Section 73 Cost with reference to certain modes of acquisition.

Income-tax Act, 2025

At a Glance

Document: Clause 73 of the Income Tax Bill, 2025 (Old Version). It sets out deemed cost-of-acquisition rules for specified modes of acquisition of capital assets. The provision affects taxpayers (transferors/transferees, companies, mutual funds, trusts), and tax administration in determining capital gains. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 73 of the Income Tax Bill, 2025. The clause prescribes deemed cost of acquisition for capital assets that become the property of an assessee by various modes (gift, succession, liquidation distribution, trust transfers, specified transfers u/s 70(1) variants, demerger, consolidation of mutual funds, conversion in LLP, etc.). The clause sets out a Table with 24 serial entries mapping specific acquisition scenarios (column B) to the deemed cost of acquisition (column C).

Definitions/explanations within the clause: Sub-section (2) defines "previous owner of the property" for serial number 1; it adopts SEBI Circular definitions for "main portfolio", "segregated portfolio" and "total portfolio" for serial numbers 11 and 12; it defines "net worth" for serial numbers 14 and 15; and it provides that certain provisions (serial numbers 2, 14 and 15) shall, as far as may be, also apply to business reorganisation of a co-operative bank as referred to in section 65.

Statutory Provision Mode

Text & Scope

The clause covers multiple modes whereby an assessee acquires capital assets and specifies the deeming rule for cost of acquisition in each scenario. Core categories include acquisition by gift/will/succession/liquidation/trust, corporate reorganisations (amalgamation, demerger, exchanges under specific section 70(1) heads), mutual fund consolidations/segregations, conversion of LLP interests, redemption of GDRs, transfers involving Electronic Gold Receipts, units of business trusts, assets declared under the Income Declaration Scheme, assets where value was subject to transfer pricing u/s 92(2)(m), and assets of trusts/institutions where accreted income was computed u/s 352.

Interpretation

The clause adopts a principle of continuity of cost: when an asset passes to an assessee by specified non-purchase modes, the cost is generally the cost to the previous owner (often adjusted for improvements). For certain specified assets (e.g., amalgamation, demerger, segregated portfolios, consolidations), the clause prescribes formulaic apportionment or special rules to determine cost. For some categories (specified securities/sweat equity and assets declared under a prior disclosure scheme), fair market value is adopted as the relevant cost.

Legislative intent suggested by text: to ensure tax neutrality in non-market transfers by preserving the prior owner's cost base (or substituting an objective market value where appropriate), and to provide clear mechanical rules for corporate reorganisations and fund restructurings. (Legislative history or policy rationale beyond the text: Not stated in the document.)

Exceptions/Provisos

No separate provisos are present beyond the Table and sub-section (2) clarifications. Specific carve-outs are embedded in entries (e.g., some entries only apply to shares of amalgamating companies, or to specified securities referred to in a particular section). Thresholds or monetary limits: Not stated in the document.

Illustrations

• Example 1: A person receives shares by inheritance (serial 1). Deemed cost = cost for which the previous owner acquired the shares, increased by cost of improvements incurred by either the previous owner or the assessee.
• Example 2: A mutual fund segregates a portfolio (serial 11). The cost of acquisition of units in the segregated portfolio is computed using X = A x B / C where A = cost of acquisition of units in total portfolio; B = NAV of asset transferred to segregated portfolio; C = NAV of total portfolio immediately before segregation.
• Example 3: Shares acquired by a non-resident on redemption of GDRs (serial 6). Deemed cost = price of the shares on a recognised stock exchange on the date of request for redemption.

Interplay

The clause expressly cross-references numerous other provisions (various heads of section 70(1), section 17(2), section 67(14), section 352, section 92(2)(m), section 26(2)(j), SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160). Interaction with those provisions is integral: the deemed cost outcomes depend on definitions and triggers in those sections and the SEBI circular. Other interactions (e.g., with capital gains indexing rules, cost inflation index, or exemptions) are Not stated in the document.

