Section 73 — Cost with reference to certain modes of acquisition. Successor to s.49 of the 1961 Act.
Section 73 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) works entirely through a Table of twenty-four entries: for a capital asset described in column B, the cost of acquisition is deemed to be the cost stated in column C. The section does not compute capital gains; it fixes the one input the gain computation cannot supply where the assessee did not buy the asset.
Entry 1 is the general succession rule. Where the asset became the assessee's property under a gift or will, by succession, inheritance or devolution, on a distribution of assets on liquidation of a company, under a transfer to a revocable or irrevocable trust, by the mode referred to in section 99(3) in the case of a Hindu undivided family after 31 December 1969, or under any of the listed transfers in section 70(1), the cost is the cost for which the previous owner acquired it, increased by the cost of any improvement incurred or borne by the previous owner or by the assessee.
Entries 2 to 15 carry the cost across corporate and fund reorganisations: shares in an amalgamated Indian company take the cost of the shares in the amalgamating company; shares or debentures on conversion take that part of the cost of the debenture, debenture-stock, bond or deposit certificate to which they relate; specified security or sweat equity shares under section 17(1)(d) take the fair market value used for that clause; a partner's rights on conversion into a limited liability partnership take the cost of the shares immediately before conversion; shares acquired by a non-resident on redemption of Global Depository Receipts take the price prevailing on any recognised stock exchange on the date the redemption request was made; units of a business trust take the cost of the shares exchanged; units in a consolidated mutual fund scheme or plan take the cost of the units in the consolidating scheme or plan; equity shares on conversion of preference shares take that part of the cost of the preference shares to which they relate; units in a segregated portfolio are computed by a formula whose variables are defined as X, the cost of the units in the segregated portfolio, A, the cost of the units in the total portfolio, B, the net asset value of the asset transferred to it, and C, the net asset value of the total portfolio immediately before segregation, with entry 12 reducing the cost of the original units in the main portfolio by that amount; shares under section 70(1)(zl) take the cost of the interest in the joint venture; and shares in a resulting company on demerger are computed by a formula with variables X, the cost of the shares in the resulting company, A, the cost of the shares in the demerged company, B, the net book value of the assets transferred, and C, the net worth of the demerged company immediately before the demerger, with entry 15 reducing the cost of the original shares by that amount.
Entries 16 to 24 pick up assets whose cost has been fixed by an earlier charge or declaration: an asset chargeable under section 71(1) takes the cost at which the transferee company acquired it; property whose value was subjected to tax under section 92(2)(m) takes that value; an asset declared under the Income Declaration Scheme, 2016, on which tax, surcharge and penalty were paid on fair market value, takes that value; a specified capital asset within clause (c) of the Explanation to section 10(37A) of the Income-tax Act, 1961, transferred after the expiry of two years from the end of the tax year in which possession was handed over, takes the stamp duty value as on the last day of the second tax year after the end of that year; a share in a project under section 67(14), other than one referred to in section 67(16), takes the amount deemed to be full value of consideration under section 67(14); an asset on which accreted income tax has been paid under section 352 takes the fair market value considered for that computation as on the specified date under section 352(2); an asset referred to in section 26(2)(j) takes the fair market value for that clause; an Electronic Gold Receipt takes the cost of the gold for the person in whose name it is issued; and gold released against such a receipt takes the cost of that receipt.
Sub-section (2) supplies four interpretive rules. "Previous owner of the property" for entry 1 is the last previous owner who acquired the asset by a mode other than one referred to in column B. "Main portfolio", "segregated portfolio" and "total portfolio" in entries 11 and 12 take the meanings in sebi Circular No. Sebi/ho/imd/DF2/cir/P/2018/160 dated 28 December 2018. "Net worth" for entries 14 and 15 is the total of paid-up share capital and general reserves as appearing in the books of the demerged company immediately before the demerger. Entries 2, 14 and 15 apply, as far as may be, to a business reorganisation of a co-operative bank referred to in section 64.
Capital gain is consideration less cost, and in every situation in this Table the assessee has paid nothing, or has paid for something that has since changed its form. Left unaddressed, a gift or an amalgamation would either produce a gain measured against a nil cost or wipe out the accrued gain altogether. The Table carries the earlier cost, or the value already brought to tax, into the new asset, so the gain deferred at the earlier step is taxed when the asset is finally sold.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Cut-off date for the Hindu undivided family mode of acquisition in entry 1 | After the 31st December, 1969 | Property becoming that of the assessee, being a Hindu undivided family, by the mode referred to in section 99(3) | Sub-section (1), Table Sl. No. 1(e) |
| Holding period after which the stamp duty value rule in entry 19 applies | Expiry of two years from the end of the tax year in which possession was handed over | A specified capital asset referred to in clause (c) of the Explanation to section 10(37A) of the Income-tax Act, 1961, transferred after that expiry | Sub-section (1), Table Sl. No. 19 |
| Date at which the stamp duty value is taken for entry 19 | The last day of the second tax year after the end of the tax year in which possession was handed over | Applies to the specified capital asset described in that entry | Sub-section (1), Table Sl. No. 19 |
| Price used for shares acquired on redemption of Global Depository Receipts | The price prevailing on any recognised stock exchange on the date on which the request for redemption was made | Shares acquired by a non-resident assessee on redemption of Global Depository Receipts referred to in section 209(1) (Table: Sl. No. 2) held by him | Sub-section (1), Table Sl. No. 6 |
| Meaning of "net worth" for the demerger formula | Total of paid-up share capital and general reserves | As appearing in the books of account of the demerged company immediately before the demerger; used in entries 14 and 15 | Sub-section (2)(c) |
The first question on any inherited or gifted asset is not what the assessee paid but who the previous owner was, and sub-section (2)(a) makes that the last previous owner who acquired the asset by a mode outside column B — so a chain of gifts is traced back to the person who actually bought it. Entry 1 allows improvement cost borne either by the previous owner or by the assessee. In the reorganisation entries the cost is carried across with no step-up, which is what makes the earlier transfer tax-neutral; entries 12 and 15 mirror entries 11 and 14, reducing the cost of what is retained by exactly the amount allotted to the new holding, so the cost is not duplicated. Where an amount has already been brought to tax — under section 17(1)(d), section 92(2)(m), section 352 or the Income Declaration Scheme, 2016 — that same amount becomes the cost. The formulae in entries 11 and 14 are set out by their variables only, so the arithmetic has to be taken from the Table as published rather than assumed.
An individual inherits a house from his father, who had himself received it as a gift from his own father, who bought it for Rs. 4 lakh and spent Rs. 2 lakh on improvement. The son later spends Rs. 6 lakh more on improvement and sells the house. Under entry 1 the cost of acquisition is the cost for which the previous owner acquired it, and under sub-section (2)(a) the previous owner is the grandfather, who acquired it otherwise than by a mode in column B. The cost is therefore Rs. 4 lakh, increased by the Rs. 2 lakh of improvement borne by the previous owner and the Rs. 6 lakh borne by the assessee.
In the capital gains computation in the return whenever the asset sold was not bought by the seller, and in an assessment order or scrutiny query challenging the cost of acquisition claimed on an inherited, gifted, amalgamation, demerger or conversion asset — the entry number in this Table is what has to be identified and defended.
The cost for which the previous owner of the property acquired it, as increased by the cost of any improvement incurred or borne by the previous owner or the assessee.
means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in column B thereof
See the full 1961 to 2025 concordance.
