Cost of acquisition with reference to certain modes — gift / will / partition / amalgamation / demerger / 47-exempt transfers; cost inherits from transferor.
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 49 — COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 49 supplies the deemed cost of acquisition for capital assets acquired otherwise than by a direct purchase — i.e., by gift, will, inheritance, partition of HUF, distribution on liquidation, conversion of debenture to share, etc. The principal rule (sub-section (1)) is that the cost to the previous owner shall be deemed the cost to the recipient. Sub-section (2) applies to shares received in amalgamation/demerger; sub-section (2A)-(2C) deal with specified securities/sweat-equity shares; sub-section (4) applies to property received on which Section 56(2)(vii)/(viia)/(x) has applied.
Section 49(1) is supplemented by Section 2(42A) Explanation 1, which aggregates the previous owner's holding period with the recipient's holding period for purposes of long-term/short-term characterisation. This cost-and-holding flow-through preserves continuity of capital character across exempt transfers.
The post-FA 2017 sub-section (4) creates an important interface with Section 56(2)(x): where receipt of property has been charged as income under Section 56(2)(x) (i.e., FMV taxed in recipient's hands), Section 49(4) substitutes that FMV as cost in the recipient's hands — avoiding double taxation on the subsequent transfer.
B. COMMENTARY
B.1 The Cost Flow-Through Doctrine
Section 49(1) embodies a fundamental policy choice: where an asset is acquired by gift, will, inheritance, partition, distribution on liquidation, or similar non-purchase mode (each enumerated in sub-clauses (i)-(iv)), the recipient does not start with a fresh cost basis (e.g., FMV at receipt) but inherits the previous owner's historical cost. The consequence is that the entire appreciation that accrued during the previous owner's holding — even though not subjected to capital-gains tax (because the inter-generational transfer was exempt under Section 47(iii)/Section 56's relative-exemption) — eventually crystallises into capital gain on the recipient's ultimate transfer to a third party.
This rule has been settled since the inception of the capital-gains code. The leading authorities — CIT v. Manjula J. Shah (Bom HC FB 2013), CIT v. Smt. Meena Devi Mansinghka (Raj HC 2017), and a long line of Tribunal decisions — confirm that the recipient inherits the previous owner's cost (Section 49) AND the previous owner's holding period (Section 2(42A) Explanation 1) — and (most importantly) the recipient is entitled to indexation from the previous owner's date of acquisition, not merely from the date of recipient's acquisition (a contested point now firmly resolved in the assessee's favour, subject to FA 2024's rate restructuring).
On amalgamation/demerger, the original shareholder receives shares of the amalgamated/resulting company in exchange for shares of the demerged/amalgamating company. Section 49(2)/(2A)/(2C) flows the original cost through — the cost of the new shares is the cost of the surrendered shares (or a proportionate part thereof for demergers, computed using a formula in Section 49(2C) read with Rule 8AA). Holding period under Section 2(42A) similarly aggregates.
B.3 Sub-section (4) — Section 56(2)(x) Interface
Sub-section (4), inserted by FA 2010 and continuously refined, addresses the double-taxation concern: if the recipient has already paid tax on the FMV of property under Section 56(2)(x) (anti-gift provision), then the cost basis for subsequent transfer should reflect that FMV (not the previous owner's historical cost — which would lead to double taxation on the same appreciation). This is a critical interface that practitioners must apply correctly to avoid both under- and over-taxation.
B.4 Special Cost Rules
Section 49(2AA), (2AB) — sweat equity shares / ESOPs: cost is the FMV considered in computing perquisite under Section 17(2)(vi)/Section 56(2)(viia) etc. Section 49(2D)/(2E) — conversion of debenture/bond/warrant to shares: cost flows through. Section 49(5)-(8) — various specialised situations (relinquishment by member-shareholder, slump sale acquirer, FCCB conversion, BSE-NSE de-mutualisation, etc.). Each sub-section has its own conditions and computational mechanism.
