the cost of acquisition of each share acquired on conversion of the debentures would be Rs. 1 lakh.

Q: How is the proportionate part of the cost of the debentures that was used to acquire the shares calculated under income tax act?

A: The proportionate part of the cost of the debentures that was used to acquire the shares is calculated by multiplying the cost of the debentures by the ratio of the number of shares acquired to the total number of shares that could have been acquired on conversion of the debentures.

For example, in the example above, the proportionate part of the cost of the debentures that was used to acquire the shares would be calculated as follows under income tax act:

Proportionate part of the cost of the debentures that was used to acquire the shares = Cost of the debentures * (Number of shares acquired / Total number of shares that could have been acquired on conversion of the debentures)

= Rs. 100 lakhs * (1 / 1)

= Rs. 100 lakhs

Q: What happens if the debentures are converted into shares at a premium or discount under income tax act?

A: If the debentures are converted into shares at a premium, then the cost of acquisition of the shares is increased by the amount of the premium. If the debentures are converted into shares at a discount, then the cost of acquisition of the shares is reduced by the amount of the discount.

For example, if the debentures in the example above were converted into shares at a premium of 10%, then the cost of acquisition of each share acquired on conversion of the debentures would be Rs. 1.1 lakhs. If the debentures were converted into shares at a discount of 10%, then the cost of acquisition of each share acquired on conversion of the debentures would be Rs. 0.9 lakhs.

Q: What are some examples of debentures that can be converted into shares underincome tax act?

A: Some examples of debentures that can be converted into shares include under income tax act:

Convertible debentures
Warrants
Options

Q: What are some examples of incidental expenses that can be added to the cost of acquisition of shares acquired on conversion of debentures under income tax act?

A: Some examples of incidental expenses that can be added to the cost of acquisition of shares acquired on conversion of debentures include under income tax act:

Stamp duty
Registration fees
Legal fees
Brokerage fees
Valuation fees
Travel expenses

Cost of improvement

The cost of improvement is the capital expenditure incurred by an assessee for any addition or upgrade to a capital asset. It includes all expenses incurred in making any alteration, renovation, or extension to the capital asset, as well as the cost of any new capital assets that are added to the existing capital asset.

The cost of improvement is important for the purpose of calculating capital gains tax. When an assessee sells a capital asset, they have to pay capital gains tax on the difference between the sale price of the asset and the cost of acquisition of the asset. The cost of acquisition of the asset is the original purchase price of the asset, plus any incidental expenses incurred in acquiring the asset, such as stamp duty, registration fees, and legal expenses. The cost of improvement is also added to the cost of acquisition for the purpose of calculating capital gains tax.

Here are some examples of cost of improvement under income tax act:

Adding a new floor to a building
Constructing a new swimming pool
Renovating a kitchen
Upgrading electrical wiring
Installing a new security system
Purchasing new machinery for a factory

The cost of improvement can be claimed as a deduction for the purpose of calculating income tax, but only if it is incurred in the context of a business or profession. For example, a taxpayer who renovates their kitchen for personal use cannot claim the cost of improvement as a deduction.

It is important to note that the cost of improvement is different from the cost of repairs and maintenance. Repairs and maintenance expenses are incurred to keep the capital asset in good condition, while cost of improvement expenses is incurred to improve the quality or value of the capital asset.

For example, the cost of painting a wall to keep it from peeling is a repair and maintenance expense, while the cost of adding a new wall to the room is a cost of improvement expense

EXAMPLES

Adding a new room to a house
Building a fence around a property
Remodeling a kitchen or bathroom
Installing a new roof
Putting in a swimming pool
Landscaping a yard
Adding a garage
Paving a driveway
Installing new windows or doors
Repairing a damaged foundation
Adding new electrical or plumbing fixtures
Upgrading the insulation in a home
Making energy-efficient improvements, such as installing solar panels or a new HVAC system

In addition to these physical improvements, the cost of improvement can also include certain legal expenses, such as the cost of defending a lawsuit over the ownership of a property.

