TaxTMI 
TaxTMI 
Provisions of 1961 Act and 2025 Act about actual cost of depreciable assets- a critical study.
Abbreviations used:
ITA 1961 or 1961/ 61 Act - The income-tax Act, 1961
ITA 2025 or 2025 / 25 Act - The income-tax Act, 2025
ITR 1962 or 1962 /62 Rules - Income Tax Rules 1962
ITR 2026 Or 2026 / 26 Rules - Income-tax rules 2026
On search in PDF books of ITA 1961 (with index) and ITA 2025 (without index) we find that :
'Actual cost' appears 94 and 56 times in 1961 and 2025 Act respectively.
In the index in 1961 the expression 'actual cost' is not found. However, in 1961 act we find the expression in footnotes and some redundant provisions corresponding to which are not found in 2025 Act.
On a cursory look at use of the expression we find that context in which expression is used are common relating to depreciation, capital gains, specific provisions of investments and withdrawals etc.
Therefore, it can be said that prima facie, provisions are similar and on same lines except that some changes are made in 2025 Act by way of placement at different place and by use of some formulae and illustrations etc. in 2025 Act.
Whether, there be any major change or not, litigation can take place and settled legal position under 1961 Act, can be distinguished and it can take new course of litigation in future when department will work during assessment, revision, rectification and appellate proceedings.
Search about litigation on related expressions used in course of implementation and litigation of law:
Showing Results for : Law: Income TaxSort : default Search In : Main Text + AI Text
Searched Text : actual cost 27982 Results
Showing Results for : Law: Income Tax Sort : default Search In : Main Text + AI Text
Searched Text : 'actual cost' - 4913 results found.
It is worth to note that in 1961 Act and 2025 Act expression 'actual cost' has not been found in search of PDF books.
Showing Results for : Law: Income Tax Sort : default Search In : Main Text + AI Text
Searched Text : cost 82090 Results .
Law: Income Tax Favour : In favour of Assessee Sort : default Search In : Main Text + AI Text Searched Text : 'actual cost' -2267 results
Law: Income Tax Favour : In favour of Revenue Sort : default Search In : Main Text + AI Text 699 Results
Thus, for search of 'actual cost' in favour of assessee 2267 and in favour of revenue 699 results are found. Other results include partly in favour of assessee and revenue and issues restored / remanded.
On search with cost we found maximum results that is 82090 Results, because it includes other terms also.
Therefore, it can be said that cost is an important aspect in taxation by way of tax on income under different heads of income and it has been a significant area of litigation.
This shows importance of simple and unambiguous language for easy understanding and implementation and to avoid and reduce litigation.
However, it seems that as in case of 1961 Act, in case of 2025 Act there will be more scope of litigation about cost and actual cost. Because new provisions are not clear and are still ambiguous. Use of other expressions in association with cost like expression
cost of
is found 262 times and 157 times in 1961 and 2025 Act respectively.
Actual cost is defined in s.43(1) of 1961 Act it was a simple definition however, over a long period of time it faced need to amend due to changes in legal positions, facts and circumstances due to restructuring of business, litigation and resultant amendment. As it is has several explanations ( 16) and provisos (5) In the section.
In the corresponding provision vide section 39 even amount of depreciation not actually allowed in past ( to previous owner or assessee himself) but allowable as per provisions of 1961 Act acter 01.04.1988 will be deducted to determine actual cost, of asset introduced in business.
Corresponding provision is found in Section 39 of 2025 Act, In this various explanations and provisos in 1961 definition are incorporated in tabular and formulae manner. The section 39 of 2025 Act is reproduced with highlights for analysis below:
Computation of actual cost.
39. (1) The actual cost of an asset used for the purposes of the business or profession shall be the actual cost to the assessee, as reduced by the following amounts:-
(a) part of cost of asset, if any, met by any other person or authority, directly or indirectly;
(b) goods and services tax paid in respect of which credit of input tax has been claimed and allowed under the relevant law;
(c) duty of excise or additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944;
(d) subsidy, grant or reimbursement, by whatever name called, if any, relatable to the acquisition of the asset, received, directly or indirectly, by the assessee from-
(i) the Central Government;
(ii) a State Government;
(iii) any authority established under any law; or
(iv) any other person.
(2) 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.
(3) In a case where the subsidy, grant or reimbursement referred to in sub-section (1)(d) is not directly relatable to the asset acquired, the amount of reduction under sub-section (1)(d) shall be determined as under:-
A BC x__ __
where,-
A = total amount of subsidy, grant or reimbursement not directly relatable to the asset;
B = cost of the asset acquired for which actual cost is to be determined;
C = cost of all the assets in respect of or in reference to which the subsidy or grant or reimbursement is so received.
(4) In circumstances specified under column B of the Table below, the actual cost of the asset shall be as specified in column C thereof.
