Source: http://taxpage.in/capital-gain-calculation-cost-of-acquisition-improvement-under-section-55-of-income-tax-act-1961.html
Timestamp: 2019-04-24 16:02:22+00:00

Document:
Cost of Acquisition is the total amount spent for acquiring the asset. Where the asset was purchased, the cost of acquisition is the amount paid to acquire it. Where the asset is acquired by way of exchange, the cost is the fair market value of that other asset as on date of exchange. Any expenditure incurred in connection with such purchase or exchange or other transaction ex. brokerage paid, registration charges and legal expenses form part of cost of acquisition.
Cost of Improvement mean all expenditure of capital nature incurred in making additions or alterations to the capital asset. However, any expenditure which is deductible in computing the income under the heads Income from House Property, Profits and gains from Business and Profession or Income from other sources would not be taken as Cost of Improvement. Cost of Improvement for Goodwill of a business, right to manufacture, produce or process any article or thing or right to carry on any business is NIL.
Mr Raj Purchase the property i.e. plot of land with constructed the ground floor on the land. After 2 years he decided to create increase the height of boundary wall from 2.5 feet to 8 feet for privacy. After 2 years with increase in the size of family he decided to construct first floor. 2 years later ram got transferred to another city he sold the home.
Date of acquisition is relevant – The cost of acquisition of the capital asset mentioned in section 48 implies date of acquisition, and the date of acquisition of the asset is crucial for determining the capital gain – Syndicate Bank Ltd. v. Addl. CIT  155 ITR 681 (Kar.).
Cost of property received on partition is cost on date of partition – Cost of an asset to a divided member must necessarily be its cost to him at the time of partition – Kalooram Govindram v. CIT  57 ITR 335 (SC).
Cost must be as on the date of acquisition – Where the property was not a capital asset on the date of acquisition but subsequently became a capital asset (like when it happens when agricultural land is converted into non-agricultural use) prior to its sale, the cost of acquisition must be only with reference to its date of acquisition, and not with reference to the date on which it became a capital asset – Ranchhodbhai Bhaijibhai Patel v. CIT  81 ITR 446 (Guj.)/ CIT v. M. Ramaiah Reddy  158 ITR 611 (Kar.)/ CIT v. Smt. M. Subaida Beevi  160 ITR 557 (Ker.).
Where agricultural lands are converted into housing sites and sold, cost of acquisition of lands is their original cost and not market value on date of conversion – Where the assessee converted agricultural lands owned by him into housing sites and sold the sites, the cost of acquisition of the lands for purposes of computation of capital gains will be their original cost, and not the market value on the date of their conversion into housing sites. The principles laid down by the Supreme Court in Bai Shirinbai K. Kooka  42 ITR 86 cannot be invoked, since those principles do not apply to provisions relating to capital gains – M. Nachiappan v. CIT  230 ITR 98 (Mad.).
Events subsequent to date of acquisition are not relevant – While computing the capital gains, the assessee is concerned with the cost of acquisition, that is, the price which was paid by the assessee for acquiring the capital asset on the date it was acquired, subject to such adjustments as laid down under section 55. The assessee has no concern with what would be the value of that asset on some subsequent occasion; in other words, subsequent events need not be taken into consideration – CIT v. Steel Group Ltd.  131 ITR 234 (Cal.).
Mortgage expenses are not excludible – Where the assessee purchased a property and on the very date of purchase mortgaged the property in order to pay the vendor and for meeting the cost of stamp duty on the sale deed, and later sold the property, the mortgage expenses incurred in connection with the acquisition of the property as well as interest payable on the mortgaged amount would form part of the cost of acquisition of the property for the purpose of computation of capital gains. The fact that the mortgage was executed after the sale deed was obtained even though both the documents were signed and registered on the same day does not render the mortgage and the borrowing made thereunder irrelevant to the task of determining the cost of acquisition – CIT v. K. Raja Gopala Rao  252 ITR 459 (Mad.).
Shares thrown into family hotchpot – Where shares are thrown by the karta of a HUF in the family hotchpot, the cost of acquisition of the shares to the HUF for the purpose of computing capital gains arising from the sale of those shares by the HUF would be the market value of the shares as on the date on which the HUF acquired them, namely, the date on which the shares were throw into the common hotchpot by the karta – Smt. Sushilaben Kantilal Shah v. CIT  208 ITR 912 (Guj.).
Provision applies only if there is cost of acquisition – The effect of section 55 is that whatever be the cost during the period preceding 1-1-1964 (now 1-4-1981), the assessee may exercise the option of having the value ascertained as on that date. This provision cannot be pressed into service where there is no cost of acquisition at all – CIT v. Markapakula Agamma  165 ITR 386 (AP)/ CIT v. H.H. Maharaja Sahib Shri Lokendra Singhji  162 ITR 93 (MP).
There is nothing in section 50(1), read with section 48(ii), which would confine the wide scope of section 55(2)(i) to the case of non-depreciable assets only where the assessee has acquired them by purchase – Goculdas Dossa & Co. v. J.P. Shah, Second ITO  75 Taxman 449 (Bom.)(FB).
Option must be exercised by assessee only – The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition of a capital asset on the basis of the fair market value as on 1-1-1964 (now 1-4-1981), unless the assessee exercises such option, as the option is given to the assessee (and not to the departmental authorities) whether to adopt the cost of acquisition of asset to the assessee or the fair market value of the asset as on 1-1-1964 (now 1-4-1981) – CIT v. Duncan Bros. & Co. Ltd.  209 ITR 44 (Cal.).
