Section 39 — Computation of actual cost. Successor to s.43 of the 1961 Act.
Section 39 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) fixes the starting point: the actual cost of an asset used for business or profession is the actual cost to the assessee, reduced by four things — any part of the cost met by any other person or authority, directly or indirectly (clause (a)); goods and services tax in respect of which input tax credit has been claimed and allowed (clause (b)); excise duty or additional customs duty under section 3 of the Customs Tariff Act, 1975 for which credit has been claimed and allowed under the Central Excise Rules, 1944 (clause (c)); and any subsidy, grant or reimbursement relatable to the acquisition of the asset received directly or indirectly from the Central Government, a State Government, any authority established under any law, or any other person (clause (d)).
Sub-section (2) excludes from actual cost any payment, or aggregate of payments, exceeding Rs. 10,000 in a day made to a person for acquisition of the asset or part of it otherwise than by specified banking or online mode.
Sub-section (3) deals with a subsidy, grant or reimbursement that is not directly relatable to the asset: the reduction is worked out from a formula whose terms the section defines — A, the total amount of the subsidy, grant or reimbursement not directly relatable to the asset; B, the cost of the asset whose actual cost is being determined; and C, the cost of all the assets in respect of or in reference to which the subsidy, grant or reimbursement was received.
Sub-section (4) carries a Table of thirteen specified circumstances in column B with the actual cost in column C. Amalgamation (entry 1) and demerger (entry 2) carry the cost forward as if the transferor had continued to hold the asset, with the demerger figure capped at the demerged company's written down value. Inventory converted into a capital asset takes fair market value on the date of conversion, as prescribed (entry 3). Gift or inheritance takes the previous owner's actual cost reduced by depreciation actually allowed for the tax year commencing 1 April 1986 or earlier and depreciation allowable from the tax year commencing on or after 1 April 1987 as if the asset were the only asset in the block (entry 4). A building of the assessee first put to business use during the year takes its actual cost less the depreciation that would have been allowable from acquisition, at the rate in force on the date it was put to use (entry 5). Holding-to-subsidiary and subsidiary-to-holding transfers satisfying section 70(1)(c) or (d) carry the transferor's position forward (entry 6). Reacquisition of an asset the assessee previously used takes the lower of the depreciated original cost and the reacquisition price (entry 7). A sale-and-leaseback back to a previous owner who used it in business and claimed depreciation takes that previous owner's written down value (entry 8). An asset moving from scientific research into the business takes cost less the deduction allowed under section 45(1)(a)(i) or section 35(1)(iv) of the 1961 Act (entry 9). An asset acquired abroad by a non-resident and brought to India takes cost less notional depreciation from acquisition at the rate in force (entry 10). Corporatisation of a recognised stock exchange approved by sebi is ignored (entry 11). Where a section 46 deduction was allowed or allowable, actual cost is deemed nil, and where a section 46 deduction becomes deemed income under section 46(9)(b) the cost is reduced by notional depreciation (entry 12). Interest relatable to any period after the asset is first put to use is excluded (entry 13).
Sub-section (5) overrides the whole Table except entry 8: where the asset was used by another person for his business before the acquisition and the Assessing Officer is satisfied that the main purpose of the transfer was to reduce tax liability by claiming depreciation on an enhanced actual cost, the actual cost is such amount as the Assessing Officer determines having regard to all the circumstances. Sub-section (6) requires that determination to be made with the prior approval of the Joint Commissioner. Sub-section (7) defines "special modes of acquisition" for entry 12 as acquisition by gift, will or irrevocable trust, on distribution on liquidation of a company, or by a transfer referred to in section 70(1)(a), (c), (d), (e), (j), (zd), (ze) and (zf).
