The cost of acquisition being the fair market value as on April 1 (Section 55(2)) of the Income Tax Act of India refers to the situation where the assessed can choose to treat the fair market value of a capital asset as on April 1, 2001 as the cost of acquisition of that asset, for the purpose of calculating capital gains or losses.

This option is available to assessed who acquired the capital asset before April 1, 2001.

To exercise this option, the assessed must file a declaration with the Income Tax Department, on or before the due date for filing the income tax return for the year in which the capital asset is transferred.

Example:

Mr. X acquired a house for Rs. 100 crores on March 31, 2001. The fair market value of the house on April 1, 2001 was Rs. 150 crores.

Mr. X sells the house in the financial year 2023-24 for Rs. 200 crores.

If Mr. X chooses to treat the fair market value of the house as on April 1, 2001 as the cost of acquisition, then his capital gain will be Rs. 50 crores (Rs. 200 crores – Rs. 150 crores).

However, if Mr. X chooses to treat the actual cost of acquisition (Rs.100 crores) as the cost of acquisition, then his capital gain will be Rs.100 crores (Rs.200 crores – Rs.100 crores).

Which option should you choose under Income Tax Act?

The option that you should choose depends on your individual circumstances. If the fair market value of the capital asset as on April 1, 2001 is higher than the actual cost of acquisition, then you should choose the option to treat the fair market value as the cost of acquisition. This will reduce your capital gain and, therefore, your tax liability.

However, if the fair market value of the capital asset as on April 1, 2001 is lower than the actual cost of acquisition, then you should choose the option to treat the actual cost of acquisition as the cost of acquisition. This will increase your capital gain and, therefore, your tax liability.

Please note:

• This option is not available for all capital assets. It is only available for capital assets that were acquired before April 1, 2001.
• This option is not available for short-term capital assets. It is only available for long-term capital assets.
• This option is not available for specified securities.

EXAMPLE

• Agricultural land acquired by the government: If the government acquires agricultural land from a farmer, the compensation received by the farmer is treated as the fair market value of the land as on April 1, and that is the cost of acquisition for the government.
• Shares in an amalgamated Indian company: When a shareholder of an amalgamating company is allotted shares in the amalgamated Indian company, the cost of acquisition of those shares is treated as the fair market value of the shares in the amalgamating company as on April 1.
• Bonus shares allotted by a company: If a company allots bonus shares to its shareholders, the cost of acquisition of those shares is treated as the fair market value of the shares on April 1 of the year in which the bonus shares are allotted.
• Right shares allotted by a company: If a company allots right shares to its shareholders, the cost of acquisition of those shares is treated as the fair market value of the right shares on the date of allotment.
• Property received under section 56(2)(vii) or (viia) or (x): When a taxpayer receives property under section 56(2)(vii) or (viia) or (x), the cost of acquisition of that property is treated as the fair market value of the bonds or debentures surrendered on April 1 of the year in which the property is received.

In general, the fair market value of an asset as on April 1 is determined by the Central Board of Direct Taxes (CBDT). The CBDT publishes a list of fair market values of various assets on its website every year.

Please note: The above examples are not exhaustive. There may be other cases where the cost of acquisition of an asset is treated as the fair market value as on April 1. For more detailed information, please consult a tax advisor.

CASE LAWS

• CIT v. M/s. S. Kumar and Co. (1979) 120 ITR 771 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date.
• CIT v. M/s. S.N. Brothers (1980) 122 ITR 510 (SC): In this case, the Supreme Court reiterated its decision in CIT v. M/s. S. Kumar and Co. and held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date.
• CIT v. M/s. Laxmi Cotton Mills (1981) 130 ITR 257 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date, even if the taxpayer had not actually exercised the option to do so.
• CIT v. M/s. B.K. Birla (1982) 133 ITR 852 (SC): In this case, the Supreme Court held that the fair market value of an asset as on April 1, 1961, can be taken as the cost of acquisition for the purpose of computing capital gains, even if the asset was acquired before that date, even if the taxpayer had not actually exercised the option to do so in the previous assessment years.

FAQ QUESTION

According to Section 55(2) of the Income Tax Act of India, the cost of acquisition of a capital asset acquired before April 1, 2001, at the option of the assesses, shall be either the actual cost of acquisition to the assesses or the fair market value of the asset as on April 1, 2001.

What is fair market value under Income Tax Act?

Fair market value is the price at which a willing buyer would purchase an asset from a willing seller, both parties being fully informed of the relevant facts and neither party being under any compulsion to buy or sell.

When can the assesses opt for fair market value as on April 1, 2001 as the cost of acquisition under Income Tax Act?

The assesses can opt for fair market value as on April 1, 2001 as the cost of acquisition only if the capital asset was acquired before April 1, 2001.

How is fair market value as on April 1, 2001 determined under Income Tax Act?

Fair market value as on April 1, 2001 can be determined in the

 following ways under Income Tax Act:

• For listed shares of the Income Tax Act: The fair market value of listed shares as on April 1, 2001 is the highest price quoted for the shares on any recognized stock exchange on that date.
• For unlisted shares of the Income Tax Act: The fair market value of unlisted shares as on April 1, 2001 can be determined by taking into account the following factors:
  • The face value of the shares.
  • The net asset value of the company as on April 1, 2001.
  • The market value of similar shares of listed companies.
• For other capital assets: The fair market value of other capital assets as on April 1, 2001 can be determined by taking into account the following factors:
  • The original cost of the asset.
  • The age and condition of the asset.
  • The demand and supply for similar assets in the market.

Benefits of opting for fair market value as on April 1, 2001 as the cost of acquisition:

The main benefit of opting for fair market value as on April 1, 2001 as the cost of acquisition is that it can reduce the capital gains tax payable by the assesses. This is because the fair market value of capital assets is generally higher than their original cost of acquisition, especially for assets that have appreciated in value over time.

Example:

Mr. X acquired a house in 1990 for Rs. 10 lakhs. The fair market value of the house as on April 1, 2001 was Rs. 50 lakhs. Mr. X sold the house in 2023 for Rs. 1 crore.

If Mr. X opts for the actual cost of acquisition as the cost of the house, his capital gain will be Rs. 90 lakhs (Rs. 1 crore – Rs. 10 lakhs). However, if Mr. X opts for the fair market value as on April 1, 2001 as the cost of the house, his capital gain will be Rs. 50 lakhs (Rs. 1 crore – Rs. 50 lakhs).

Therefore, by opting for the fair market value as on April 1, 2001 as the cost of the house, Mr. X can save Rs.40 lakhs in capital gains tax.