Section 55(2) of the Income Tax Act provides details on calculating Cost of Acquisition of the Capital Asset. Calculating COA under section 55(2) varies in each situation, which are detailed below. Here, we have provided detailed analysis on calculating Cost of Acquisition for Goodwill and other Intangible Assets under section 55(2), Calculating COA u/s 55(2) where the asset is acquired before 1981, An Example and Illustration explaining the calculation of COA under Section 55(2) of Income Tax Act etc.
Goodwill COA – Section 55(2) Income Tax Act
For the purposes of Sections 48 and 49, ‘cost of acquisition’ of goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours is:
- in the case of acquisition of such asset by the assessee by purchase from a previous owner, cost of acquisition means the amount of the purchase price; and
- in any other case cost of acquisition shall be Nil.
Cost of an asset acquired before 1.4.1981:
where the capital asset became the property of the assessee before 1.4.1981, cost of acquisition means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on 1.4.1981 at the option of the assessee and the indexation of cost will be available with reference to such actual cost of acquisition or the FMV as opted for by the assessee;
Before 1981 – Section 55(2) Income Tax Act
where the capital asset became the property of the assessee by any of the modes specified in Section 49(1) and the capital asset became the property of the previous owner before 1.4.1981 cost of acquisition means the cost of capital asset to the previous owner or the fair market value of the asset as on 1.4.1981 at the option of the assessee. However the indexation will commence from the year in which the asset became the property of the assessee and not 1981-82.
Depreciable Capital Asset – Section 55(2) Income Tax Act
If a depreciable capital asset becomes the property of assessee under the circumstances mentioned in para 9, he has got an option to substitute the fair market value of the asset on April 1, 1981 in place of its cost of acquisition. If, however, an assessee acquires a depreciable asset in the circumstances, other than those mentioned in para 9, he cannot opt for fair market value on April 1, 1981 in the place of its cost of acquisition [Section 50(2) – Rajnagar Vaktapur Ginning, Pressing & Mfg. Co. Ltd. v. CIT (1975) 99 ITR 264 (Guj.) and India Jute Co. Ltd. v. CIT (1981) 6 Taxman 239 (Cal.)].
Unearned Increase – Section 55(2) Income Tax Act
Unearned increase in value of land is not to be deducted while determining FMV (Fair Market Value) of property as on April 1, 1981. [CIT v. Rekha Mathur (2006) 152 Taxman 70 (Mag.) (Del.)].
FMV Substitution – Section 55(2) Income Tax Act
The option given to the assessee to substitute the fair market value of the asset on 1.4.1981 is to ensure that capital gains are not computed with reference to some historical cost; and thus mitigate the hardship to some of the assessees who would have acquired the asset at cheaper cost, fifteen or even twenty years back. Keeping in view this, the Finance Act, 1992 has introduced the system of indexation which has already been discussed elsewhere in this chapter.
Cost of assets acquired on liquidation of a company -Section 55(2) Income Tax Act
(iii) where the capital asset became the property of the assessee on the distribution of capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head ‘capital gains’ in respect of that asset under Section 46, ‘cost of acquisition’ means the market value of the asset on the date of distribution.
Cost of Securities – Section 55(2) Income Tax Act
Cost of original shares, acquired directly from a company or otherwise, shall be deemed to be the actual price paid therefor just as the cost of rights shares shall be deemed to be the actual price paid therefor to the company plus any amount to the renouncer. Cost of bonus shares shall be deemed to be Nil. Cost of renunciation of rights shall also be deemed to be Nil.
Cost on consolidation or conversion of shares – Section 55(2) Income Tax Act
(iv) where the capital asset, being a share or a stock of a company, became the property of the assessee on –
- the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares;
- the conversion of any shares of company into stock;
- the reconversion of any stock of company into shares;
- the sub-division of any of the shares of the company into shares of smaller amount; or
- the conversion of one kind of shares of the company into another kind,
the ‘cost of acquisition’ means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.
In relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for corporatisation approved by the Securities and Exchange Board of India Act, 1992 (15 of 192), shall be the cost of acquisition of his original membership of the exchange.
Example 3: Section 55(2) Income Tax Act
X bought 100 shares of Rs.10 each fully paid @ Rs.15 per share. The company sub-divided shares into shares of Rs.5 each (fully paid). X later on sold 50 of the shares @ Rs.8 each.
|Sale proceeds or consideration received 50 x Rs.8||Rs.400|
|Less: Cost of acquisition: 50 shares now sold by X have been derived from 25 shares 375 which he had originally acquired @ Rs.15 per share. Cost of acquisition of these 50 shares will be 25 x Rs.15||Rs.375|