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Unit 12: Income under the Head Capital Gains

2. The conversion of Indian currency into foreign currency and the re-conversion of Notes
foreign currency into Indian currency shall be at the rate of exchange prescribed in
that behalf;
3. ‘Indexed cost of acquisition’ means an amount which bears to the cost of acquisition
the same proportion as Cost Inflation Index for the year in which the asset is
transferred bears to the Cost Inflation Index for the first year in which the asset was
st
held by the assessee or for the year beginning on the 1 day of April 1981 whichever
is later;
4. ‘Indexed cost of any improvement’ means an amount which bears to the cost of
improvement the same proportion as Cost Inflation Index for the year in which the
asset is transferred bears to the Cost Inflation Index for the year in which the
improvement to the asset took place; and

5. ‘Cost inflation index’, in relation to a previous year, means such Index as the Central
Government may, having regard to seventy-five per cent of average rise in the
Consumer Price Index for urban non-manual employees for the immediately
preceding previous year to such previous year, by notification in the Official Gazette,
specify in this behalf.
Commission paid to a broker for effecting sale of the asset falls under (1) above. Similarly
expenditure incurred on litigation for getting enhanced compensation is expenditure
wholly and exclusively incurred in connection with transfer of the capital asset and is
deductible. However, litigation expenses incurred for having the shares registered in his
name are part of the cost of acquisition and that incurred for gaining better voting rights
is cost of improvement. Section 48 of the Act does not an Assessing Officer from taking
into amount sale consideration stated in the deed or actual consideration received by the
assessee whichever is higher.

12.5.1 Cost of Acquisition

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under
transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of
registration, storage etc. expenses incurred on completing transfer.
In other words, Cost of acquisition of an asset is the sum total of amount spent for acquiring the
asset.
Where the asset was purchased, the cost of acquisition is the price paid. Where the asset was
acquired by way of exchange for another asset, the cost of acquisition is the fair market value of
that other asset as on the date of exchange. Any expenditure incurred in connection with such;
purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal
expenses also forms part of cost of acquisition.
Sometimes advance is received against agreement to transfer a particular asset. Later on, if the
advance is retained by the tax payer or forfeited for other party’s failure to complete the
transaction, such advance is to be deducted from the cost of acquisition.

Cost of Acquisition with reference to Certain Modes of Acquisition

Where the capital asset became the property of the assessee:
1. on any distribution of assets on the total or partial partition of a Hindu undivided family
2. under a gift or will:

(a) by succession, inheritance or devolution;

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