Tag: Section 73

Section 73 of the Income-tax Act, 2025 provides rules for determining the deemed or notional cost of acquisition in specified cases where the actual acquisition cost cannot appropriately be used for computing capital gains. The provision applies to certain capital assets acquired through specified modes or under particular circumstances prescribed by the Act. Instead of relying solely on the amount actually paid by the assessee, the law determines a statutory cost of acquisition for capital-gains purposes. This deemed cost ensures proper computation of taxable capital gains by establishing an appropriate cost base, particularly where an asset has been acquired without an ordinary purchase transaction.

Applicability of Section 73:

1. Assets Acquired by Gift or Will

Section 73 applies where a capital asset becomes the property of the assessee through a gift or will. Since the recipient normally does not pay a purchase price for such an asset, the ordinary rule for determining cost cannot be applied. Therefore, the cost of acquisition is generally taken as the cost for which the previous owner acquired the property, increased by qualifying cost of improvement incurred or borne by the previous owner or the assessee. This deemed cost becomes relevant when the recipient subsequently transfers the asset and capital gain is computed under the Act. Thus, Section 73 provides continuity of cost in such transfers.

2. Assets Acquired by Succession or Inheritance

Where a capital asset is acquired by succession, inheritance or devolution, Section 73 determines its cost for capital-gains purposes. The person inheriting the property generally does not incur an actual acquisition price. Accordingly, the cost to the previous owner is treated as the cost of acquisition of the assessee, together with qualifying improvement cost as provided by the section. This rule becomes important when the inherited asset is later transferred and taxable capital gain has to be determined. By adopting the previous owner’s cost, Section 73 ensures that the original cost base of the asset continues despite the change in ownership through inheritance or succession.

3. Distribution of Assets on Liquidation

Section 73 also applies to specified capital assets received on the distribution of assets upon liquidation of a company. Where an asset becomes the property of an assessee through such distribution, its cost of acquisition is determined according to the special rule prescribed in the section rather than merely by reference to an ordinary purchase price. In the cases covered by the relevant entry, the previous owner’s cost, together with qualifying cost of improvement, forms the basis for determining the deemed cost. This amount becomes relevant when the assessee subsequently transfers the asset. The provision therefore establishes an appropriate cost base for capital-gains computation.

4. Transfer to Revocable or Irrevocable Trust

Where a capital asset becomes the property of the assessee under a transfer to a revocable or irrevocable trust, Section 73 may apply for determining its cost of acquisition. Such transfers may occur without an ordinary sale consideration, making it necessary to prescribe a statutory cost for future capital-gains computation. In the cases specified by Section 73, the cost incurred by the previous owner, increased by qualifying cost of improvement incurred by the previous owner or assessee, is adopted. Therefore, when the capital asset is subsequently transferred, the prescribed deemed cost is used for determining the resulting capital gain or capital loss under the applicable provisions.

5. Shares Received on Amalgamation

Section 73 applies where an assessee receives shares in an amalgamated company, which is an Indian company, in consideration of a qualifying transfer under Section 70(1)(f). In such circumstances, the cost of acquisition of the shares received in the amalgamated company is deemed to be the cost of acquisition of the shares in the amalgamating company. Therefore, no new cost is created merely because old shares are exchanged for shares of the amalgamated company in a qualifying amalgamation. This rule maintains continuity of cost and enables correct computation of capital gains when the shares in the amalgamated company are subsequently transferred.

6. Shares Received on Demerger

Section 73 contains specific rules for determining the cost of shares received pursuant to a demerger. The cost of acquisition of shares in the resulting company is determined by allocating the cost of the original shares in the demerged company according to the statutory formula based on the net book value of assets transferred and the net worth of the demerged company. Correspondingly, the cost of the original shares remaining in the demerged company is reduced by the amount allocated to the resulting company. This mechanism ensures a proper allocation of original cost between the shares of the demerged and resulting companies for future capital-gains computation.

7. Other Specified Modes of Acquisition

Section 73 also applies to several other specifically prescribed capital assets and transactions, including certain specified securities, sweat equity shares, LLP interests, business-trust units, mutual-fund units and corporate restructuring transactions. For each category, the statutory table specifies the amount that must be treated as the cost of acquisition. The applicable cost may be based on the previous asset’s cost, fair market value, prescribed market price or another statutory formula, depending upon the transaction. Therefore, Section 73 is not limited to gifts and inheritances; it provides comprehensive special cost rules for various non-ordinary modes of acquiring capital assets.

