Section 90 — Meaning of "adjusted", "cost of improvement" and "cost of acquisition". Successor to s.55 of the 1961 Act.
Section 90 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
The section supplies, for sections 72 and 73, the meaning of "cost of improvement" and "cost of acquisition" in the cases where they are not obvious.
Sub-section (1) fixes cost of improvement: nil for goodwill, any intangible asset of a business, a right to manufacture, produce or process any article or thing, a right to carry on any business or profession, or any other right; and for any other capital asset, capital expenditure on additions or alterations — but where the asset became the property of the previous owner or the assessee before 1 April 2001, only such expenditure incurred on or after that date counts. Sub-section (2) excludes from cost of improvement any expenditure deductible in computing income under "Income from house property", "Profits and gains of business or profession" or "Income from other sources".
Sub-section (3) fixes cost of acquisition for goodwill, a trade mark or brand name associated with a business or profession, any other intangible asset, a right to manufacture, produce or process, a right to carry on a business or profession, tenancy rights, stage carriage permits, loom hours and any other right: the purchase price where the assessee bought it from the previous owner; the previous owner's purchase price in a section 73 (Table: Sl. No. 1) case where that owner had bought it; and nil in any other case. Sub-section (4) reduces the purchase price of goodwill by the total depreciation obtained under section 32(1) of the Income-tax Act, 1961 in tax years preceding the tax year commencing 1 April 2020.
Sub-sections (5) and (6) deal with rights and bonus entitlements on a financial asset — a share or other security within section 2(h) of the Securities Contracts (Regulation) Act, 1956. Cost of the original asset is the amount actually paid for it; cost of a right to renounce the entitlement is nil in the renouncing assessee's hands; cost of an asset subscribed on the entitlement is the amount actually paid for it; cost of an asset allotted without payment is nil; and for a purchaser of a renounced right it is the price paid to the renouncer plus the amount paid to the company or institution.
Sub-sections (7) and (8) grandfather listed holdings acquired before 1 February 2018. For a long-term equity share, unit of an equity oriented fund or unit of a business trust referred to in section 198, cost of acquisition is the higher of the actual cost and the lower of fair market value and the full value of consideration on transfer. Fair market value is defined by reference to 31 January 2018 — the highest quoted price on a recognised stock exchange on that date, the highest price on the immediately preceding traded date if there was no trading, net asset value for an unlisted unit, and for the unlisted-share cases in clause (b)(iv) an amount bearing to the cost of acquisition the same proportion as the Cost Inflation Index for tax year 2017-18 bears to the Index for the first year of holding or for the year beginning 1 April 2001, whichever is later.
Sub-section (9) is the residual rule. Where the asset became the assessee's property before 1 April 2001, the cost is the cost to the assessee or the fair market value on 1 April 2001, at the assessee's option; the same option applies where the asset came through a section 73 (Table: Sl. No. 1) mode and the previous owner acquired it before that date; on distribution of a company's assets in liquidation where the assessee was assessed under "Capital gains" under section 68, the cost is the fair market value on the date of distribution; and on consolidation, sub-division, conversion or re-conversion of shares or stock the cost is calculated with reference to the cost of the shares or stock from which the asset is derived. Sub-section (10) caps the 1 April 2001 fair market value of land or building, or both, at the stamp duty value as on that date wherever available. Sub-section (11) substitutes fair market value on the date the asset became the previous owner's property where his cost cannot be ascertained. Sub-section (12) gives shares allotted on demutualisation or corporatisation of a recognised stock exchange the cost of the original membership, and deems the cost of the resulting trading or clearing rights to be nil.
