Section 90 Meaning of “adjusted”, “cost of improvement” and “cost of acquisition”.

Income-tax Act, 2025

At a Glance

Clause 90 of the Income Tax Bill, 2025 (Old Version) sets out definitions of "adjusted", "cost of improvement" and "cost of acquisition" for the purposes of sections 72 and 73 (capital gains). It matters because these definitions determine taxable capital gains computation for a wide range of assets (including intangibles, shares and units), affecting taxpayers, tax administrators and capital markets participants. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: references throughout to sections 72 and 73 of the Income Tax law, section 2(h) of the Securities Contracts (Regulation) Act, 1956, and section 32(1) of the Income-tax Act, 1961. The clause purports to delineate the meaning of "cost of improvement" and "cost of acquisition" across categories of capital assets - intangibles (including goodwill and rights), physical assets, financial assets (shares, units, securities), long-term equity assets acquired before 1 Feb 2018, and assets acquired before 1 Apr 2001. Definitions include special rules for subscription rights, allotments without payment, treatment where depreciation on goodwill was claimed, and valuation references (fair market value, net asset value, Cost Inflation Index). Any definition or explanatory provision not present is identified as "Not stated in the document."

Statutory Provision Mode

Text & Scope

The clause differentiates two principal concepts:

• Cost of improvement: For intangibles such as goodwill, rights to carry on business/production, etc., cost of improvement is treated as nil. For other assets, cost of improvement comprises capital expenditure incurred on or after 1 Apr 2001 if the asset was owned before that date; otherwise capital expenditure incurred by the assessee after acquisition (or by previous owner where acquisition was by modes in section 73 Table Sl. No. 1).
• Cost of acquisition: For specified intangibles and rights, cost of acquisition is the purchase price if acquired by purchase from previous owner, purchase price to previous owner where relevant u/s 73 Table Sl. No. 1, and nil otherwise. Further special rules apply for financial assets where subscription/bonus/right issues arise; for long-term equity assets acquired before 1 Feb 2018 (special higher-of rule); for assets acquired before 1 Apr 2001 (option to take original cost or FMV as on 1 Apr 2001); and specific rules for shares/stock arising from corporate actions (consolidation, subdivision, conversion).

Interpretation

The text signals legislative intent to: (a) exclude improvements to specified intangibles from being capitalised as "cost of improvement"; (b) protect taxpayers holding pre-2001 assets by allowing a 1 Apr 2001 fair market value alternative; (c) provide rules addressing bonus/allotment/rights and renunciation; and (d) adjust acquisition cost for goodwill where depreciation was previously claimed. The clause employs objective valuation anchors (exchange quote on 31 Jan 2018, net asset value) and the Cost Inflation Index to compute proportionate indexed cost for certain unlisted equity situations. No broader legislative history, policy justification or explanatory memorandum is provided in the document: Not stated in the document.

Exceptions/Provisos

The text contains express carve-outs and provisos, notably:

• Intangibles listed in (1)(a) - cost of improvement = nil.
• Expenditure deductible under specified heads (house property, business/profession, other sources) excluded from cost of improvement (sub-section (2)).
• Reduction of purchase price by total depreciation claimed on goodwill before tax year commencing 1 Apr 2020 (sub-section (4)).
• For long-term equity assets acquired before 1 Feb 2018, cost of acquisition is the higher of original cost and lower of FMV and full value of consideration on transfer (sub-section (7)), with detailed FMV definitions (8).
• Where assets became property before 1 Apr 2001, option to adopt cost or FMV as on 1 Apr 2001, subject to stamp duty cap for land/building (sub-sections (9) and (10)).

Illustrations

• Example 1 (intangible improvement): A taxpayer owns goodwill and incurs capital expenditure to 'improve' it - cost of improvement for capital gains computation = nil (per (1)(a)).
• Example 2 (pre-2001 asset): Land acquired in 1995 - taxpayer may elect cost of acquisition = original cost or FMV as on 1 Apr 2001; if FMV used for land/building it cannot exceed stamp duty value as on 1 Apr 2001 (per (9) & (10)).
• Example 3 (share bonus): Assessee holds shares entitling to subscribe for bonus shares; rights renounced - cost of right to renounce = nil for renouncing assessee; cost for purchaser who paid to renouncer includes amounts paid to renouncer plus amounts paid to company (per (6)).

Interplay

The clause expressly interacts with:

• Sections 72 and 73 (capital gains) - the entire clause is for their purposes.
• Section 32(1) (depreciation) for the goodwill adjustment (sub-section (4)).
• Section 2(h) of the Securities Contracts (Regulation) Act for definition of "financial asset" (sub-section (5)).
• Section 70 referenced in sub-clause (8)(b)(iv) in relation to certain transactions giving rise to shares - the Bill text contains variant drafting which affects the category of transactions referenced (see Differences section below).