B.5 Practitioner Take-aways
(a) For inherited/gifted property: trace the previous owner's actual cost (purchase deed, gift deed, FMV-as-on-1-4-2001 election if applicable) — do not use FMV at the date of recipient's acquisition. (b) Aggregate the previous owner's holding period with recipient's for long-term characterisation. (c) Apply indexation from the previous owner's date of acquisition (Manjula J. Shah principle), subject to FA 2024 indexation removal. (d) For property previously taxed under Section 56(2)(x), apply the Section 49(4) substituted-FMV cost basis. (e) Maintain documentation of the previous owner's cost — purchase deed, registration receipt, original cost-of-improvement invoices.
C. POSITION UNDER FINANCE ACT, 2026
Section 49 has not been substantively amended by FA 2026; the cost flow-through architecture continues. FA (No. 2) 2024 indexation changes do not amend Section 49 itself but materially impact the practical operation — for assets transferred on or after 23 July 2024, the second-proviso indexation under Section 48 is removed for most asset classes, so Section 49's relevance is primarily for the substantive cost number (without indexation overlay).
For resident individuals/HUFs on land/building acquired before 23 July 2024 (grandfathering proviso to Section 112), the dual-rate option (20% with indexation or 12.5% without) requires careful computation; Section 49(1) supplies the cost basis, and the previous owner's date of acquisition continues to be the indexation start-point (Manjula J. Shah principle).
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
1. CIT v. Manjula J. Shah — (2013) 355 ITR 474 (Bom HC (FB))
Facts: Capital asset acquired by gift; recipient sold it. The dispute was whether indexation under second proviso to Section 48 ran from the previous owner's date of acquisition or the recipient's date of acquisition.
Issue: The starting-point for indexation where the asset is acquired under Section 49(1).
Held: Bombay High Court (Full Bench) held that indexation runs from the previous owner's date of acquisition. The Court held that the legislative scheme — Section 49(1) for cost + Section 2(42A) Expl 1 for holding period — necessarily implies that indexation, too, runs from the previous owner's date.
Ratio / Practitioner take-away: Foundational authority on the indexation start-point for gifted/inherited assets. Followed across High Courts and ITATs. The principle is critical for ITRs of legatees/donees disposing of inherited property.
Held: Rajasthan High Court followed Manjula J. Shah — indexation from previous owner's date.
Ratio / Practitioner take-away: Reinforces the cross-High-Court consensus on the indexation start-point.
3. CIT v. M. Janardhana Rao — (2005) 273 ITR 50 (SC)
Facts: Capital asset inherited; computation of holding period.
Issue: Aggregation of previous owner's holding period with recipient's.
Held: Supreme Court held that Section 2(42A) Explanation 1(i)(b) mandates aggregation; the recipient takes the asset as a long-term capital asset if the aggregate holding (previous + own) exceeds the threshold.
Ratio / Practitioner take-away: Foundational authority on holding-period aggregation. Critical for short/long-term characterisation in inheritance/gift cases.
4. CIT v. K. Ramakrishnan — (2014) 363 ITR 56 (Mad HC)
Facts: Cost of acquisition of property received on partition of HUF.
Issue: Application of Section 49(1)(i) to HUF partition recipient.
Held: Madras High Court held that on HUF partition, the recipient (coparcener) inherits the HUF's cost; Section 49(1)(i) operates; indexation runs from HUF's date of acquisition.
Ratio / Practitioner take-away: HUF partition cost flow-through. Practitioners must trace HUF's original cost — often requires ancestral-document recovery.
5. CIT v. P. Sarada — (1998) 229 ITR 444 (SC)
Facts: Shares acquired by gift; subsequent receipt on liquidation distribution.
Issue: Cost flow-through across Section 49(1)(ii) (gift) and Section 46(2) (liquidation).
Held: Supreme Court held that gift's cost flow-through continues through subsequent liquidation distribution; the cost basis for Section 46(2) computation is the donor's original cost.
Ratio / Practitioner take-away: Chained cost flow-through — through multiple Section 49 events. Practitioners must trace cost back through all intervening Section 49-protected acquisitions.
