The Assessing Officer has charged my client under section 56(2)(x) on the stamp-duty difference. When he sells the property, does he pay capital gains on that same amount all over again?
No. Section 49(4) provides that where the capital gain arises from the transfer of a property the value of which has been subjected to income-tax under clause (vii), clause (viia) or clause (x) of section 56(2), the cost of acquisition of that property is deemed to be the value taken into account for the purposes of that clause. The amount already taxed as income from other sources therefore comes back as cost, and is not taxed a second time as capital gain.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2017-04-01, reported as Income-tax Act, 1961, s.49(4); the words "or clause (x)" inserted by the Finance Act, 2017, w.e.f. 1-4-2017. It bears on section 49(4), section 56(2)(x), section 56(2)(vii), section 56(2)(viia), section 56(2)(viib) of the Income Tax Act 1961, in Capital Gains and Gifts, Shares & Angel Tax matters.
This is the single most-forgotten consequence of a section 56(2)(x) addition. The addition is made in year one by the Assessing Officer; the sale happens in year five, often before a different officer, and the deemed cost is simply not claimed. Two further points decide cases in practice. First, section 49(4) is drafted around the value 'taken into account' for the section 56 clause, not around the addition actually sustained — so if the addition is reduced on appeal, the cost step-up follows the reduced figure. Second, the step-up is a statutory deeming, not a fresh claim of deduction, which is why Tribunals have allowed it as an alternative plea even where it was never made in the return (see the companion entry on Ravi Ramakrishnan, where the DRP had refused it on Goetze grounds). Note also that section 49(4) speaks only of clauses (vii), (viia) and (x) of section 56(2) — it does not reach a section 56(2)(viib) charge, which falls on the issuing company and not on any property the company later transfers.
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Section 56(2)(x) charges a receipt of money or property without, or for inadequate, consideration as income from other sources in the recipient's hands. The same property is later sold, and the sale is charged under section 45. Without a correcting provision the amount brought to tax under section 56(2)(x) would be taxed again as part of the capital gain, because the recipient's actual cost is the (lower) consideration he paid. Section 49(4) is that correcting provision, and it operates for the predecessor clauses (vii) and (viia) as well as for clause (x).
Section 49(4), as printed on the departmental section page carrying the heading 'Cost with reference to certain modes of acquisition' and the stamp 'Year: 2024 (No. 2)', reads: 'Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x).'
The provision is a deeming rule, not a deduction. It fixes the cost of acquisition by reference to the value that was 'taken into account' for the section 56(2) clause, so it operates automatically once a charge under one of the three listed clauses has been made on the same property, and it operates whether the property is transferred in the same previous year or a later one. It is confined to the three clauses named; it does not extend to section 56(2)(viib), nor to a section 68 or section 69 addition.
Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x).
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Handle my notice → Ask a CA on WhatsAppNo. Section 49(4) provides that where the capital gain arises from the transfer of a property the value of which has been subjected to income-tax under clause (vii), clause (viia) or clause (x) of section 56(2), the cost of acquisition of that property is deemed to be the value taken into account for the purposes of that clause. The amount already taxed as income from other sources therefore comes back as cost, and is not taxed a second time as capital gain. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 49(4), section 56(2)(x), section 56(2)(vii), section 56(2)(viia), section 56(2)(viib) of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.49(4); the words "or clause (x)" inserted by the Finance Act, 2017, w.e.f. 1-4-2017. This is the single most-forgotten consequence of a section 56(2)(x) addition. The addition is made in year one by the Assessing Officer; the sale happens in year five, often before a different officer, and the deemed cost is simply not claimed. Two further points decide cases in practice. First, section 49(4) is drafted around the value 'taken into account' for the section 56 clause, not around the addition actually sustained — so if the addition is reduced on appeal, the cost step-up follows the reduced figure. Second, the step-up is a statutory deeming, not a fresh claim of deduction, which is why Tribunals have allowed it as an alternative plea even where it was never made in the return (see the companion entry on Ravi Ramakrishnan, where the DRP had refused it on Goetze grounds). Note also that section 49(4) speaks only of clauses (vii), (viia) and (x) of section 56(2) — it does not reach a section 56(2)(viib) charge, which falls on the issuing company and not on any property the company later transfers. If it applies to you, the first step is this: Whenever a section 56(2)(x) or section 56(2)(vii)(b) addition is made or accepted, record the exact figure 'taken into account' by the officer and file it with the client's cost records for that asset.