Practical Implications

• Compliance: Taxpayers with intangibles cannot capitalise improvements for indexation/adjustment - taxpayers and advisors must treat expenditure on goodwill/rights as non-improvements for capital gains; this affects computation on disposal and record-keeping of such expenditures (cost of improvement = nil).
• Valuation records: For assets acquired before 1 Apr 2001 or before 1 Feb 2018 and for FMV calculations, taxpayers should retain contemporaneous exchange quotes, NAV computations and stamp duty valuations as the clause relies on these values.
• Depreciation adjustment: For goodwill purchased where depreciation on goodwill was claimed prior to tax year 2020-21, taxpayers must reduce purchase price by cumulative earlier depreciation - requiring records of depreciation claimed.
• Rights/bonus transactions: Specific allocation rules for cost among original asset, rights, allotments and purchasers impose evidentiary need for documentation of payments to renouncers and payments to the issuing company.
• Elective options (pre-2001 assets): Availability of option to adopt FMV as on 1 Apr 2001 or original cost creates planning considerations; for land/building FMV is capped by stamp duty value, so taxpayers must secure reliable stamp duty records.

Key Takeaways

• Intangibles such as goodwill and certain rights have cost of improvement treated as nil - expenditure cannot be added to cost for capital gains purposes.
• Cost of acquisition rules vary by asset class: purchase price where bought, nil otherwise, with special rules for subscription/allotment/renunciation and long-term equities pre-Feb-2018.
• Special valuation anchors (31 Jan 2018 exchange price, NAV, Cost Inflation Index) are prescribed for certain pre-2018 equity assets; taxpayers must preserve supporting market data.
• Depreciation earlier claimed on goodwill reduces purchase price for acquisition cost computation.
• Assets held before 1 Apr 2001 may use the 1 Apr 2001 FMV alternative, but land/building FMV limited by stamp duty value.
• The clause imposes multiple evidentiary and record-keeping obligations tied to valuation, payments on renunciation and historical depreciation records.
• Where the document is silent on legislative intent, administrative procedures, transitional rules and effective date, the text offers no guidance: Not stated in the document.

Differences between the Clause 90 of the Income Tax Bill, 2025 (Old Version) and the Section 90 of the Income-tax Act, 2025

Comparison between the Bill (Clause 90, Old Version) and the consolidated/Section 90 (Act text) shows a number of drafting and substantive differences observable in the provided documents. The principal differences and their practical impacts (derived only from the two texts) are:

• Demutualisation provision (sub-section (12) in the Act): Present in enacted Section 90 (explicit rule treating cost of acquisition of equity allotted under approved demutualisation as cost of original membership; trading/clearing rights deemed nil). Absent from Clause 90 in the Bill.
  • Practical impact: omission in the Bill would create uncertainty for demutualisation transactions; absence in the Bill text removes a clear statutory cost rule for such allotments. (Act includes it; Bill omits it.)
• Reference to SCRA citation: Bill lists the Securities Contracts (Regulation) Act as "(45 of 1956)"; Act lists "(42 of 1956)".
  • Practical impact: purely editorial or numbering error if uncorrected could generate interpretive confusion but not substantive change in policy; likely a drafting error. The Bill also contains a footnote correcting a different cross-reference (to section 72(8)(a)).
• Sub-section (5) phrasing: Act: "For the purposes of sections 72 and 73, and subject to the provisions ..." Bill: phrase reads "For the purposes of sections 72 and 73(a) and (b), and subject to..." - Bill's insertion of "(a) and (b)" appears anomalous.
  • Practical impact: introduces ambiguity about whether the reference is to sections or to subclauses; may require clarification to avoid limiting application.
• Fair market value wording for equities (sub-clause (8)(b)(ii) and (iv)(B)/(C)): The Bill uses "irrespective of sub-clause (i), if there is no trading ..." versus the Act's slightly different conditional phrasing; importantly, Bill's (8)(b)(iv)(B) references transactions "mentioned in section 70" while the Act uses "not regarded as transfer mentioned in section 70."
  • Practical impact: altering whether certain IPO/offer for sale situations qualify can materially change whether the proportionate indexed cost calculation applies; the change may broaden or narrow situations covered and thus affect taxpayers selling such shares.
• Wording on ascertainability of previous owner's cost (sub-section (11)): Bill uses "is unable to be ascertained" while Act uses "cannot be ascertained."
  • Practical impact: semantic only; however, drafting consistency matters for interpretation.

Action Points

• Tax counsel and compliance teams should track whether the demutualisation rule (present in the Act) is present in the final Bill; if absent in a particular draft, seek clarification or administrative guidance.
• Maintain robust market records (exchange quotes as on 31 Jan 2018, NAVs, stamp duty valuations, depreciation schedules and payments in rights renunciation) to support cost calculations prescribed.
• Where corporate actions or pre-2001 holdings are involved, confirm which variant of the text applies (Bill vs enacted provision) to determine applicable valuation formulae.

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Full Text:

Section 90 Meaning of “adjusted”, “cost of improvement” and “cost of acquisition”.

Cost of acquisition rules clarify valuation and allocation for capital gains, with special treatment for intangibles and pre-existing equity holdings. The provision defines cost of improvement and cost of acquisition for capital gains, treating improvements to specified intangibles as nil, excluding deductible expenditures, and reducing acquisition cost by prior depreciation on goodwill. It prescribes allocation rules for acquisitions by purchase, allotment, bonus, subscription and renunciation, and provides alternative valuation anchors-including an option to adopt a historic fair market value, exchange quotes, net asset value and the Cost Inflation Index-for certain pre-existing and unlisted equity holdings.