Cost of Acquisition for Capital Gains - Different Scenarios

The cost of acquisition is important in calculating capital gains tax, as it affects the taxable profit realised from the transfer of capital assets. The cost of acquisition is determined differently in different scenarios. This article will discuss these scenarios and the cost of acquisition applicable to these scenarios.

Cost of Acquisition (COA)

The cost of acquisition in relation to the transfer of capital assets refers to the expenses made by an assessee to acquire an asset. It includes the asset’s purchase price and other costs incurred to get the asset ready to use. It is critical to determine the capital gains when the asset is transferred. The formula used is:

Capital Gain = Sale price (-) Cost of Acquisition

Cost of Acquisition in Different Scenarios

Section 49(1): Cost of Previous Owner Deemed as Cost of Acquisition

The cost of acquisition of the previous owner will be deemed to be the cost of acquisition in the following circumstances:

Where the capital asset is transferred to you in the following ways the cost of acquisition will be deemed to be the cost of acquisition to the previous owner:

• On the distribution of assets on the total or partial participation in HUF.
• By way of a gift or will
• By succession, inheritance or devolution
• On any distribution of assets on the liquidation of a company
• On transfer to a revocable or irrevocable trust
• On the transfer from a holding company to its wholly owned subsidiary Indian company or by a subsidiary to its 100% holding Indian company
• On the transfer of capital assets from the amalgamating company to the amalgamated Indian company in a scheme of amalgamation
• On the transfer of shares of an Indian company in a scheme of amalgamation by amalgamating a foreign company to the amalgamated foreign company
• On the transfer by the banking company to the banking institution under the scheme of amalgamation
• On the transfer by the demerged company to the resulting Indian company in a scheme of demerger
• On the transfer in a business reorganisation by the predecessor co-operative bank to the successor co-operative bank
• On the transfer by a private company or an unlisted public company to a limited liability partnership(LLP) as a result of the conversion of a company to a LLP.
• On the conversion by an individual of his separate property into a HUF property, by the mode as referred in Section 64(2)

Section 49(2): COA of Shares Received Under the Scheme of Amalgamation

If you receive any share in an amalgamated Indian company as a result of a transfer, as referred to in Section 47(vii). In that case, the cost of those shares will be considered the same as the COA of the shares in the amalgamating company.

Section 49(2A): COA in Case of Conversion of Debentures, Bonds, Debenture-stock or Debenture Certificate into Shares and Debentures

If you receive any share or debenture in a company as a result of the conversion of debenture, debenture-stock, or deposit certificates then the COA of such share or debenture will be considered as part of the of the original cost of the debenture, bond, or deposit certificate from which they were acquired.

Section 49(2AA): COA of Specified Security or Sweat Equity Shares

If an employee is granted sweat equity shares or specified securities, and later sells or transfers those shares, the COA for calculating capital gain will be the Fair Market Value (FMV) of those shares when they were originally issued to the employee i.e. FMV that has been taken into account for perquisite valuation (as per the guidelines under Section 17(2)(vi)).

Section 49(2AAA): COA of rights received in a firm by shareholders on conversion of a private or unlisted company into an LLP

Where a company is converted to an LLP as referred to in section 47(xiiib) the COA of the capital asset being rights of a partner shall be deemed to be the COA to him of the shares in the predecessor company, immediately before its conversion.

Section 49(2C): COA of shares received in the resulting company

In the case of demerger, the COA of the shares received in the resulting company is determined proportionately. The proportion is based on the ratio of the net book value of the assets transferred to the net worth of the demerged company immediately before the demerger. The resulting proportion is then applied to the original cost of acquisition of the shares in the demerged company to calculate the cost of acquisition of the shares in the resulting company. 

COA of Resulting Company Shares=(Net Worth of Demerged Company / Net Book Value of Transferred Assets​) x Cost of Acquisition of Demerged Company Shares

Section 49(2D): COA of shares held in the demerged company 

In the case of a demerger, the COA of the original shares held by a shareholder in the demerged company is reduced by an amount determined under sub-section (2C).

Section 49(4): COA of Property as referred in Section 56(2)(x) 

Capital gains as a result of the transfer of property as referred to under section 56(2)(x) the COA shall be deemed to be the value taken into consideration for the purpose of section 56(2)(x).

Section 49(7): COA of capital asset being share in the project under section 45(5A)

The COA of share in joint development agreement will be the sum of the stamp duty value of the land/building on the date of completion certificate is issued plus cash consideration received for the transfer of share in project.

COA = Stamp Duty Value on Completion Date + Cash Consideration

Section 49(9): COA of stock-in-trade into capital asset

Where  a stock-in-trade asset is converted into a capital asset, the cost of acquisition for the purpose of calculating capital gains will be the fair market value (FMV) of the asset at the time of conversion.

Conclusion

The cost of acquisition (COA) plays a pivotal role in determining the capital gains tax when a capital asset is transferred. It is essential to determine the COA in various scenarios as it directly impacts the taxable profit from the sale or transfer of assets. The Income Tax Act, 1961 provides detailed provisions under different sections that outline how the COA should be determined based on the nature of the asset and the specific circumstances of its transfer. Understanding the correct COA ensures accurate capital gains tax calculation and compliance, reflecting the complexities of asset transfers and tax obligations.