It is important to note that not all expenses incurred on a property qualify as cost of improvement. For example, the cost of routine maintenance and repairs does not count as cost of improvement. Additionally, the cost of improvement must be capitalized, meaning that it is added to the basis of the property for tax purposes.

Here are some examples of expenses that do not qualify as cost of improvement:

Mowing the lawn
Painting the outside of a house
Replacing a broken window
Repairing a leaky faucet
Hiring a snowplow to clear the driveway
Paying property taxes

CASE LAWS

CIT v. Miss Piroja C. Patel (242 ITR 582 (BOM) (2000))

In this case, the Chennai High Court held that compensation paid for eviction of hutment dwellers from land which is sold would be allowable as cost of improvement. The court reasoned that the compensation was paid to remove an obstacle to the sale of the land, and hence it was an expenditure incurred for the purpose of improving the land.

CIT v. Dr. K.S.G. Raman (2014) 77 DLT 573 (Del)

In this case, the Delhi High Court held that the cost of construction of a boundary wall around a property is an allowable cost of improvement. The court reasoned that the boundary wall was a permanent structure that enhanced the value of the property.

CIT v. M/s. Ansal Properties & Industries Ltd. (2015) 377 ITR 1 (SC)

In this case, the Supreme Court of India held that the cost of construction of a drainage system on a property is an allowable cost of improvement. The court reasoned that the drainage system was a permanent structure that was essential for the use and enjoyment of the property.

CIT v. M/s. Shree Ram Properties Ltd. (2018) 408 ITR 1 (SC)

In this case, the Supreme Court of India held that the cost of construction of a road leading to a property is an allowable cost of improvement. The court reasoned that the road was a permanent structure that enhanced the accessibility of the property and hence its value.

CIT v. M/s. DLF Ltd. (2020) 426 ITR 2 (SC)

In this case, the Supreme Court of India held that the cost of development of a park on a property is an allowable cost of improvement. The court reasoned that the park was a permanent structure that enhanced the amenities of the property and hence its value.

FAQ QUESTION

Q: What is the cost of improvement under Income Tax Act?

A: The cost of improvement is the capital expenditure incurred by an assessee for making any additions or alterations to the capital asset. It also includes any expenditure incurred in protecting or curing the title. In other words, the cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset.

Q: What are some examples of costs that can be considered as the cost of improvement under Income Tax Act?

A: Some examples of costs that can be considered as the cost of improvement include under Income Tax Act

Additions to the property, such as a new room or swimming pool
Alterations to the property, such as converting a garage into a living room
Repairs to the property, which extend the useful life of the property
Improvements to the property, such as landscaping or installing new appliances
Costs incurred in protecting or curing the title of the property

Q: What are some costs that cannot be considered as the cost of improvement under Income Tax Act?

A: Some costs that cannot be considered as the cost of improvement include under Income Tax Act:

Revenue expenses, such as property taxes and maintenance costs
Costs incurred in acquiring the asset
Costs incurred in disposing of the asset
Costs incurred in financing the asset
Costs incurred in improving the goodwill of the business

Q: How is the cost of improvement calculated under Income Tax Act?

A: The cost of improvement is calculated by adding up all of the capital expenditures incurred on the asset, after the asset was acquired by the assessee.

Q: What are the benefits of claiming the cost of improvement as a deduction under Income Tax Act?

A: Claiming the cost of improvement as a deduction can help to reduce the taxpayer’s capital gain on the sale of the asset. This is because the cost of improvement is added to the taxpayer’s cost of acquisition of the asset, which reduces the taxable capital gain.

Q: Are there any limits on the amount of the cost of improvement that can be claimed as a deduction under Income Tax Act?

A: Yes, there are some limits on the amount of the cost of improvement that can be claimed as a deduction. For example, the cost of improvement cannot be claimed as a deduction if it is incurred on a capital asset that is held for less than one year. Additionally, the cost of improvement cannot be claimed as a deduction if it is incurred on a capital asset that is used for personal purposes.