Cases Where Cost of Acquisition is Deemed:

1. Property Acquired by Gift or Will

Where a capital asset is acquired by the assessee through gift or will, there is generally no actual purchase price paid by the recipient. Therefore, Section 73 provides that the cost of acquisition is generally taken as the cost for which the previous owner acquired the asset, together with the qualifying cost of improvement as prescribed. This deemed cost is used when the recipient subsequently transfers the capital asset and capital gains are computed. The provision maintains continuity in the cost of the asset and prevents the acquisition cost from becoming nil merely because the assessee received the property without paying consideration.

2. Property Acquired by Succession or Inheritance

Where an assessee acquires a capital asset through succession, inheritance or devolution, the cost of acquisition is determined according to the deemed-cost provisions of Section 73. Since the heir or successor ordinarily does not pay a purchase consideration for acquiring the inherited property, the previous owner’s cost is generally adopted as the assessee’s cost, subject to the prescribed adjustments and qualifying improvement expenditure. When the inherited property is subsequently transferred, this deemed amount is considered while calculating the resulting capital gain or loss. Thus, the provision ensures continuity of the historical acquisition cost even though ownership passes from one person to another through inheritance.

3. Property Received on Partition of HUF

Where a capital asset becomes the property of an assessee on the total or partial partition of a Hindu Undivided Family (HUF), the assessee does not ordinarily incur an independent purchase cost. Therefore, Section 73 provides an appropriate deemed-cost mechanism for determining the asset’s acquisition cost. Generally, the cost attributable to the previous owner is relevant, subject to the conditions and adjustments specified in the Act. This cost becomes important when the member subsequently transfers the asset and capital gains have to be calculated. The provision ensures that distribution of family assets does not result in the loss of the original cost base for capital-gains purposes.

4. Property Acquired through Specified Trust Arrangements

Where a capital asset becomes the property of an assessee through specified revocable or irrevocable trust arrangements, Section 73 may prescribe the cost to be adopted instead of an ordinary purchase price. Since such acquisition may occur without a conventional sale transaction, the Act generally maintains continuity of cost by referring to the cost incurred by the previous owner, together with eligible improvement expenditure where applicable. The deemed cost becomes relevant when the recipient subsequently transfers the capital asset. Thus, the provision establishes a statutory acquisition value and enables proper calculation of the capital gain or capital loss arising on the eventual transfer of the property.

5. Shares Acquired in Amalgamation

Where a shareholder receives shares of an amalgamated company in exchange for shares held in the amalgamating company under a qualifying amalgamation, the new shares do not have an ordinary independent purchase price. Accordingly, Section 73 generally deems the cost of the shares in the amalgamating company to be the cost of acquisition of the corresponding shares received in the amalgamated company. This preserves continuity of the shareholder’s investment cost through the corporate restructuring. When the new shares are subsequently transferred, the deemed cost is used for computing capital gains. The rule prevents an artificial resetting of acquisition cost merely because of a qualifying amalgamation.

6. Shares Acquired in Demerger

In the case of a qualifying demerger, a shareholder may receive shares in the resulting company without making a separate payment for those shares. Section 73 therefore provides a statutory method for allocating the original cost of shares held in the demerged company between the shares of the demerged company and the resulting company. The allocation is generally made using the prescribed relationship between the net book value of assets transferred and net worth of the demerged company. This allocated amount becomes the deemed cost of shares in the resulting company and is used when those shares are subsequently transferred for determining taxable capital gains.

7. Other Specified Capital Assets

Section 73 contains special deemed-cost rules for various other specified capital assets and transactions where the ordinary purchase-price method may not provide an appropriate cost. Depending upon the particular case, the deemed cost may be determined with reference to the cost of an earlier asset, fair market value, prescribed market value or another statutory amount. Such provisions may apply to specified securities, units, business reorganisations and other transactions expressly covered by the Act. The purpose is to provide a definite and consistent cost of acquisition for capital-gains computation where an asset is acquired through a special transaction rather than through an ordinary purchase.

