The cost of acquisition of a capital asset under the Income Tax Act is the amount that the taxpayer incurred to acquire the asset. It includes the following:

• The purchase price of the asset
• Any other consideration paid for the asset, such as a gift or inheritance
• Any liabilities taken over by the taxpayer in connection with the acquisition
• Any expenses incurred by the taxpayer in connection with the acquisition, such as brokerage fees and legal fees

The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration received or accruing as a result of the transfer of the asset.

In certain cases, the cost of acquisition may be determined on a notional basis. For example, if a capital asset is transferred to a close relative for a nominal consideration, the cost of acquisition will be taken as the fair market value of the asset on the date of transfer.

Here are some examples of cost of acquisition:

• The purchase price of a house
• The market value of shares bought on a stock exchange
• The value of a gift received from a friend or relative
• The value of an inheritance received from a deceased person
• The value of liabilities taken over by the taxpayer in connection with the acquisition of an asset
• The value of expenses incurred by the taxpayer in connection with the acquisition of an asset

EXAMPLES

• The purchase price of the asset, including any brokerage fees or other expenses incurred in connection with the purchase.
• The cost of any improvements made to the asset after it was purchased.
• The cost of any incidental expenses incurred in connection with the acquisition of the asset, such as stamp duty and registration charges.
• In the case of a depreciable asset, the cost of acquisition also includes the amount of depreciation claimed on the asset in the previous years.
• The cost of acquisition of a house would include the purchase price, brokerage fees, stamp duty, and registration charges.
• The cost of acquisition of a car would include the purchase price, brokerage fees, insurance premium, and registration charges.
• The cost of acquisition of a share would include the purchase price and brokerage fees.
• The cost of acquisition of a machine would include the purchase price, transportation costs, and installation charges.

It is important to note that the cost of acquisition is not always the same as the fair market value of the asset. For example, if you purchase a house for Rs. 1 crore, but the fair market value of the house is Rs. 1.2 crores, the cost of acquisition will still be Rs. 1 crore.

The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration

Case laws

• CIT v. Shakuntala Devi (1975) 99 ITR 179 (SC): The Supreme Court held that the cost of acquisition of a capital asset includes all expenditure incurred by the taxpayer on acquiring the asset, including the cost of purchase, stamp duty, registration charges, and legal fees.
• CIT v. C.L. Sawhney (1994) 210 ITR 535 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on improving the asset, such as the cost of construction or renovation.
• CIT v. P.P.H. Shoes Manufacturing Co. Ltd. (1999) 242 ITR 633 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on defending the title to the asset, such as the cost of litigation.
• ITO v. M.S. Krishnan (2003) 261 ITR 565 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on borrowing money to acquire the asset, such as the interest on the loan.
• ITO v. D.C.W. Ltd. (2009) 319 ITR 404 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on acquiring the goodwill of the business associated with the asset.

Faq question

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

A: The cost of acquisition of a capital asset is the amount of money or other property paid or incurred by the taxpayer to acquire the asset. It includes the following:

• The purchase price of the asset
• Any expenses incurred in connection with the purchase, such as brokerage fees, legal fees, and stamp duty
• Any liabilities taken over by the taxpayer as part of the purchase
• Any costs incurred by the taxpayer to improve the asset

Q: What are the different methods for determining the cost of acquisition of a capital asset under Income tax act?

A: The cost of acquisition of a capital asset can be determined in different ways depending on the mode of acquisition. For example, the cost of acquisition of a capital asset acquired by purchase is the purchase price of the asset plus any expensses incurred in connection with the purchase. The cost of acquisition of a capital asset acquired by gift is the market value of the asset on the date of gift.

Q: What are some special rules for determining the cost of acquisition of a capital asset under Income tax act?

A: There are a few special rules for determining the cost of acquisition of a capital asset in certain cases. For example, the following rules apply under Income tax act:

• In the case of a capital asset inherited from a deceased person, the cost of acquisition of the asset is the market value of the asset on the date of death of the deceased person.
• In the case of a capital asset acquired under a scheme of amalgamation or demerger, the cost of acquisition of the asset is the cost of acquisition of the shares in the amalgamated company or the demerged company, as the case may be.

Q: What are the implications of the cost of acquisition for capital gains tax under Income tax act?

A: The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale proceeds of the asset.