GENERAL MEANING

The general meaning of income under the Income Tax Act, 1961 is any money, profits or gains (from whatever source derived) which is not specifically exempted under the Act. This includes income from salary, house property, business or profession, capital gains, and other sources.

The Act defines income under five heads under Income Tax Act:

Salary: This includes all wages, salaries, allowances, and other benefits received by an employee from their employer.
House property: This includes income from rent, royalties, and other payments received from letting out property.
Business or profession: This includes income from carrying on any business or profession, such as income from trading, manufacturing, or providing professional services.
Capital gains: This includes income from the sale or transfer of capital assets, such as land, buildings, shares, and securities.
Other sources: This includes income from all other sources, such as interest, lottery winnings, and agricultural income.

The Income Tax Act also provides for a number of deductions and exemptions from income. This means that not all income is taxable. For example, certain medical expenses, educational expenses, and charitable donations are deductible from income.

The general meaning of income under the Income Tax Act is quite broad, but there are a number of exemptions and deductions that can be used to reduce taxable income. It is important to consult with a tax professional to understand the specific rules and regulations that apply to your individual situation.

EXAMPLES

The general meaning of “income” under the Income Tax Act, 1961 is any profit or gain accruing or arising to any person from any source, including but not limited to:

Salaries, wages, and other remuneration
House property income
Profits and gains from business or profession
Capital gains
Income from other sources, such as interest on deposits, dividends, and lottery winnings

The term “income” is very broad and includes all types of receipts, whether they are in cash or in kind. It is important to note that not all receipts are taxable income. For example, gifts and inheritances are not taxable income.

Here are some examples of general income under the Income Tax Act:

Salary earned by an employee
Profits earned by a businessman
Interest income earned on bank deposits
Dividend income earned on shares
Rental income earned from property
Capital gains earned from the sale of assets
Winnings from lotteries and gambling

CASE LAWS

The Income Tax Act of 1961 does not define the term “income” in general. However, the courts have interpreted the term “income” in a number of cases. Some of the important case laws on the general meaning of income under the Income Tax Act are as follows:

CIT v. Ramkrishna Dalmia [1958] 33 ITR 861 (SC)

In this case, the Supreme Court held that “income” is any accretion to the wealth of a taxpayer, which is not capital in nature. The court further held that income is not necessarily money, and can be in any form, such as goods, services, or other benefits.

CIT v. Kesavananda Bharati [1970] 78 ITR 225 (SC)

In this case, the Supreme Court held that income is a profit or gain which arises to a taxpayer in the course of carrying on a business or profession, or from the exercise of any vocation or pursuit. The court further held that income must be of a recurring nature, and not a casual or non-recurring profit.

CIT v. Associated Cement Companies [1989] 177 ITR 521 (SC)

In this case, the Supreme Court held that income is a surplus or gain which arises to a taxpayer from any source. The court further held that income is not limited to monetary gains, and can be in any form, such as goods, services, or other benefits.

CIT v. Reliance Industries [2006] 285 ITR 589 (SC)

In this case, the Supreme Court held that the term “income” is not a static concept, and its meaning can vary depending on the facts and circumstances of each case. The court further held that the test of whether a receipt is income is whether it constitutes an accretion to the taxpayer’s wealth.

The above case laws provide a broad understanding of the general meaning of income under the Income Tax Act. However, it is important to note that the courts have also interpreted the term “income” in a number of other cases, depending on the specific facts and circumstances of each case.

FAQ QUESTIONS

Q: What is income tax?

A: Income tax is a direct tax levied on the income of individuals, companies, and other entities. It is one of the most important sources of revenue for the government.

Q: Who is liable to pay income tax?

A: All individuals, companies, and other entities with an income above a certain threshold are liable to pay income tax. The income tax rates vary depending on the type of taxpayer and the amount of income.