Option can be exercised at any time before capital gain is computed – Section 55(2)(i) gives an option to the assessee to adopt as the cost of acquisition either the original cost or the fair market value as on 1-1-1981. The right of choice is conferred on the assessee solely for its benefit and in the absence of anything to the contrary in the enactment, such a right cannot be curtailed. The freedom of choice is available to the assessee till the income chargeable under the head ‘Capital gains’ is computed. The assessee can justifiably contend that he can exercise the option after both the figures, viz., the original cost and the fair market value of the asset as on 1-1-1981, are available – P.N.B. Finance Ltd. v. CIT  252 ITR 491 (Delhi).
Provision applies even if asset has cost nothing to the assessee – The expression ‘became the property of the assessee’s need not be confined to acquisition of the property by the assessee from a third party or acquisition for some price paid – CIT v. Daulatran Nayar  105 ITR 843 (Bom.).
Subsequent issue of bonus shares will have no effect – The cost of acquisition of the original shares is immutable. It can be either the actual cost of acquisition or, at the option of the assessee, the market value thereof on 1-1-1974 (now 1-4-1981). Once the assessee elects to adopt this latter market value, subsequent issue of bonus shares would have no effect on the cost of acquisition of the original shares, and the capital gains on transfer of such original shares has to be calculated on such cost – CIT v. Pormutit Body Ltd.  73 Taxman 560 (Cal.).
No separate value should be allotted to bonus shares where entire block of shares has been sold – No separate value should be allotted to the bonus shares where the entire block of shares has been sold and the whole cost of original shares including the bonus shares being a known figure, it would be unnecessary to ascertain the individual cost of each share – T.S. Srinivasan v. CIT  244 ITR 443 (Mad.).
Expenses must have actually been incurred – Only those expenses which have been actually incurred by the assessee in making additions and improvements in the property ought to be taken into consideration as ‘cost of improvement’ while computing capital gains under section 55(1)(b) of the Act – Shri Parmanand Bhai Patel & Smt. Jyotsna Devi Patel v. CIT  149 ITR 80 (MP).
Betterment charges are allowable – The expenditure in the shape of betterment charges paid under the town planning scheme for acquiring an enduring benefit are in the nature of capital expenditure and go to improve the value of the land, hence, they would fall under section 48(ii) – Mathurdas Mangaldas Parekh v. CIT  126 ITR 669 (Guj.).
Assessee must make a specific claim – It is necessary that before the provisions of section 48 can be called in aid for purposes of deduction of any costs incurred by the assessee on the improvement of the asset, the assessee must not only claim that he has made any such capital expenditure but also demonstrate that any such expenditure could possibly have been incurred by him for purposes of making an improvement to the asset in question – Emerald Valley Estates Ltd. v. CIT  88 Taxman 335 (Kar.).
Intangible assets can have no cost of improvement – In the case of intangible assets the additions cannot be physical. Therefore, it is not possible to say in every case that without any physical addition to the capital asset, there can be no improvement thereto. Whether physical addition is necessary or not will depend on the nature of the asset – Smt. S. Valliammai v. CIT  127 ITR 713 (Mad.) (FB).
Mortgage after purchase cannot constitute an improvement to asset – If subsequent to the purchase of the property by the previous owner, it was mortgaged by him and that mortgage was later discharged either by himself or by his successor-in-interest, that would not constitute an improvement to the capital asset which became originally the property of the previous owner – Ambat Echukutty Menon v. CIT  111 ITR 880 (Ker.).
Improvement must be on the asset itself and not on title to asset – The word ‘thereto’ in the expression ‘cost of any improvement thereto’ in section 55(2) would appears to cover a case where the amount is expended on the asset itself. Improving the owner’s title to the asset is different from improving the asset itself. Therefore, the amount paid as and by way of settlement of a claim to the person who disputed the title of the assessee cannot be said to be an expenditure by way of any improvement to the asset as such – CIT v. V. Indira  119 ITR 837 (Mad.).
Improvement to rubber trees – Expenses incurred by way of manuring, spraying, weeding, etc., in respect of rubber trees are really expenses incurred in connection with the cultivation and incidental thereto. They cannot be called ‘improvement’ as envisaged in section 55 – Travancore Rubbers Ltd. v. CIT 51 Taxman 355 (Ker.).
Compensation paid to tenants for vacating premises – Where the assessee sold a property to the Bombay Municipal Corporation, and paid compensation to the hutment dwellers for vacating the land, the amount so paid was allowable as ‘cost of improvement’ in the computation of capital gains, since by eviction of the hutment dwellers the value of the land increased – CIT v. Miss Piroja C. Patel  242 ITR 582 (Bom.).
S.48, 54F, 55 of IT Act, 1961 — Capital gains — Sec.54 of the Act exempts capital gain to the extent that consideration is paid for the purpose of a residential house. Where assessee has acquired one residential house consisting of two flats, it cannot be said that the assessee has purchased two residential houses. — CIT Vs. Raman Kumar Suri.
Meaning of “adjusted”, “cost of improvement” and “cost f acquisition”.
Meaning of “adjusted”, “cost of acquisition”.

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