• Section 43(1) of the Income Tax Act, 1961 defines the term “actual cost” of an asset for the purposes of depreciation. The actual cost is the cost of the asset to the assesses, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
• In other words, the actual cost of an asset is the amount that the assesses has actually paid for the asset, plus any incidental expenses incurred in acquiring the asset, such as freight, installation charges, etc. However, the actual cost is reduced by any amount that has been paid for the asset by any other person or authority.
• For example, if an assesses buys a machine for Rs. 10 lakhs and the seller agrees to bear the freight charges of Rs. 50,000, the actual cost of the machine to the assesses will be Rs. 9.5 lakhs (Rs. 10 lakhs – Rs. 50,000).
• The actual cost of an asset is important for the purposes of calculating depreciation. The depreciation is calculated on the actual cost of the asset, over its useful life. The higher the actual cost of the asset, the higher the depreciation amount.

EXAMPLES of the Income Tax Act, 1961

• In the state of Andhra Pradesh, the actual cost of a motor car that is acquired by an assesses after March 31, 1967, but before March 1, 1975, and is used otherwise than in a business of running it on hire for tourists, is reduced by the excess of the actual cost over Rs. 25,000.
• In the state of Maharashtra, the actual cost of an asset that is acquired by an assesses after April 1, 2001, and is used for the purpose of a business or profession in the state of Maharashtra, is reduced by the amount of any expenditure incurred on the acquisition of the asset that is not allowable as a deduction under the Income Tax Act.
• In the state of Pune, the actual cost of an asset that is acquired by an assesses after April 1, 2011, and is used for the purpose of a business or profession in the state of Kerala, is reduced by the amount of any expenditure incurred on the acquisition of the asset that is not allowable as a deduction under the Income Tax Act, and by the amount of any tax paid by the assesses on the acquisition of the asset.

CASE LAWS of the Income Tax Act, 1961

Commissioner of Income Tax vs. Ambica Electrolytic Capacitors Ltd. (1990): In this case, the Supreme Court held that the term “actual cost” in Section 43(1) the Income Tax Act, 1961 includes the cost of installation of assets.

• The Commissioner of Income Tax Synergy Financial Exchange Ltd. (2006): In this case, the Madras High Court held that the term “actual cost” in Section 43(1) the Income Tax Act, 1961 includes the cost of preliminary expenses incurred in setting up a business.
• Commissioner of Income Tax, Hides and Leather Products Pvt … (1973): In this case, the Gujarat High Court held that the term “actual cost” in Section 43(1) of the Income Tax Act, 1961 includes the cost of freight and insurance incurred in bringing assets into India.
• M/S.Eid Parry (India) Limited vs. The Dy. Commissioner of Income Tax (2012): In this case, the Madras High Court held that the term “actual cost” in Section 43(1) of the Income Tax Act, 1961 includes the cost of repairs and maintenance incurred during the useful life of an asset.
• The Commissioner of Income-Tax vs Currimbhoy Ebrahim and Sons Ltd. (1933): In this case, the Bombay High Court held that the term “actual cost” in Section 43(1) of the Income Tax Act, 1961 does not include the cost of goodwill.