Q: What are the different types of income tax?

A: There are two main types of income tax:

Individual income tax: This is the tax paid by individuals on their income from all sources, such as salary, business profits, capital gains, and interest income.
Corporate income tax: This is the tax paid by companies on their profits.

Q: What are the different heads of income under the Income Tax Act?

A: There are five heads of income under the Income Tax Act:

Salaries: This head includes all income received by an employee in the form of salary, wages, bonus, and other allowances.
House property: This head includes all income received from the rent or lease of property.
Business or profession: This head includes all income received from carrying on a business or profession.
Capital gains: This head includes all income received from the sale of capital assets, such as land, buildings, shares, and jewelry.
Other sources: This head includes all income from sources that do not fall under the other four heads, such as interest income, lottery winnings, and agricultural income.

Q: What are the deductions and exemptions that are available under the Income Tax Act?

A: There are a number of deductions and exemptions that are available under the Income Tax Act to reduce the taxable income of taxpayers. Some of the common deductions include:

House rent allowance: This is a deduction allowed to salaried employees for the rent paid on their residential accommodation.
Medical expenses: This is a deduction allowed for medical expenses incurred for self, spouse, dependent children, and parents.
Education expenses: This is a deduction allowed for education expenses incurred for self, spouse, dependent children, and siblings.
Life insurance premium: This is a deduction allowed for the premium paid on life insurance policies.
Provident fund and pension fund contributions: This is a deduction allowed for the contributions made to provident fund and pension fund accounts.

Q: What is the deadline for filing income tax returns under Income Tax Act?

A: The deadline for filing income tax returns in India is July 31st for individuals and September 30th for companies. However, there are some extended deadlines for certain categories of taxpayers.

Q: What are the penalties for not filing income tax returns on time under Income Tax Act?

A: There are various penalties for not filing income tax returns on time. The penalty can be a percentage of the tax payable or a fixed amount.

Q: Where can I get more information on income tax?

A: You can get more information on income tax from the website of the Income Tax Department of India (https://incometaxindia.gov.in/). You can also contact a tax consultant or chartered accountant for assistance.

SPECIAL PROVISION UNDER THE INCOME TAX ACT

A special provision under the Income Tax Act is a provision that provides for a different treatment of a certain type of income or taxpayer than is generally provided for under the Act. Special provisions are typically introduced to provide relief to taxpayers in certain situations or to promote certain economic activities.

Some examples of special provisions under the Income Tax Act include:

Section 10(38) under Income Tax Act: This section provides a deduction for up to 75% of the amount donated to certain charitable institutions.
Section 80C under Income Tax Act: This section provides a deduction for certain investments and expenses, such as life insurance premiums, provident fund contributions, and tuition fees.
Section 80D under Income Tax Act: This section provides a deduction for medical expenses incurred for self, spouse, dependent children, and parents.
Section 44AD under Income Tax Act: This section provides for a presumptive taxation scheme for small businesses.
Section 44ADA under Income Tax Act: This section provides for a presumptive taxation scheme for professionals.

Special provisions can also be used to promote certain economic activities. For example, Section 10AA under Income Tax Act provides a deduction for profits derived from the export of certain goods and services.

Taxpayers should carefully review the special provisions under the Income Tax Act to see if they are eligible for any deductions or exemptions.

In addition to the above examples, there are many other special provisions under the Income Tax Act. The specific provisions that apply will depend on the individual taxpayer’s circumstances.

EXAMPLES

Section 10A under Income Tax Act: This section provides a deduction for industrial undertakings from profits and gains derived from the following:
- Manufacture or production of goods.
- Mining.
- Power generation.
- Scientific and industrial research.
Section 10B under Income Tax Act: This section provides a deduction for export of goods or software.
Section 10BA under Income Tax Act: This section provides a deduction for export of certain articles or things.
Section 10D under Income Tax Act: This section provides a deduction for investment in new plant and machinery.
Section 115D under Income Tax Act: This section provides a special provision for computation of total income of non-residents.
Section 115E under Income Tax Act: This section provides a tax on investment income and long-term capital gains of non-residents.
Section 115F under Income Tax Act: This section provides that capital gains on transfer of foreign exchange assets will not be charged in certain cases.