Depreciation runs off actual cost, so every rupee added to actual cost is a deduction claimed over the life of the asset. The section therefore strips out what the assessee did not really bear — another person's contribution, credited tax, a subsidy — and blocks the two classic ways of inflating the base: paying in cash and routing a used asset through a transfer at a written-up price. The Table then answers the recurring question of what cost to use when the asset arrives other than by an ordinary purchase.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Cash payment excluded from actual cost | Payment or aggregate of payments exceeding Rs. 10,000 in a day | Made to a person for acquisition of the asset or part of it in a mode otherwise than by specified banking or online mode | Sub-section (2) |
| Depreciation deducted from the previous owner's cost on gift or inheritance | Depreciation actually allowed for the tax year commencing 1 April 1986 or earlier, plus depreciation allowable from the tax year commencing on or after 1 April 1987 | Computed as if the asset were the only asset in the relevant block of assets | Sub-section (4), Table Sl. No. 4 |
| Cap on the actual cost to a resulting company in a demerger | Shall not exceed the written down value of the asset in the hands of the demerged company | Capital asset transferred by a demerged company to a resulting company being an Indian company in a demerger | Sub-section (4), Table Sl. No. 2 |
| Actual cost on reacquisition of an asset previously used by the assessee | The lower of the depreciated original actual cost and the actual reacquisition price | Asset previously belonged to the assessee and had been used by him for business or profession | Sub-section (4), Table Sl. No. 7 |
| Actual cost where a section 46 deduction was allowed or allowable | Nil | Deduction allowed or allowable to the assessee, or to a person from whom the assessee acquires the asset through a special mode of acquisition defined in sub-section (7) | Sub-section (4), Table Sl. No. 12(a) |
| Interest excluded from actual cost | So much of the interest as is relatable to any period after the asset is first put to use | Amount paid or payable as interest in connection with the acquisition of the asset | Sub-section (4), Table Sl. No. 13 |
Work in order: take the price, apply the four reductions in sub-section (1), knock out any day's cash payments over Rs. 10,000 under sub-section (2), and only then ask whether the acquisition falls in one of the thirteen Table circumstances — because most of those entries replace the price altogether with a carried-forward or depreciated figure. Two traps sit in the Table. Entry 13 does not disallow acquisition interest; it splits it at the date the asset is first put to use, so pre-use interest stays in cost and post-use interest does not. Entry 12(a) reduces actual cost to nil where a section 46 deduction was allowed or allowable — and "allowable" is enough, so a deduction that could have been claimed by the assessee or by the person he acquired from through a special mode still empties the cost. Finally, sub-section (5) is a live override on everything except entry 8: if the asset had been used in someone else's business and the Assessing Officer finds the main purpose of the transfer was depreciation on an enhanced cost, he substitutes his own figure, and the only procedural protection is the Joint Commissioner's prior approval under sub-section (6).
A company buys plant for Rs. 1 crore, receives a Rs. 15 lakh State Government subsidy relatable to that acquisition, claims and is allowed input tax credit of Rs. 8 lakh on it, and pays Rs. 40,000 of the price in cash on a single day. Actual cost is Rs. 1 crore less Rs. 15 lakh under sub-section (1)(d), less Rs. 8 lakh under sub-section (1)(b), less the Rs. 40,000 excluded by sub-section (2) — Rs. 76.6 lakh — and depreciation runs on that figure. If the subsidy had instead been a single Rs. 15 lakh grant covering several assets and not directly relatable to this one, the reduction would be worked out under sub-section (3) from A, B and C rather than by deducting the whole grant here.
You meet it in the depreciation working attached to a return and in the assessment order that disturbs it — most often as a proposal to reduce the block's opening cost for a subsidy or credited tax, or as a sub-section (5) determination substituting the Assessing Officer's figure for the price you paid, which must carry the Joint Commissioner's prior approval.
The payment or aggregate of payments exceeding Rs. 10,000 in a day for acquisition of an asset or part thereof, made to a person in a mode otherwise than by specified banking or online mode, shall be excluded from the actual cost of that asset.
Actual cost shall not include so much of such amount as is relatable to any period after such asset is first put to use.
the Assessing Officer is satisfied that the main purpose of the transfer of the asset, directly or indirectly, was to reduce tax liability (by claiming depreciation on enhanced actual cost)
The determination of actual cost under sub-section (5) shall be made with the prior approval of the Joint Commissioner.
See the full 1961 to 2025 concordance.
See every circular and notification on this section, or the circulars index.
See every circular and notification on this section, or the notifications index.