Cost of Acquisition in Specified Modes of Transfer:

1. Gift or Will

Where a capital asset becomes the property of the assessee through a gift or will, the assessee ordinarily does not pay any consideration for acquiring it. Under Section 73, the cost of acquisition is generally deemed to be the amount for which the previous owner acquired the asset, together with the qualifying cost of improvement incurred or borne by the previous owner or the assessee, as applicable. Therefore, the cost is not treated as nil merely because the recipient acquired the asset without payment. This deemed cost is considered when the recipient subsequently transfers the asset and capital gains are computed.

2. Succession, Inheritance or Devolution

Where an asset is acquired through succession, inheritance or devolution, the cost of acquisition is generally determined with reference to the cost to the previous owner. The heir or successor does not ordinarily incur a purchase price while acquiring the property. Therefore, Section 73 preserves the historical cost of the asset for capital-gains purposes. Qualifying cost of improvement may also be considered according to the applicable provisions. When the inherited asset is subsequently sold or otherwise transferred, this deemed acquisition cost is deducted in determining the capital gain. Thus, the provision ensures continuity of cost despite the change in ownership through inheritance.

3. Distribution of Assets on Partition of HUF

Where a capital asset becomes the property of an assessee upon the total or partial partition of an HUF, the acquisition does not involve an ordinary purchase transaction. Consequently, Section 73 applies a deemed-cost rule for determining the asset’s acquisition cost. Broadly, the cost to the previous owner forms the basis for determining the cost in the hands of the recipient, subject to the statutory provisions concerning qualifying improvements and other adjustments. When the member subsequently transfers the asset, this cost is considered for calculating capital gain or capital loss. The rule maintains continuity of the original cost despite distribution of property upon HUF partition.

4. Transfer through Specified Trust

Where a capital asset becomes the property of the assessee through specified revocable or irrevocable trust arrangements, the Act provides a special rule for determining the cost of acquisition. Since the recipient may acquire the asset without paying an ordinary purchase consideration, the previous owner’s acquisition cost is generally relevant, subject to the conditions specified in Section 73. Eligible improvement expenditure may also form part of the cost where permitted. When the asset is subsequently transferred, the deemed cost is used in computing the resulting capital gains. This ensures that a qualifying transfer through a trust does not artificially create a new acquisition cost.

5. Shares Received on Amalgamation

Where shares in an amalgamated company are received in consideration for shares held in the amalgamating company under a qualifying amalgamation, Section 73 provides for continuity of acquisition cost. Generally, the cost of acquiring the shares in the amalgamated company is deemed to be the cost of the corresponding shares in the amalgamating company. The shareholder therefore does not obtain a new cost merely because the shares have been exchanged as part of the amalgamation. When the new shares are subsequently transferred, this deemed cost is considered in computing the resulting capital gain or loss. This treatment facilitates tax-neutral corporate restructuring.

6. Shares Received on Demerger

Where an assessee receives shares in a resulting company pursuant to a demerger, the cost of the original shares is appropriately allocated between the shares of the demerged company and the resulting company. Section 73 provides a statutory formula based broadly on the net book value of assets transferred in relation to the net worth of the demerged company. The amount so allocated becomes the cost of acquisition of shares in the resulting company. Correspondingly, the cost of shares in the demerged company is reduced by that amount. This allocation ensures accurate capital-gains computation when either set of shares is subsequently transferred.

7. Conversion or Corporate Reorganisation

Section 73 also contains special cost rules for assets or securities received under specified conversion, succession or corporate reorganisation transactions. Where the original transaction receives tax-neutral treatment, the cost of the new capital asset is generally determined with reference to the cost of the original asset or interest, or according to another method specifically prescribed by the Act. This prevents taxpayers from obtaining an artificial increase or decrease in acquisition cost merely because the legal form of their investment changes. The deemed cost subsequently becomes relevant when the new asset is transferred and the resulting taxable capital gain or loss is calculated.

Computation of Capital gain in Certain cases:

The Income-tax Act, 2025 contains special provisions for the computation of capital gains in certain cases where the ordinary method of deducting cost from sale consideration may not provide the correct taxable gain. These provisions apply to transactions such as depreciable assets, compulsory acquisition, slump sale, transfer of shares or securities, conversion of capital assets, and other specified transactions. Depending upon the nature of the transaction, the Act may prescribe a special full value of consideration, cost of acquisition, period of holding, or computation method. These rules ensure consistent and appropriate determination of taxable capital gains in specified circumstances.

General Computation