Income Tax 2025

Appearance

Special provision for computation of cost of acquisition of certain assets ​

40(1) ​

For the purposes of computation of income under the head “Profits and gains of business or profession”, cost of acquisition of an asset acquired by–

  • (a) an amalgamated company under a scheme of amalgamation; or
  • (b) an assessee, under a gift, or will, or an irrevocable trust, or on total or partial partition of a Hindu undivided family,

when sold as stock-in-trade shall be the sum of—

  • (i) cost of acquisition of the said asset in the hands of the amalgamating company in case of clause (a), or the transferor or donor in case of clause (b);
  • (ii) any cost of improvement made;
  • (iii) any expenditure incurred by the amalgamating company or transferor or donor wholly and exclusively in connection with such transfer.

40(2) ​

This section shall not apply to an asset referred to in section 67(6)

Explanation

Section Summary: ​

This section provides a special rule for calculating the cost of acquisition of certain assets when they are sold as stock-in-trade. It applies to assets acquired by:

  1. An amalgamated company under a scheme of amalgamation, or
  2. An assessee (taxpayer) through a gift, will, irrevocable trust, or partition of a Hindu Undivided Family (HUF).

The purpose is to ensure that the cost of acquisition is calculated consistently, considering the original cost, improvements, and transfer-related expenses.

Key Changes: ​

This section introduces a specific method for determining the cost of acquisition for assets sold as stock-in-trade in two scenarios:

  1. Amalgamation: When a company acquires assets through amalgamation.
  2. Transfers without consideration: When assets are received via gift, will, trust, or HUF partition.

Previously, the cost of acquisition in such cases might have been interpreted differently, leading to inconsistencies. This section clarifies the calculation method.

Practical Implications: ​

  1. For Amalgamated Companies: The cost of acquisition will include the original cost in the hands of the amalgamating company, plus any improvements or transfer-related expenses.
  2. For Taxpayers Receiving Assets via Gift/Will/Trust/HUF Partition: The cost of acquisition will include the original cost in the hands of the transferor/donor, plus improvements and transfer-related expenses.
  3. Stock-in-Trade: This rule applies only when the asset is sold as stock-in-trade (i.e., inventory for business purposes).

This ensures fair taxation by preventing undervaluation of assets and aligning the cost basis with the original owner's records.

Critical Concepts: ​

  1. Cost of Acquisition: The original price paid to acquire the asset, plus any costs directly related to the acquisition.
  2. Cost of Improvement: Expenses incurred to enhance the value of the asset.
  3. Transfer-Related Expenses: Costs incurred during the transfer process (e.g., legal fees, stamp duty).
  4. Stock-in-Trade: Assets held for sale in the ordinary course of business (inventory).
  5. Exclusion: This section does not apply to assets covered under Section 67(6).

Compliance Steps: ​

  1. Document Original Cost: Maintain records of the original cost of acquisition from the amalgamating company or transferor/donor.
  2. Track Improvements: Document any costs incurred to improve the asset.
  3. Record Transfer Expenses: Keep receipts for expenses related to the transfer (e.g., legal fees, stamp duty).
  4. Report Correctly: Ensure the cost of acquisition is calculated as per this section when filing tax returns.

Example: ​

Scenario 1: Amalgamation

  • Company A amalgamates with Company B. Company B receives machinery as part of the amalgamation.
  • The original cost of the machinery in Company A’s books was ₹10 lakh. Company A spent ₹2 lakh on improvements and ₹50,000 on legal fees for the transfer.
  • When Company B sells the machinery as stock-in-trade, the cost of acquisition will be ₹12.5 lakh (₹10 lakh + ₹2 lakh + ₹50,000).

Scenario 2: Gift

  • Mr. X receives a piece of land as a gift from his father. The land was originally purchased by his father for ₹5 lakh. His father spent ₹1 lakh on fencing the land and ₹20,000 on legal fees for the transfer.
  • If Mr. X sells the land as stock-in-trade, the cost of acquisition will be ₹6.2 lakh (₹5 lakh + ₹1 lakh + ₹20,000).

This ensures that the taxable profit is calculated based on the actual cost incurred by the original owner, plus any additional expenses.