Section 40 — Special provision for computation of cost of acquisition of certain assets. Successor to s.43C of the 1961 Act.
Section 40 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) fixes the cost of acquisition, for computing income under "Profits and gains of business or profession", of an asset that became the property of (a) an amalgamated company under a scheme of amalgamation, or (b) an assessee under a gift, will, irrevocable trust, or on total or partial partition of a Hindu undivided family — but only where that asset is sold as stock-in-trade. The cost is the sum of the cost of acquisition in the hands of the amalgamating company, transferor or donor; any cost of improvement made; and any expenditure incurred by that company, transferor or donor wholly and exclusively in connection with the transfer.
Sub-section (2) puts an asset referred to in section 67(6) outside the section.
An asset arriving without a purchase price — by amalgamation, gift, will, trust or partition — has no cost of its own, and if it is then sold as stock-in-trade the business profit would be measured against a value the assessee chose. The section carries the predecessor's cost across, so gain accumulated in the earlier holder's hands is not washed out by the mode of acquisition.
The rule is triggered by the character of the sale, not by how the asset arrived: an asset received on amalgamation, gift, will, trust or partition and held as a capital asset is untouched here. Sell it as stock-in-trade and the predecessor's cost history has to be reconstructed — original cost, improvements, and the transfer expenditure of the amalgamating company, transferor or donor. That evidence usually sits with the predecessor rather than with the assessee, which is why claims under this section fail on proof more often than on principle. Sub-section (2) takes assets referred to in section 67(6) out of all of it.
A company receives a plot on amalgamation. The amalgamating company had acquired it for Rs 40 lakh, spent Rs 6 lakh on improvement and Rs 1 lakh wholly and exclusively in connection with the transfer. When the amalgamated company sells the plot as stock-in-trade for Rs 90 lakh, its cost of acquisition is Rs 47 lakh — not the value at which the plot was recorded on amalgamation — so the business profit is Rs 43 lakh.
In the business income computation of a return, and in scrutiny of a stock-in-trade sale where the stock came in by amalgamation, gift, will, trust or partition; the Assessing Officer asks for the predecessor's cost rather than the value taken on record.
when sold as stock-in-trade shall be the sum of—
any expenditure incurred by the amalgamating company or transferor or donor, as the case may be, wholly and exclusively in connection with such transfer
This section shall not apply to an asset referred to in section 67(6).
See the full 1961 to 2025 concordance.
