Section 39 Computation of actual cost.

Income-tax Act, 2025 [As Passed]

At a Glance

Document considered: Clause 39 of the Income Tax Bill, 2025 (Old Version). It prescribes rules for computing the "actual cost" of an asset used in business or profession, setting out reductions, special circumstances for valuation, and the Assessing Officer's power to re-determine cost. It affects taxpayers claiming depreciation, buyers of formerly used assets, transferee companies in reorganisations, and tax authorities. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 39, Income Tax Bill, 2025 - titled "Computation of actual cost." The provision governs computation of the actual cost of assets used for business or profession for the purpose of determining allowable depreciation and consequential tax treatment. It sets reductions to actual cost for amounts met by others, input tax credits, certain duties, and subsidies/grants; prescribes exclusions for payments made otherwise than specified banking/online modes over a threshold; provides a formula for apportioning non-asset-specific subsidies; contains a Table of specified circumstances where a different actual cost determination applies; preserves Assessing Officer discretion to determine actual cost in specified cases; and defines "special modes of acquisition." No separate definitions section is present in the Bill text reproduced beyond what is included in the sub-clauses.

Statutory Provision Mode

Text & Scope

Clause 39(1) establishes that "actual cost" of an asset used for business/profession is the actual cost to the assessee reduced by: (a) any part of cost borne by another person; (b) GST paid where input tax credit has been claimed and allowed; (c) additional duty leviable u/s 3 of the Customs Tariff Act, 1975 where credit has been claimed and allowed under Central Excise Rules, 1944; and (d) any subsidy, grant or reimbursement relatable to acquisition received from Central/State Government, any authority established under law, or any other person.

Sub-section (2) excludes from actual cost any payment or aggregate payments exceeding Rs.10,000 in a day made otherwise than by specified banking/online modes. Sub-section (3) prescribes an apportionment formula for subsidies/grants not directly relatable to a particular asset: A x (B / C), where A = total subsidy not directly relatable, B = cost of the asset, C = cost of all assets in reference to which subsidy is received.

Sub-section (4) contains a Table of 13 specified circumstances where a different rule for actual cost applies - including transfers on amalgamation, demerger, inventory-to-capital conversion, gift/inheritance, use of own property, intra-group transfers (section 70 conditions), reacquisition, transfers back to previous owner where previous owner claimed depreciation, post-research use (section 33(3)), import of asset by non-resident and brought to India, corporatisation of recognised stock exchange, special treatment where deduction u/s 46 was allowed or becomes deemed income, and exclusion of interest relatable to post-use periods.

Interpretation

The text indicates an intent to exclude from depreciable "actual cost" amounts that have been effectively subsidised or already relieved through tax credits (GST/input credit, excise/Additional duty credits), or funded by third parties. The apportionment formula in sub-section (3) displays a ratio-based approach to allocate non-asset-specific subsidies across assets. The Table demonstrates legislative intent to retain continuity in cost basis on corporate reorganisations (amalgamation/demerger/holdco-subco transfers), and to prevent inflation of cost through certain transfers or reconstructive transactions. The provision gives the Assessing Officer discretionary power to determine actual cost where an asset was previously used, subject to conditions, signalling an anti-avoidance concern (prevent enhanced depreciation by buying used assets from related parties).

Exceptions/Provisos

Notable carve-outs in the Table: reacquisition (serial 7) allows the lower of original reduced cost or reacquisition price; transfers where previous owner claimed depreciation (serial 8) prescribe written down value in prior hands as the cost; where deduction u/s 46 was allowed, actual cost may be deemed nil (serial 12(a)). Interest paid in connection with acquisition excludes amounts attributable to periods after first put to use (serial 13). The Bill requires AO determination under prescribed conditions (sub-section (5)) and prior approval of Joint Commissioner for such determination (sub-section (6)).