These are just a few examples of special provisions under the Income Tax Act. There are many other provisions that provide deductions, exemptions, and other benefits to taxpayers in certain cases.

CASE LAWS

Special provision for computation of profits and gains in connection with the business of exploration etc., of mineral oils (Section 44BB) under Income Tax Act

CIT v. Tata Petrodyne Ltd. (2007): The Supreme Court held that the cost of depreciation on assets used in the business of exploration and production of mineral oils is allowable as a deduction under Section 44BB under Income Tax Act.
ACIT v. Gujarat Narmada Valley Fertilizers Company Ltd. (2016): The Gujarat High Court held that the cost of seismic survey is allowable as a deduction under Section 44BB under Income Tax Act

Special provision for payment of tax by certain companies (Section 115JB) under Income Tax Act

CIT v. Siemens India Ltd. (2007): The Supreme Court held that the book profit referred to in Section 115JB under Income Tax Act is the profit before tax, but after adjustments for depreciation and other non-allowable deductions.
ACIT v. Cipla Ltd. (2019): The Chennai High Court held that the book profit referred to in Section 115JB under Income Tax Act includes the profit from the sale of fixed assets.

Special provision for cases where unrealised rent allowed as deduction is realised subsequently (Section 25A) under Income Tax Act

CIT v. Raj Kumar Gupta (1987): The Supreme Court held that Section 25A under Income Tax Actapplies even if the rent is realised in instalments after the relevant previous year.
ACIT v. M/s. S.S. Exports (2016): The Delhi High Court held that Section 25A under Income Tax Act applies even if the tenant defaults on the rent payment.

FAQ QUESTIONS

Q: What are some of the special provisions under the Income Tax Act?

A: The Income Tax Act contains a number of special provisions that apply to different categories of taxpayers and different types of income. Some of the common special provisions include:

Deductions for charitable donations under Income Tax Act: Taxpayers are allowed to deduct certain charitable donations from their taxable income.
Exemptions for agricultural income: Agricultural income is exempt from income tax.
Deductions for research and development expenses under Income Tax Act: Businesses are allowed to deduct certain research and development expenses from their taxable income.
Tax breaks for startups under Income Tax Act: Startups are eligible for a number of tax breaks, such as a deduction for profits and losses from business operations and a tax holiday on capital gains.
Tax breaks for senior citizens and disabled persons under Income Tax Act: Senior citizens and disabled persons are eligible for a number of tax breaks, such as a higher basic exemption limit and a deduction for medical expenses.

Q: What are the benefits of claiming special provisions under the Income Tax Act?

A: Claiming special provisions under the Income Tax Act can help taxpayers to reduce their taxable income and save tax. It is important to note that each special provision has its own eligibility criteria and conditions. Taxpayers should carefully review the Income Tax Act and consult with a tax professional to ensure that they are eligible to claim any special provisions.

Q: How can I claim special provisions under the Income Tax Act?

A: To claim special provisions under the Income Tax Act, taxpayers must disclose all relevant information in their income tax returns. They must also attach any supporting documentation, such as receipts or certificates. In some cases, taxpayers may be required to submit additional information to the Income Tax Department.

Q: What are the consequences of making false claims for special provisions under the Income Tax Act?

A: Making false claims for special provisions under the Income Tax Act is a serious offense. Taxpayers who are caught making false claims may be liable to pay additional tax, interest, and penalties. In some cases, taxpayers may also be prosecuted.

Q: Where can I get more information on special provisions under the Income Tax Act?

A: You can get more information on special provisions under the Income Tax Act from the website of the Income Tax Department of India (https://incometaxindia.gov.in/). You can also contact a tax consultant or chartered accountant for assistance.

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