Cost of Acquisition - Taxation

Section 55(2). What is cost of acquisition

1. Meaning of cost of acquisition (COA) : Purchase Price + Registration Charges + Stamp duty + Brokerage paid + interest on loan taken for purchasing the capital asset provided it is capitalised and deduction is not taken in respect of such expenses under any other provisions of the Act + Other expenses incurred for acquisition and installation of the asset. In short we can write

COA = Purchase price + Brokerage paid on acquisition of the asset.

2. What is the cost of acquisition if the asset is acquired before 1-4-1981: Assessee as per his choice can opt either Cost of acquisition or Fair Market Value as on 1-4-1981. Assessee shall make a choice in such a manner that he pays minimum tax. In this case it shall opt for higher value.

P1: Compute cost of acquisition in following cases.

Ans: (1) 2,02,000; (2) 70,000; (3) 52,500; (4) 44,800.

3. Cost of acquisition of shares

Note 1: Securities transaction tax paid either on transfer of shares or acquisition of shares is neither treated as expenses on transfer nor expenses on acquisition of the asset. [fifth proviso to section 48].

4. Cost of acquisition and cost of improvement of self generated assets.

• ‘Self-generated assets’ means intangible assets (Intellectual Property Rights) which are created and developed on its own without purchasing from outside agency.

• Supreme Court held that such self-generated assets which do not cost anything to the assessee in terms of money cannot be subjected to capital gain. It means that those capital assets whose COA & COI cannot be determined cannot be subjected to capital gain.

• However Income Tax Act since then was amended and as per Section 55(2)(a)(i) following self-generated assets COA shall be deemed to be nil.

Note 1: Where the above asset is purchased from outside agency cost of acquisition is price paid to outside agency.
Note 2: For computing cost of acquisition of the above said assets FMV as on 1-4-1981 is not applicable whether the asset is self-generated or purchased from outside agency.
Note 3: Asset such as goodwill of a profession -self generated, if transferred, is not subjected to capital gain since COA cannot be determined. However if goodwill of a profession is purchased from the outside agency there exists COA and therefore shall be subjected to capital gain.

P1: Compute COA.

a. Mr. Ram Gopal Verma registered a trademark ‘The Factory’ in the year 1960 whose FMV as on 1-4-1981 is Rs 50 Lakhs. Determine the cost of acquisition of the trademark.

b. Suppose the trademark ‘The Factory’ is purchased by Miss K.K. for Rs 30 lakhs on 4-5-1979. Determine the cost of acquisition of the trademark for Miss KK if FMV as on 1-4-1981 is Rs 50 Lakhs.

c. Mr. Rajeev Goel was in practice as a company secretary who had built up valuable goodwill by personal efforts. He sold his practice to Mr. Prabhat Nanda who paid Rs 20 lakhs for goodwill. Is Mr. Rajeev Goel liable to any capital gain tax?

Ans: (a) Nil; (b) Rs 30 lakhs since FMV is not applicable. (c) No

P2: Compute capital gain.

Ans: 4,00,000; 4,50,000; 8,00,000; NA; 1,20,000.

P3: Explain

a. Even if conditions of section 45(1) are satisfied then also gain is not chargeable to tax. When?

b. List two situations in which fair market value as on 1-4-1981 is treated as cost of acquisition?

c. List a situation in which fair market value as on 1-4-1981 is not applicable?

Ans:

a. As per Supreme Court judgement in case of those assets whose cost of acquisition cannot be determined therefore cannot be subjected to capital gain. But with the amendment of Income Tax Act, cost of acquisition of certain self-generated assets is deemed to be nil. But income tax act has not provided that COA of goodwill of a profession -self generated shall be nil. Therefore transfer of goodwill of a profession is not subjected to capital gain.

b. Where the bonus shares are allotted before 1-4-1981 and for other assets if FMV as on 1-4-1981 is more than cost of acquisition. c. In case of following assets whether the assets are purchased or self generated, fair market value as on 1-4-1981 is not applicable. (1) Brand name, Trademark & goodwill associated with the business. (2) Tenancy rights. (3) Patent.

4. Section 49(1). Deemed cost of acquisition [It is applicable if section 56(2)(vii) is not applicable]

In case the asset is acquired through a mode given in section 47 (Gift to relative or will) then cost of acquisition is cost to the previous owner. Previous owner is the person who acquires the asset by paying the price.

Note : As per section 2(42A) period of holding is computed from the date the previous owner acquires the asset.

5. Section 49(4). Deemed cost of acquisition [It is applicable if section 56(2)(vii) is applicable]

In case of Land and Building is gifted and S 56(2)(vii) is applicable then COA is amount taxed under the head other sources. Period of holding is computed from the date the donor acquires the asset.
In case of Jad pb sas is gifted and S 56(2)(vii) is applicable then COA is amount taxed under the head other sources. Period of holding is computed from the date the donor acquires the asset.
In case of Land and Building or JAD PB SAS is sold and S 56(2)(vii) is applicable then COA = Purchase price + amount taxed under the head other sources. As per section 2(42A) period of holding is computed from the date the purchaser acquires the asset.

P1 : Find out COA from the following informations.

1. Mr. X gifts immovable property to Mr Y his friend. Its stamp duty value is Rs 15,00,000.

2. Mr. X sells his immovable property to Mr Y for Rs 25,00,000. Its stamp duty value is Rs 30,00,000.

3. Mr. Y has received gift of agricultural land having stamp duty value of Rs 45,000 and also a residential house having a stamp duty value of Rs 2,00,000 from his non relative.

4. Mr. Y has received gift of industrial land having stamp duty value of Rs 6,00,000 from his relative.

5. X Ltd purchases shares for Rs 50,00,000 having prescribed fair market value of Rs 60,00,000.

6. X purchases shares for Rs 50,00,000 having prescribed fair market value of Rs 60,00,000 on 30-9-2010.

7. X purchases shares for Rs 50,00,000 having prescribed fair market value of Rs 60,00,000 on 30-9-2009.

8. Mr. X gifts shares to his friend Mr Y. Prescribed FMV is Rs 4,00,000.

9. Mr. X sells his jewellery to Mr Y for Rs 8,00,000. Prescribed FMV is Rs 9,00,000.

10. Mr. X sells his M. F. Hussain paintings to Mr Y for Rs 7,00,000. Prescribed FMV is Rs 7,30,000.

11. Mr. Y has received gift of M. F. Husain paintings having prescribed FMV of Rs 80,000 from his relative.

12. Mr. X sells his immovable property to Mr Y for Rs 5,00,000. Its stamp duty value is Rs 5,50,000.

Ans : (1) S 49(4) : 15,00,000 (2) S 49(4) : 30,00,000 (3) S 49(1) : Ag : Cost to the PO. S 49(4) : RHP : 2,00,000 (4) S 49(1) : Cost to the PO (5) S 55 : 50,00,000 (6)  S 49(4) : 60,00,000 (7) S 55 : 50,00,000 (8) S 49(4) : 4,00,000 (9) S 49(4) : 8,00,000 + 1,00,000 = 9,00,000 (10) S 55 : 7,00,000 (11) S 49(1) : Cost to the previous owner. (12) S 55 : 5,00,000.