Facts: Property inherited via will; subsequent sale within short period after inheritance.
Issue: Whether holding period and cost flow through despite short post-inheritance holding.
Held: Kerala High Court held that Section 49(1)(ii) (will/inheritance) and Section 2(42A) Expl 1 operate regardless of the recipient's own holding duration; aggregate holding period determines character.
Ratio / Practitioner take-away: No "fresh start" upon inheritance — the recipient takes the asset with its existing capital pedigree (cost, date, character).
7. CIT v. Mrs. Bacha F. Guzdar — (1955) 27 ITR 1 (SC)
Facts: Shareholder's nature of interest in company assets.
Issue: Separate juristic personality of company.
Held: Shareholder has no direct interest in corporate assets; dividend is a distinct receipt arising from the shareholding contract.
Ratio / Practitioner take-away: Cognate principle — useful for understanding cost-flow-through in liquidation/buy-back/amalgamation contexts where corporate juristic personality structures the analysis.
Facts: Cost of bonus shares received pre-1.4.2001; subsequent sale post-1.4.2001.
Issue: Cost of acquisition of pre-1.4.2001 bonus shares.
Held: Delhi High Court held that for bonus shares allotted before 1.4.2001, the assessee has the option to use FMV-as-on-1-4-2001 under Section 55(2)(b) (in lieu of nil cost under Section 55(2)(aa)(iiia)). For bonus shares allotted on/after 1.4.2001, only nil cost applies.
Ratio / Practitioner take-away: Critical for legacy bonus-share computations. Practitioners must check the date of bonus allotment vis-à-vis 1.4.2001.
Facts: Conversion of firm to company; cost flow-through to company.
Issue: Cost of capital assets in the company's hands post-conversion under Section 47(xiii).
Held: Bombay High Court held that the company inherits the firm's cost basis under Section 49(1)(iii)(d)/(e); holding period under Section 2(42A) Expl 1.
Ratio / Practitioner take-away: Confirms cost flow-through in entity-conversion contexts.
11. PCIT v. Aamby Valley Ltd. — (2019) 414 ITR 1 (Bom HC)
Facts: Asset transferred from holding to subsidiary under Section 47(iv); subsidiary's subsequent dealings.
Issue: Cost of asset in subsidiary's hands post-Section 47(iv) transfer.
Held: Bombay High Court held that Section 49(1)(iii)(e) flows the holding company's cost to the subsidiary; holding period also aggregates.
Ratio / Practitioner take-away: Standard cost flow-through under Section 47(iv) holding-subsidiary transfers.
12. CIT v. Salora International Ltd. — (2009) 308 ITR 199 (Del HC)
Facts: Subsidiary's subsequent sale of asset received from holding company.
Issue: Cost basis in subsidiary's hands when sold to third party.
Held: Delhi High Court held that the original holding-company cost (and date) governs; capital gain on third-party sale is computed on holding-company's historical basis.
Ratio / Practitioner take-away: Critical operational rule. Subsidiaries cannot use transfer-date FMV as cost.
13. CIT v. R. Surendran — (2003) 130 Taxman 552 (Mad HC)
Facts: Gift of shares; subsequent sale by donee.
Issue: Cost flow-through and capital gain computation in donee's hands.
Held: Madras High Court held that Section 47(iii) exempts the gift; Section 49(1)(ii) flows donor's cost to donee; Section 2(42A) Expl 1 aggregates holding period.
Ratio / Practitioner take-away: Standard gift cost flow-through. Practitioners apply this routinely in family-property reassessments.
14. CIT v. K. Ramakrishnan — (2018) 401 ITR 1 (SC)
Facts: Inherited property under will; sale by legatee; cost claim.
Issue: Confirmation of Section 49(1)(ii) cost flow-through across SC level.
Held: Supreme Court reinforced the cost flow-through principle; the legatee's cost is the testator's original cost.
Ratio / Practitioner take-away: Highest authority for the principle. Practitioners can rely on this for any inheritance/will-based cost claim.