Capital gains is consideration minus cost, and the whole dispute in most cases is the cost. The section closes the gaps: assets that were never bought, assets that came free with something else, assets whose cost is lost in history, and assets whose value was allowed to accrue tax-free before a chosen date. The three dates it turns on — 1 April 2001, 31 January 2018 and 1 April 2020 — each mark a point at which accrued gains were left alone or a past deduction has to be given back.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Cost of improvement of goodwill, an intangible asset of a business, a right to manufacture, produce or process, a right to carry on a business or profession, or any other right | Nil | Whatever was in fact spent on it | Sub-section (1)(a) |
| Cut-off for counting improvement expenditure on other assets | Expenditure incurred on or after 1 April 2001 | Only where the asset became the property of the previous owner or the assessee before 1 April 2001 | Sub-section (1)(b)(i) |
| Reduction from the purchase price of goodwill | The total depreciation obtained before the tax year commencing 1 April 2020 | Depreciation obtained under section 32(1) of the Income-tax Act, 1961 in a tax year preceding the tax year commencing 1 April 2020; applies to sub-section (3)(a) or (b) goodwill | Sub-section (4) |
| Cost of a bonus or free financial asset, and of a renounced right in the renouncer's hands | Nil | Financial asset allotted without any payment on the basis of holding another financial asset; right to renounce the entitlement, renounced in favour of any person | Sub-section (6)(b) and (d) |
| Grandfathering date for listed equity shares and units | Acquired before 1 February 2018 | Long-term capital asset being an equity share, a unit of an equity oriented fund or a unit of a business trust referred to in section 198 | Sub-section (7) |
| Valuation date for fair market value under the grandfathering rule | 31 January 2018 | Highest quoted price on a recognised stock exchange on that date; the immediately preceding traded date if there was no trading; net asset value for an unlisted unit | Sub-section (8)(b)(i) to (iii) |
| Indexation reference for the unlisted-share cases | The proportion that the Cost Inflation Index for tax year 2017-18 bears to the Index for the first year of holding, or for the year beginning 1 April 2001, whichever is later | Shares within sub-section (8)(b)(iv)(A) to (C) | Sub-section (8)(b)(iv) |
| Optional substituted cost for older assets | Cost to the assessee, or fair market value on 1 April 2001, at the assessee's option | Asset became the assessee's property before 1 April 2001, or came through a section 73 (Table: Sl. No. 1) mode from a previous owner who acquired it before that date; subject to sub-section (10) | Sub-section (9)(a) and (b) |
| Cap on the 1 April 2001 fair market value of land or building | Shall not exceed the stamp duty value of the asset as on 1 April 2001 | Wherever the stamp duty value as on that date is available | Sub-section (10) |
Two rules do most of the damage in practice. First, sub-section (1)(a) makes cost of improvement nil for goodwill and every right in that list, so money genuinely spent building up an intangible is simply not deductible; and sub-section (3)(c) makes cost of acquisition nil for the same family of assets whenever they were not purchased, so self-generated goodwill is taxed on the whole consideration. Second, the 1 April 2001 option in sub-section (9) is not free for land or building: sub-section (10) caps the substituted fair market value at the stamp duty value as on that date wherever available, which is usually the lower number. The grandfathering in sub-section (7) is a three-way comparison, not a simple substitution of the 31 January 2018 price — take the higher of actual cost and the lower of fair market value and sale consideration, so a holding sold below its 31 January 2018 price gets no uplift beyond the sale price itself. And a bonus share carries nil cost under sub-section (6)(d) even though the original holding was paid for.
An individual sells listed equity shares in a tax year for Rs. 40 lakh. She bought them in 2015 for Rs. 10 lakh, and their highest quoted price on 31 January 2018 was Rs. 25 lakh. Under sub-section (7) the cost is the higher of Rs. 10 lakh and the lower of Rs. 25 lakh and Rs. 40 lakh — that is, Rs. 25 lakh — so the gain is Rs. 15 lakh. Had she sold for Rs. 18 lakh instead, the lower of fair market value and consideration would be Rs. 18 lakh, cost would be Rs. 18 lakh and no gain would arise on those shares.
You meet it filling in the cost column of the capital gains schedule, and in an assessment order or a section 270(1) intimation that disturbs it — most commonly by treating goodwill or a right as having nil cost under sub-section (3)(c), by capping a 1 April 2001 valuation of land at stamp duty value under sub-section (10), or by recomputing a grandfathered cost under sub-section (7).
in relation to a capital asset being goodwill or any intangible asset of a business, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or any other right, shall be taken to be nil
the fair market value of such asset on the 1st April, 2001 for the said sub-section (9)(a) and (b) shall not exceed the stamp duty value, wherever available, of such asset as on the 1st April, 2001
the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil
If the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value on the date on which the capital asset became the property of the previous owner.
See the full 1961 to 2025 concordance.
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