TABLE
Sl. No. | Specified circumstances | Determination of actual cost |
A | B | C |
1. | Where capital asset is transferred by an amalgamating company to an amalgamated company being an Indian company in a scheme of amalgamation. | Actual cost to amalgamated company shall be the same as it would have been if the amalgamating company had continued to hold such capital asset for the purpose of its own business. |
2. | Where capital asset is transferred by a demerged company to a resulting company being an Indian company in a demerger. | Actual cost to resulting company shall be the same as it would have been, if the demerged company had continued to hold such asset for the purpose of its own business, which shall not exceed the written down value of such capital asset in the hands of demerged company. |
3. | Where inventory is converted into or treated as a capital asset. | Fair Market Value of such inventory as on date of conversion, as determined in the manner as may be prescribed. |
4. | Where asset is acquired by the assessee by way of gift or inheritance. | Actual cost to the previous owner as reduced by- (a) depreciation actually allowed in respect of tax year commencing on 1st April, 1986 or any earlier tax year; and (b) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961(43 of 1961), as if such asset was the only asset in the relevant block of asset. |
5. | Where a building, being the property of the assessee, is put to use for the purpose of business or profession during the tax year. | Actual cost of the building as reduced by the depreciation- (a) that would have been allowable had the building been used for the purpose of business or profession from the date of acquisition; and (b) calculated at the rate in force on the date on which such asset was put to use for the purpose of business or profession. |
6. | Where capital asset is transferred by- (a) a holding company to its subsidiary company; or (b) a subsidiary company to its holding company, and the conditions of section 70(1)(c) and (d), as the case may be, are satisfied. | Actual cost to the transferee company shall be the same as it would have been, if the transferor company had continued to hold such asset for the purpose of its own business. |
7. | Where an asset, which previously belonged to the assessee and had been used by him for the purpose of his business or profession, is reacquired by the assessee. | (a) Actual cost of the asset in the hands of assessee, when it was first acquired, as reduced by- (i) depreciation actually allowed in respect of tax year com mencing on 1st April, 1986 or any earlier tax year; and (ii) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961 (43 of 1961), as if such asset was the only asset in the relevant block of asset; or (b) actual price for which such asset is reacquired by the assessee, whichever is lower. |
8. | Where an asset is acquired by the assessee from previous owner and subsequently asset is given back to the previous owner by way of lease, hire or otherwise, and- (a) the asset was being used for the purpose of business or profession by the previous owner; and (b) depreciation has been clai-med by the previous owner. | Actual cost of asset to the assessee shall be the written down value of the asset in the hands of the previous owner at the time of transfer by the previous owner. |
9. | Where an asset is used in business after it ceases to be used for scientific research related to that business and a deduction is allowable under section 33(3). | Actual cost of asset as reduced by deduction allowed for the capital asset under section 45(1)(a)(i) or under section 35(1)(iv) of the Income-tax Act, 1961 (43 of 1961). |
10. | Where the assessee had acquired an asset outside India, as a non-resident, and the asset is brought by him to India and put to use in his business or profession in India. | Actual cost of the asset as reduced by the depreciation- (a) that would have been allowable had the asset been used for the purpose of business or profession in India since the date of its acqui sition; and (b) calculated at the rate in force. |
11. | Where capital asset is acquired under the scheme of corporatisa-tion of a recognised stock exchange approved by the Securities and Exchange Board of India. | Actual cost of the asset, as if there was no corporatisation. |
12. | (a) Where deduction under section 46 was allowed or allowable in respect of the capital asset- (i) to the assessee; or (ii) to any person and the assessee acquires or receives such asset through special modes of acquisition from such person. | (a) Actual cost shall be deemed to be nil. |
(b) Where deduction allowed under section 46 in respect of a capital asset becomes deemed income as per section 46(9)(b). | (b) Actual cost of the asset as reduced by the depreciation,- that would (i) that whave been allow able had the asset been used for the purpose of business since date of acquisition; and (ii) calculated at the rate in force. | |
13. | Where any amount is paid or payable as interest in connection with the acquisition of an 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. |
(5) Irrespective of anything contained in sub-section (4), other than serial number 8 of the Table in the said sub-section, in a case where the asset is acquired by the assessee, its actual cost shall be such amount as may be determined by the Assessing Officer having regard to all the circumstances of the case, where-
(a) the asset was used by any other person for the purposes of his business, before such acquisition; and
(b) 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).
(6) The determination of actual cost under sub-section (5) shall be made with the prior approval of the Joint Commissioner.
(7) For the purposes of this section, 'special modes of acquisition' means acquisition-
(a) by way of a gift or will or an irrevocable trust; or
(b) upon distribution on the liquidation of a company; or
(c) by such mode of transfer as is referred to in section 70(1)(a), (c), (d), (e), (j), (zd), (ze) and (zf)
Further observations:
As discussed earlier and also as high lighted in new provisions, it is very likely that the new provisions will again cause litigation in many situations where question of determination of depreciation allowable in past requires consideration and the provisions which empowers the Assessing Officers to determine actual cost.
It appears that the provisions of 2025 Act, though basically on old theme of 1961 Act will unsettle settled aspects and cause more litigation.
Another aspect important in liberal regime of accepting self-assessment as final assessment will suffer a setback, and by use of artificial intelligence and by human intervention, many cases will be selected for scrutiny, leading to additions and appeals and relief in appeal and ultimately, after lot of exercise by tax authorities and efforts of assessee claims of assessee will be settled as per return.
Therefore, on analysis of some provisions and cursory reading of 2025 Act it is felt that exercise of enactment of 2025 Act is not likely to result in benefits to tax department by way of reduced litigation and more revenue and it is likely to make life of tax payer tough. Gainers would be only people engaged in litigations as has been in case of many provisions related to depreciation including those related to 'actual cost' and consequential aspects.