Cases where the cost of acquisition is the cost to the previous owner (as set, 1961 Act, AY 2019-20)

The rule

Where an assessee gets a capital asset without paying for it, or by a transfer the Act does not treat as a sale, his own cost would be nil or not real. Section 49(1) therefore deems the cost of acquisition to be the cost at which the previous owner acquired it, increased by any cost of improvement borne by the previous owner or by the assessee.

The cases

Section 49(1) applies where the asset became the assessee's property:

1. on the distribution of assets on a total or partial partition of a Hindu undivided family (clause (i));
2. under a gift or a will (clause (ii));
3. by succession, inheritance or devolution (clause (iii)(a));
4. on the distribution of assets when a company goes into liquidation (clause (iii)(c));
5. under a transfer to a revocable or irrevocable trust (clause (iii)(d));
6. under one of the section 47 transfers that clause (iii)(e) lists (not every transfer section 47 exempts), such as a transfer of a capital asset by a company to its wholly owned Indian subsidiary, or by a wholly owned subsidiary to its Indian holding company (section 47(iv) and (v), which do not cover a transfer made after 29 February 1988 as stock-in-trade: proviso to section 47(v)), or by an amalgamating company to an Indian amalgamated company in a scheme of amalgamation (section 47(vi)) (clause (iii)(e));
7. where the assessee is a Hindu undivided family and the asset became its property when a member converted his own property into family property, threw it into the family's common stock, or transferred it to the family, directly or indirectly, otherwise than for adequate consideration, after 31 December 1969 (clause (iv), the mode of section 64(2));
8. when a firm, body of individuals or association of persons was dissolved before 1 April 1987 and its assets were shared out (clause (iii)(b)).

Points that go with the rule

• Who is the previous owner: the last previous owner who acquired the asset by a mode other than those in clauses
  1. to (iv) above (Explanation to section 49(1)); the test is the mode by which that owner came by it, not that he bought or made it.
• Period of holding: in these cases the period for which the previous owner held the asset is included in the assessee's period of holding (section 2(42A), Explanation 1(i)(b)), so an inherited asset can be long-term at once.
• Assets held from before 1 April 2001: if the previous owner acquired the asset before that date, the assessee may take its fair market value on 1 April 2001 as the cost instead (section 55(2)(b)(ii)). This option is not open for the assets of section 55(2)(a) (goodwill of a business, a trade mark or brand name, a right to manufacture or to carry on a business or profession, tenancy rights, stage carriage permits and loom hours), because section 55(2)(b) covers only capital assets other than those.
• Cost of improvement: for goodwill of a business, a right to manufacture, produce or process, or a right to carry on a business or profession, it is nil; for other assets it is capital expenditure on additions or alterations, and where the asset became the previous owner's or the assessee's property before 1 April 2001, only such expenditure incurred on or after that date counts (section 55(1)(b)).

Example (our own figures)

Asha bought a plot in 2004 for ₹6,00,000 and left it by will to her son Kabir, who sold it in 2018-19. Kabir's cost of acquisition is ₹6,00,000, Asha's cost, and his period of holding runs from 2004, so the gain is long-term.