Section 56(2)(x) charges a receipt of money or property without, or for inadequate, consideration as income from other sources in the recipient's hands. The same property is later sold, and the sale is charged under section 45. Without a correcting provision the amount brought to tax under section 56(2)(x) would be taxed again as part of the capital gain, because the recipient's actual cost is the (lower) consideration he paid. Section 49(4) is that correcting provision, and it operates for the predecessor clauses (vii) and (viia) as well as for clause (x). The matter was decided on 2017-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Section 49(4), as printed on the departmental section page carrying the heading 'Cost with reference to certain modes of acquisition' and the stamp 'Year: 2024 (No. 2)', reads: 'Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x).'
The provision is a deeming rule, not a deduction. It fixes the cost of acquisition by reference to the value that was 'taken into account' for the section 56(2) clause, so it operates automatically once a charge under one of the three listed clauses has been made on the same property, and it operates whether the property is transferred in the same previous year or a later one. It is confined to the three clauses named; it does not extend to section 56(2)(viib), nor to a section 68 or section 69 addition. In the words reproduced by the source cited on this page: "Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x)."
It was decided by the CBDT Circulars & Instructions on 2017-04-01 and is reported as Income-tax Act, 1961, s.49(4); the words "or clause (x)" inserted by the Finance Act, 2017, w.e.f. 1-4-2017. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 49(4), section 56(2)(x), section 56(2)(vii), section 56(2)(viia), section 56(2)(viib), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Section 49(4), as printed on the departmental section page carrying the heading 'Cost with reference to certain modes of acquisition' and the stamp 'Year: 2024 (No. 2)', reads: 'Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x).' It arises in Capital Gains and Gifts, Shares & Angel Tax matters, on section 49(4), section 56(2)(x), section 56(2)(vii), section 56(2)(viia), section 56(2)(viib) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. On the later sale, compute the cost of acquisition at the deemed figure under section 49(4) and disclose the working in the computation, not merely in the return figures. If the section 56 addition was reduced or deleted in appeal, recompute — the deemed cost tracks the value actually taken into account under section 56, so a deleted addition gives no step-up. Where the purchase and the sale fall in the same previous year, raise the section 49(4) relief as an alternative ground in the same appeal rather than waiting for a later year. Do not attempt the same argument for a section 56(2)(viib) addition — section 49(4) does not list clause (viib).
Still good law. The identical text appears on departmental pages stamped Year 2019 (No. 1), Year 2022 and Year 2024 (No. 2), and is reproduced in the same words by the ITAT Mumbai in Ravi Ramakrishnan (order of 17 January 2025, para 7). No amendment to sub-section (4) was found on any of the three pages. I did not check whether the Income-tax Act, 2025 carries an equivalent provision; per the governing brief the 1961 Act governs every assessment year up to and including AY 2026-27. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Statutory position, not a decided case. The text of section 49(4) was read on three separate departmental section pages carrying different 'Year:' stamps — /w/section-49-63 (Year: 2024 (No. 2)), /w/section-49-60 (Year: 2022) and /w/section-49-66 (Year: 2019 (No. 1)) — each of which printed the section heading 'Cost with reference to certain modes of acquisition' and returned word-for-word identical text for sub-section (4). 'decided_on' is the commencement date of the amendment this entry is about, not a judgment date: footnote 73 on /w/section-49-66 (Year: 2019 (No. 1)) is attached to each occurrence of the bracketed words '[or clause (x)]' in sub-section (4) and reads 'Ins. by the Finance Act, 2017 (w.e.f. 1-4-2017).' Sub-section (4) itself, which reached clauses (vii) and (viia) before 2017, carries no footnote on any of the three pages read, so no commencement date is stated for the sub-section as originally inserted. The date the text was checked is in 'checked_on'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Section 49(4), as printed on the departmental section page carrying the heading 'Cost with reference to certain modes of acquisition' and the stamp 'Year: 2024 (No. 2)', reads: 'Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) or clause (x) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia) or clause (x).'
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