Assets whose cost of acquisition is taken as nil (as set, 1961 Act, AY 2019-20)

Why a nil cost

Some assets are not bought but come into being through the owner's own effort, or come free with another asset. They have no cost that can be measured, yet they can be transferred for a price. Section 55(2) fixes their cost of acquisition for sections 48 and 49 at nil, so no cost of acquisition is deducted: the capital gain is the sale price less the expenditure incurred wholly and exclusively in connection with the transfer (section 48(i)) and less any cost of improvement (section 48(ii)); for goodwill and the rights in item 3 that cost of improvement is itself nil (section 55(1)(b)(1)), so only the transfer expenditure is deducted.

Four assets

Under section 55(2)(a)(ii), the cost is nil for the following when not bought from a previous owner:

1. Goodwill of a business that the owner has built up himself.
2. A trade mark or brand name associated with a business.
3. A right to make, produce or process an article or thing, and a right to carry on a business or a profession.
4. Tenancy rights, stage carriage permits and loom hours.

A further case is in section 55(2)(aa)(iiia):

5. Bonus shares and other financial assets allotted without payment on the basis of a share or other security already held (a security in the sense the Securities Contracts (Regulation) Act, 1956 gives the word, as section 55(2)(aa) says); their cost is nil in the hands of the person to whom they are allotted. (For bonus shares allotted before 1 April 2001, the holder may instead take their fair market value on that date, under section 55(2)(b), the provision to which clause (aa) is made subject.)

When the cost is not nil

If any asset in items 1 to 4 was bought from a previous owner, its cost is the purchase price (section 55(2)(a)(i)). If it came by gift, will, inheritance, partition or another mode of section 49(1), the previous owner's cost is used under section 49. The cost of improvement of goodwill, of a right to manufacture and of a right to carry on a business or profession is also nil (section 55(1)(b)(1)).