Section 40 Special provision for computation of cost of acquisition of certain assets.

Income-tax Act, 2025

At a Glance

The document is Clause 40 of the Income Tax Bill, 2025 (Old Version), which provides a special rule for computing the cost of acquisition of certain assets when sold as stock-in-trade. It matters to amalgamated companies, transferees receiving assets by gift, will, irrevocable trust, or HUF partition, and to tax authorities assessing business profits on such disposals. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 40 is located within the Part addressing "Profits and gains of business or profession" of the Income Tax Bill, 2025 - Old Version. The clause sets out a special provision for computation of cost of acquisition of assets in limited transfer scenarios. Context: It governs the basis for computing cost of acquisition for the purpose of determining income under the head "Profits and gains of business or profession" when such assets are sold as stock-in-trade. Definitions or explanatory glosses: Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 40 applies "for the purposes of computation of income under the head 'Profits and gains of business or profession'." It applies where an asset is acquired by either-(a) an amalgamated company under a scheme of amalgamation; or (b) an assessee under a gift, will, an irrevocable trust, or on total or partial partition of a Hindu undivided family-and is subsequently sold as stock-in-trade.

The provision prescribes that the "cost of acquisition" of such an asset, for the taxable sale as stock-in-trade, "shall be the sum of": (i) the cost of acquisition of the asset in the hands of the amalgamating company (for clause (a)) or the transferor/donor (for clause (b)); (ii) any cost of improvement made; and (iii) any expenditure incurred by the amalgamating company or transferor or donor wholly and exclusively in connection with such transfer. Clause (2) provides that the section does not apply to an asset referred to in section 67(6).

Interpretation

Legislative intent as indicated by the text: The clause aims to carry forward the historical cost (subject to adjustments) of the asset from the transferor (or amalgamating company) to the transferee for the specific purpose of computing profit on sale when the asset is treated as stock-in-trade. The mechanism appears intended to avoid artificial step-up or reset of cost to market value on such transfers and to ensure continuity of cost base while permitting inclusion of specified improvements and transfer-related expenditures in the transferee's cost. The text indicates an intent to aggregate the original cost and subsequent improvement/transfer costs into a composite cost of acquisition for the transferee.

Exceptions/Provisos

Clause 40(2) excludes assets referenced in section 67(6) from its application. No further provisos, thresholds, or conditions are provided in the clause as reproduced.

Illustrations

• Example 1: An amalgamating company acquired machinery at a cost of X. After amalgamation, the amalgamated company sells the machinery as stock-in-trade. Under Clause 40, the cost of acquisition for computing profit would include X plus any cost of improvement and any expenditure incurred by the amalgamating company wholly and exclusively in connection with the transfer. (Quantities/values: Not stated in the document.)

• Example 2: An asset received by an assessee by gift from a donor whose original cost was Y, later sold as stock-in-trade. The assessee's cost of acquisition for that sale is Y plus any cost of improvement and any expenditure by the donor wholly and exclusively incurred in connection with the transfer. (Specific numeric illustration: Not stated in the document.)

Interplay

Clause 40 explicitly refers to section 67(6) to exclude certain assets, implying interplay with the provisions that define or treat specific assets differently u/s 67(6). Other interactions with rules, notifications or circulars: Not stated in the document. Interaction with capital gains provisions, valuation rules, or provisions dealing with stock-in-trade classification is not elaborated in the clause; those interactions must be determined from other provisions outside this clause. Specific cross-references beyond section 67(6): Not stated in the document.

Differences Between the Two Provisions and Practical Impact

• Formulation of acquisition language: Document 1 (Section 40, Act) uses the phrase "cost of acquisition of an asset which becomes property of" while Document 2 (Clause 40, Bill - Old Version) uses "cost of acquisition of an asset acquired by". Practical impact: purely stylistic; no substantive change in scope is apparent from the texts provided.

• Placement of qualifying phrase in clause (iii): Document 1 reads "any expenditure incurred by the amalgamating company or transferor or donor, as the case may be, wholly and exclusively in connection with such transfer." Document 2 reads "any expenditure incurred by the amalgamating company or transferor or donor wholly and exclusively in connection with such transfer." Practical impact: syntactic only; meaning unchanged.

• Designation: Document 1 is presented as "Section 40" in the Income-tax Act, 2025; Document 2 is "Clause 40" of the Income Tax Bill, 2025 (Old Version). Practical impact: Document 2 is a pre-enactment draft; Document 1 reflects the enacted numbering and presentation. If both texts are identical substantively, practical effect for taxpayers and the Department is continuity of the rule from bill to statute.

Practical Implications

• Compliance and risk areas: Taxpayers receiving assets through amalgamation, gift, will, irrevocable trust or HUF partition must preserve and be able to prove the cost of acquisition in the hands of the transferor/amalgamating company if the asset is later sold as stock-in-trade, since this cost forms part of the transferee's cost base for computing taxable profits. Failure to establish the transferor's cost could expose the transferee to assessment adjustments. The clause does not provide an alternative mechanism for determining cost where transferor cost is unknown; the document is silent on evidentiary standards or presumptions. (Evidentiary treatment: Not stated in the document.)
• Record-keeping/evidence points: The text implies that records of (i) original cost in transferor's hands, (ii) costs of improvement, and (iii) transfer-related expenditures incurred by the transferor/amalgamating company should be retained. Documentation evidencing those amounts will be material to substantiate the composite cost on sale as stock-in-trade. Specific documentary requirements, form of proof, or timelines for retention are not specified in the clause.

Key Takeaways

• Clause 40 prescribes that, for sales as stock-in-trade, the transferee's cost of acquisition is the aggregate of the transferor's original cost, cost of improvements, and transfer-related expenditures incurred by the transferor/amalgamating company.
• The provision applies to assets received on amalgamation, gift, will, irrevocable trust, or HUF partition, when sold as stock-in-trade.
• Assets referred to in section 67(6) are excluded from Clause 40's operation.
• The clause places the practical burden on transferees to establish the transferor's cost and qualifying improvement/transfer expenditures, but it does not state evidentiary standards or procedures.
• The text as reproduced contains no special valuation formula, indexation provision, or guidance where transferor cost is unknown; those matters are "Not stated in the document."

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Full Text:

Section 40 Special provision for computation of cost of acquisition of certain assets.

Cost of acquisition continuity: transferee inherits transferor's cost plus improvements and transfer expenses for stock-in-trade sales. When an asset received on amalgamation, by gift, will, irrevocable trust, or HUF partition is sold as stock-in-trade, the transferee's cost of acquisition is the sum of the transferor's original cost, any cost of improvement, and any expenditure incurred by the transferor or amalgamating company wholly and exclusively in connection with the transfer; certain assets are excluded by separate statutory provision and no alternative valuation or evidentiary rules are provided.