Differences between the two provisions and practical impact

• Reference to section on specified securities/sweat equity (Table entry 4): Bill (Clause 73) cites section 17(2); Act (Section 73) cites section 17(1)(d).
  • Practical impact: The amendment in the Act changes the statutory anchor for which category of specified securities or sweat equity shares the deemed cost rule applies. This can affect which instruments are valued at fair market value for cost purposes. (Precise reach of the change: Not stated in the document.)
• Exclusion in entry regarding shares in a project (Table entry 20): Bill refers to "Capital asset, being share in the project, in the form of land or building, or both, u/s 67(14)"; Act adds the qualification "not being a capital asset referred to in section 67(16)".
  • Practical impact: The Act narrows the entry by excluding assets covered by section 67(16), thereby limiting the scope of the deemed cost rule under this entry. This reduces unintended coverage for assets specifically carved out by section 67(16). (Further detail: Not stated in the document.)
• Provision for accreted income / fair market value reference (Table entry 21): Bill cites computation and tax paid as per section 352 and uses section 352(3) for the specified date; Act cites section 352 and uses section 352(2) for the specified date.
  • Practical impact: The Act shifts the cross-reference to a different sub-paragraph of section 352 for the relevant date when fair market value was considered for computation of accreted income. This may change the precise valuation date or procedural reference for trusts/institutions. (Exact date/implication: Not stated in the document.)
• Formulation of formulae and minor drafting differences (Table entries 11 and 14): Bill expresses formulas as "X = A x B /C" and in entry 11 uses "immediately before segregation"; Act sets out formula in a two-line presentation "X = A x B / C" with explanatory punctuation and uses "immediately before segregation of portfolios" (slightly fuller wording).
  • Practical impact: These are drafting and clarity differences; the mathematical operation appears identical. The Act's fuller wording may reduce ambiguity about the temporal reference ("immediately before segregation of portfolios").
• Wording differences in reduction language for original units/shares (Table entries 12 and 15): Bill uses shorter phrasing ("The cost of acquisition as reduced by..."; "As reduced by..."); Act uses fuller phrasing ("The cost of acquisition of such original units as reduced by..." and "The cost of acquisition of such original shares as reduced by...").
  • Practical impact: Primarily stylistic; the Act's phrasing is marginally clearer on subject of reduction being applied to the cost of acquisition of the original asset.
• Cross-reference to cooperative bank business reorganisation (sub-section (2)(d)): Bill refers to section 65; Act refers to section 64.
  • Practical impact: The Act alters which section governs application "as far as may be" to co-operative bank reorganisations. This may change whether the listed rules apply to such reorganisations (scope depends on the substantive content of sections 64/65, which is Not stated in the document).
• Minor wording elsewhere (e.g., serial 3 wording "in relation to which such asset is acquired by the assesse" in Act vs "for which such asset is acquired by the assesse" in Bill):
  • Practical impact: These are drafting refinements likely intended to improve grammatical clarity; they do not, on the face of the text, alter substantive effect.

Practical Implications

• Compliance and risk areas: Taxpayers receiving assets by non-purchase modes must trace the previous owner's cost of acquisition (serial 1). Where assets arise from reorganisations, taxpayers and advisers must apply the prescribed formulae to apportion cost (serials 11, 14). For instruments where fair market value is prescribed (serials 4, 17, 18, 21, 22), appropriate documentation of valuation date and valuation method is necessary. The clause delegates some definitional matters (e.g., SEBI definitions), so reliance on external circulars is required.
• Record-keeping/evidence points: Maintain purchase records of previous owners where available; documents substantiating improvements; NAV statements and contemporaneous valuation data for mutual fund reorganisations; stock exchange prices on specified dates (e.g., GDR redemption date); records of tax paid and valuation dates u/s 352; records of disclosure and payment under the Income Declaration Scheme, 2016 where invoked.

Key Takeaways

• Clause 73 prescribes deemed cost of acquisition rules for a wide range of non-market transfers and restructurings.
• General rule: the prior owner's cost (plus improvements) is carried forward in most non-purchase acquisitions.
• Specific categories (amalgamation, demerger, segregations, consolidations) require mechanical apportionment/formulae to determine cost.
• Certain instruments/assets use fair market value or market price on a specified date as deemed cost.
• The clause cross-references several statutory provisions and a SEBI circular; precise application depends on those external texts.
• Taxpayers must preserve evidence of prior costs, improvements, NAVs, market prices and valuation dates to support cost calculations.
• Where the Bill uses concise phrasing, careful reading with the cross-references is necessary to determine operative dates and definitions.

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Full Text:

Section 73 Cost with reference to certain modes of acquisition.

Deemed cost of acquisition: prior-owner cost continuity and formulaic apportionment govern non purchase transfers and restructurings. Section 73 prescribes deemed cost of acquisition rules for assets received by non-purchase modes: generally continuing the previous owner's cost (adjusted for improvements) and prescribing formulaic apportionment or fair market value bases for corporate reorganisations, mutual fund segregations/consolidations and specified instruments, with application guided by cross-references and delegated definitions.