Illustrations

• Example 1 (amalgamation): An amalgamating company transfers a plant to an Indian amalgamated company in a scheme of amalgamation. The transferee's actual cost is the same as it would have been had the amalgamating company continued to hold it. (Consistent with Table serial 1.)
• Example 2 (inventory converted to capital): Inventory converted into a capital asset is valued at fair market value on date of conversion, determined "in the manner as prescribed." (Table serial 3.)
• Example 3 (gifted asset): A taxpayer receives machinery by inheritance; actual cost equals previous owner's actual cost reduced by depreciation allowable up to the immediately preceding tax year, computed as if the asset were the sole asset in the block. (Table serial 4.)

Interplay

The clause references interplay with: the GST/input tax credit regime ("relevant law"), Central Excise Rules, 1944, Customs Tariff Act, 1975 (section 3), and other sections of Income-tax law (section 33(3), section 46, section 70(1) conditions). Specific procedural rules for FMV determination are referenced as "as prescribed," indicating reliance on Rules or subordinate legislation. No circulars, notifications, or specific Rules are reproduced in the document.

Preliminary comparison - Key differences and practical impact

• Terminology and cross-references to tax law: The passed Section 39 (Document 1) refers to "goods and services tax paid in respect of which credit of input tax has been claimed and allowed under the relevant law," whereas the Bill (Document 2) uses "goods and services tax paid in respect of which input tax credit has been claimed and allowed under the relevant law." The change is largely stylistic and does not appear to alter substance.
  • Practical impact: negligible.
• Customs/Excise duty description: The passed Section 39 (Doc 1) references "duty of excise or additional duty leviable u/s 3 of the Customs Tariff Act, 1975 in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944," while the Bill (Doc 2) refers only to "additional duty leviable u/s 3 of the Customs Tariff Act, 1975 in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 (51 of 1975)."
  • Practical impact: the passed version appears broader by explicitly stating "duty of excise or additional duty," which could capture a wider range of levies; the Bill's wording is narrower. This may affect whether certain excise levies are deducted from actual cost where credit has been claimed.
• Aggregation/payment threshold phrasing: Doc 1 states "payment or aggregate of payments exceeding Rs.10000 in a day" while Doc 2 states "ten thousand rupees in a day." This is a formatting/wording difference only.
  • Practical impact: none.
• Conversion of inventory wording: Doc 1: "Where inventory is converted into or treated as a capital asset." Doc 2: "Where inventory is converted into capital asset." Doc 1 adds "or treated as" - potentially broadening scope to assets treated as capital assets even without physical conversion.
  • Practical impact: Doc 1 could capture more situations where inventory is reclassified without physical conversion; Doc 2 may be slightly narrower.
• Gift/inheritance depreciation wording: Doc 1 sets out a two-part reduction for assets acquired by gift/inheritance with explicit reference to depreciation actually allowed for TY beginning 1 April 1986 or earlier and depreciation allowable for tax years commencing on or after 1 April 1987 under this Act or the Income-tax Act, 1961. Doc 2 provides a single phrase: "Actual cost to previous owner as reduced by the depreciation allowable up to the immediately preceding tax year, as if such asset was the only asset in the relevant block of asset."
  • Practical impact: Doc 1 is more granular and ties reductions to specific historical tax year cutoffs; Doc 2 uses a single "up to immediately preceding tax year" standard. This may produce differences in the quantum of reduction for older assets.
• Section 33(3) / related provisions language: Doc 1 (passed) states reduction where asset used after ceasing scientific research and "a deduction is allowable u/s 33(3)." Doc 2 (Bill) states reduction where such use occurs "and a deduction is made u/s 33(3)."
  • Practical impact: "is allowable" (Doc 1) may be broader than "is made" (Doc 2), potentially including situations where a deduction is permissible though not yet claimed. Doc 1 may therefore produce a wider application.
• Section references in clause 12(b): Doc 1 reduces actual cost where deduction u/s 46 becomes deemed income "as per section 46(9)(b)." Doc 2 refers to "section 46(9)(b)" but couples text slightly differently across subclauses.
  • Practical impact: minor drafting variation; substance appears aligned.
• Sub-section (5) and (6) differences: Doc 2 sub-section (5) states the AO "shall be determined by the Assessing Officer having regard to all circumstances of the case, subject to the following conditions" and lists conditions (a) & (b). Doc 1 sub-section (5) states the AO "shall be such amount as may be determined by the Assessing Officer having regard to all the circumstances of the case, where - (a) ... and (b) ..." - Doc 1 additionally excludes serial number 8 from the proviso in sub-section (5) by a later clause (5) prefaced with "Irrespective of anything contained in sub-section (4), other than serial number 8...". Doc 2 does not contain that explicit exclusion text.
  • Practical impact: Doc 1 clarifies that serial number 8 of the Table is not subject to the AO's re-determination power; Doc 2 lacks that carve-out, which may leave ambiguity whether the AO could redetermine cost even in serial 8 cases. Doc 1 thereby narrows AO discretion in that specific circumstance.
• Definition placement and phrasing of "special modes of acquisition": Both documents define the term, but Doc 1 places the definition phrasing as "For the purposes of this section, 'special modes of acquisition' means acquisition - (a) ...; (b) ...; (c) ...", identically to Doc 2.
  • Practical impact: no substantive change.
• Other drafting and specificity differences: Several clauses in Doc 1 include parenthetical references to the Income-tax Act, 1961 and specific subclauses and insert minor textual refinements (e.g., "as the case may be", "or under the Income-tax Act, 1961") that appear aimed at clarifying historical treatment.
  • Practical impact: largely clarificatory; a few refinements (noted above) may widen or narrow application in edge cases.

