Page 345 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes (b) on any distribution of assets on the dissolution of a ‘firm, body of individuals, or
other association of persons, where such dissolution had taken place at any time
before 01.04.1987;
(c) on any distribution of assets on the liquidation of a company;
(d) under a transfer to a revocable or an irrevocable trust;
(e) by transfer in a scheme of amalgamation;
(f) by an individual member of a Hindu Undivided Family living his separate property
to the assessee HUF any time after 31.12.1969.
The cost of acquisition of the asset shall be the cost for which the previous owner of the property
acquired it, as increased by the cost of any improvement of the asset incurred or borne by the
previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the
assessee. If the previous owner had also acquired the capital asset by any of the modes above,
then the cost to that previous owner, who had acquired it by mode of acquisition other than the
above, should be taken as cost of acquisition.
Where the cost for which the previous owner acquired the property cannot be ascertained the
cost of acquisition to the previous owner means the fair market value on the date on which the
capital asset became the property of the owner.
Where the capital asset, being a share or debenture in a company, the cost of acquisition of the
asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or
deposit certificates in relation to which such asset is acquired by the assessee. Accordingly the
cost of acquisition of rights share is the amount paid by the assessee to get them and the cost of
acquisition of bonus shares is nil.

Concept of Indexation

The value of a rupee today is not same as will be its value tomorrow because of inflation.
Likewise to be fair when paying capital gain tax, the effect of inflation on the purchase is
included. For instance if you bought a flat in January 2002 for ` 20 lakh and sold it in January 2011
for ` 35 lakh; you don’t pay tax on the ` 15 lakh gain. The tax authorities allow the concept of
indexation so that you can show a higher purchase cost, lowering the overall profit and reducing
the tax you pay on the gain. Using the inflation index, one needs to increase the purchase price
of the asset to reflect inflation-adjusted true price in the year of sale.
Indexed Cost of Acquisition = (Cost Inflation Index (CII) for year in which asset is transferred or
sold) divided by CII for year in which asset was acquired or bought). The CII is then multiplied
with the purchase price to arrive at the indexed cost of acquisition which is the actual or true cost
at the time of tax computation or calculation.
CII of Year of transfer
Indexed Cost of Acquisition = COA ×
CII of Year of acquisition

The indices for the various previous years are given below:
S. No. Financial Year Cost Inflation Index
1 1981-82 100
2 1982-83 109
3 1983-84 116
4 1984-85 125

Contd...

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