Meaning of “Adjusted”, “Cost of Improvement” and “Cost of Acquisition” (Sec.90)
by Section 90 of the Income-tax Act, 2025 provides important definitions for computing income chargeable under the head “Capital Gains.” It explains expressions used in determining the cost attributable to a capital asset, particularly “adjusted,” “cost of improvement” and “cost of acquisition.” These concepts are important because capital gain is generally determined after deducting the allowable cost of acquisition and improvement from the consideration received on transfer. Section 90 also contains special rules for determining these costs in different circumstances. Thus, it helps establish the correct cost base of a capital asset and ensures proper and consistent computation of taxable capital gains.
1. Meaning of “Adjusted”
Under Section 90, the expression “adjusted” is used for specified capital-gains computations where the cost of an asset requires modification according to the provisions of the Act. The adjustment ensures that the amount considered as cost properly reflects the statutory treatment of the capital asset. Depending upon the nature of the asset and transaction, the original cost may require modification by considering prescribed amounts or circumstances. Such adjustment is relevant because the amount treated as cost directly affects the capital gain or capital loss arising on transfer. Therefore, the concept of adjusted cost helps determine the appropriate tax basis for computing taxable capital gains.
2. Cost of Improvement
Cost of improvement generally refers to expenditure of a capital nature incurred in making additions or alterations to a capital asset by the assessee or, in specified cases, by the previous owner. Such expenditure enhances or improves the value, quality or usefulness of the asset and may be considered while computing capital gains, subject to the provisions of Section 90. Ordinary repairs and revenue expenditure are not treated as cost of improvement merely because they maintain the asset. The amount qualifying as cost of improvement is deducted according to the applicable capital-gains computation provisions, thereby helping determine the actual taxable gain arising from transfer of the capital asset.
3. Cost of Acquisition
Cost of acquisition means the amount incurred by the assessee for acquiring a capital asset, subject to the specific rules contained in Section 90 and other applicable provisions. It ordinarily includes the purchase price and qualifying expenditure directly attributable to acquisition. Where an asset is acquired through specified modes such as gift, inheritance, succession or certain reorganisations, the Act may prescribe a special method for determining its cost, including reference to the cost to the previous owner. Special rules may also apply to assets acquired before prescribed dates or without an ascertainable purchase price. The allowable cost is important for calculating the resulting capital gain or loss.