Practical Implications

• Compliance and risk areas: Taxpayers must adjust asset cost for any third-party funding (subsidies/grants), and for tax credits (GST/input credit, excise/Additional duty credits). Where payments exceed Rs.10,000 in cash/unspecified modes on a day, those amounts are excluded from cost. Failure to reduce cost appropriately risks reassessment and disallowance of excess depreciation claimed.
• Record-keeping/evidence: Documentation evidencing input tax credits, excise/Customs duty credits, subsidy/grant receipts and their allocation across assets (particularly where grants are not directly attributable) is essential. For instances of intra-group transfers, amalgamation/demerger approvals and scheme documents will be necessary to apply the specified Table entries. Where AO may re-determine cost, contemporaneous evidence showing commercial justification for transfers and absence of tax-avoidance motive will be material. For inventory-to-capital conversions, records to support FMV determination per prescribed method are required.

Key Takeaways

• Clause 39 defines "actual cost" and mandates reductions for third-party funding, input tax/excise credits and subsidies/grants; it seeks to prevent artificial inflation of depreciable base.
• A formulaic apportionment applies where subsidies/grants are not directly attributable to a particular asset.
• The Table preserves continuity of cost on corporate reorganisations and prescribes special rules for gifts, inheritances, reacquisitions, intra-group transfers, and other specified circumstances.
• AO has power to redetermine actual cost where the asset was previously used by another and transfer was mainly to reduce tax liability; such determination requires Joint Commissioner approval.
• Strict record-keeping of grants, credits, transfer documents, and payment modes is necessary to support claimed actual cost and depreciation.
• Where the clause refers to "as prescribed" for FMV or similar matters, subordinate rules are expected to provide methods - those rules are not reproduced here. Not stated in the document: the precise rules or form/procedure for FMV determination.

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Full Text:

Section 39 Computation of actual cost.

Computation of actual cost: adjustments for third party funding and input tax credits limit depreciable base. Section 39 defines actual cost for assets used in business or profession as the assessee's cost reduced by amounts borne by another person, GST/input tax credits where claimed and allowed, excise/additional customs duty credits where claimed and allowed, and any subsidy, grant or reimbursement relatable to acquisition; it excludes payments made outside prescribed banking/online modes beyond the daily threshold and prescribes a formula to apportion non asset specific subsidies across assets.