Bailabel Type : bailable

Description

Section 49 of the Income Tax Act, 1961 provides the provisions for determining the cost of acquisition of capital assets that are acquired through certain modes of transfer, such as inheritance, gift, or transfer under a trust. This section is important for computing the capital gains on the sale of assets acquired in non-standard ways, where the original cost of acquisition is not directly available.

The section applies in situations where the asset was not directly purchased by the taxpayer, but was instead acquired through other means, such as through a gift, inheritance, will, or other specified transfers.

Key Provisions of Section 49:

---

1. Inherited Assets (Section 49(1))

• Acquisition through inheritance or gift: When a capital asset is acquired by the taxpayer through inheritance, gift, will, or succession, the cost of acquisition for computing capital gains is the cost to the previous owner of the asset, rather than the market value at the time of inheritance or gift.

  • For Example: If a person inherits a piece of land from their parent, the cost of acquisition of that land for the inheritor will be the cost of the land paid by the parent (the original owner). Even though the inheritor did not pay for the property, they will be taxed on the capital gains based on the original cost, not the current market value.

• Adjusted for indexation: The cost to the previous owner is adjusted using the Cost Inflation Index (CII) from the year the asset was acquired by the previous owner. This allows the new owner to get the benefit of inflationary adjustments on the asset’s cost.

  • Formula for indexed cost of acquisition:
  $$\text{Indexed Cost of Acquisition} = \left(\text{Cost to Previous Owner} \times \frac{\text{CII for Sale Year}}{\text{CII for Year of Inheritance}}\right)$$

---

2. Acquisition by Gift (Section 49(1))

• Gift of capital assets: When an individual acquires an asset as a gift, the cost of acquisition is the cost to the donor (i.e., the person who gave the gift).

  • Example: If a father gifts his son a plot of land, the son will calculate the capital gains by using the father's original cost of acquisition of the land, along with adjustments for inflation using the CII.

---

3. Acquisition by Will (Section 49(1))

• Acquisition under a Will: When a person acquires an asset through a will or legal succession, the cost of acquisition remains as the cost to the deceased person (the testator or previous owner).

• The same rule applies to any property passed on under a will or by way of intestate succession (i.e., when a person dies without a will).

---

4. Transfer under Trust (Section 49(1))

• Transfer under a trust: When a capital asset is transferred to an individual by a trust, the cost of acquisition will be the cost of the asset to the trust.

  • Example: If a trust transfers an asset (e.g., land or shares) to a beneficiary, the beneficiary will use the trust's cost of acquisition to calculate the capital gains when they sell the asset.

---

5. Conversion of Capital Assets into Stock-in-Trade (Section 49(2))

• Conversion of capital assets into stock-in-trade: If a capital asset is converted into stock-in-trade for business purposes, the cost of acquisition for the purpose of calculating capital gains is the market value on the date of conversion.

  • Example: If a person owns a house that is later converted into stock-in-trade for a real estate business, the market value of the property at the time of conversion will be taken as the cost of acquisition for computing any capital gains when the property is sold.

---

6. Capital Assets Transferred in Corporate Reorganization (Section 49(3))

• Corporate reorganization or restructuring: If a capital asset is transferred as part of a corporate restructuring (like in the case of a merger or demerger), the cost of acquisition will be determined by the relevant provisions of the Indian tax law governing corporate restructurings.

  • Example: If a company transfers its assets to a newly formed company during a demerger or amalgamation, the cost of the assets for the new company will be determined according to the rules laid out by the law for corporate reorganization.

Punishment

• Penalties: If a taxpayer fails to report the correct cost of acquisition or misrepresents the acquisition method, penalties may apply.
  • Penalty for Concealment: Under Section 271(1)(c), a penalty can be imposed for concealment of income, which could be 100% to 300% of the tax evaded.
  • Interest: Interest for late payment of tax may also be applicable under Section 234A, 234B, and 234C.
• Tax Evasion: If there is an attempt to evade taxes through incorrect reporting of the cost of acquisition, this may lead to criminal prosecution and further legal consequences.