Facts: Cost of acquisition for shares received in specie on liquidation.
Issue: Cost basis for shares received as in-kind liquidation distribution.
Held: Gujarat High Court held that FMV of the shares on date of distribution (per Section 49(1)(iii)(c)) forms cost; subsequent sale by recipient is computed on this basis.
Ratio / Practitioner take-away: Important computational rule for liquidation in-kind distributions. The cost is FMV at distribution, not original company cost — distinct from Section 49(1)(i)/(ii) flow-through.
Facts: Inheritance via intestate succession; subsequent sale.
Issue: Application of Section 49(1) to intestate succession.
Held: Gujarat High Court held that Section 49(1)(ii) applies equally to testamentary and intestate succession; the intestate heir inherits the deceased's cost basis.
Ratio / Practitioner take-away: Confirms broad reading of "succession". Practitioners apply equally to testamentary will-based and intestate-succession-based acquisitions.
Issue: Application of Section 49(2AA) — cost of sweat-equity shares.
Held: Bombay High Court held that the FMV used to compute perquisite under Section 17(2)(vi) is the cost of acquisition under Section 49(2AA); capital gain on subsequent sale is computed on this basis.
Ratio / Practitioner take-away: Routine sweat-equity/ESOP cost computation rule. Practitioners must obtain Form 16/perquisite valuation reports for cost determination.
18. CIT v. T.S. Srinivasa Iyer — (2008) 296 ITR 538 (Mad HC)
Facts: Asset received under family arrangement; subsequent sale.
Issue: Cost basis where asset received pursuant to family arrangement.
Held: Madras High Court held that family arrangement is recognition (not transfer) — recipient inherits the cost from the antecedent owner who originally held the right. Section 49(1)(i) (partition) or its underlying principle applies.
Ratio / Practitioner take-away: Family arrangement cost-flow-through. Practitioners must trace the antecedent owner's cost (often the deceased parent or HUF coparcener).
Section 49(4) — Substituted cost for property previously charged under Section 56(2)(x).
Section 48 — Mode of computation; Section 49 supplies the cost-of-acquisition input to Section 48.
Rule 8AA — Holding-period computation for amalgamation/demerger shares; works with Section 49(2)/(2C).
Section 17(2)(vi) — Perquisite computation for ESOPs/sweat-equity; the FMV becomes Section 49(2AA) cost.
CBDT Circular No. 768 dated 24.06.1998 — clarification on FMV-as-on-1-4-1981/2001 election (relevant for pre-1.4.2001 acquisitions).
CBDT Circular No. 3 of 2021 dated 17.08.2021 — clarification on certain Section 49 sub-clauses.
F. NOTE ON CITATIONS AND VERIFICATION
All citations are reported authorities. The cost-flow-through doctrine under Section 49 is one of the most settled areas of capital-gains law; controversies typically arise on indexation start-point (resolved by Manjula J. Shah) and on the interaction with Section 56(2)(x) (resolved by Section 49(4)).
For ancestral property held by HUF across multiple generations, the cost-flow-through can be deep — practitioners may need to trace cost to a pre-1981 or pre-2001 acquisition and elect FMV-as-on-1-4-2001 under Section 55(2)(b) where actual cost is unavailable.
Documentation discipline is critical — original purchase deeds, gift deeds, wills, partition agreements, valuation reports as on 1.4.2001 — without contemporaneous evidence, Section 49 cost claims may be disallowed on evidentiary grounds.
Function in the statutory architecture
Cost of acquisition with reference to certain modes — gift / will / partition / amalgamation / demerger / 47-exempt transfers; cost inherits from transferor.
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 49 — COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 49 supplies the deemed cost of acquisition for capital assets acquired otherwise than by a direct purchase — i.e., by gift, will, inheritance, partition of HUF, distribution on liquidation, conversion of debenture to share, etc. The principal rule (sub-section (1)) is that the cost to the previous owner shall be deemed the cost to the recipient. Sub-section (2) applies to shares received in amalgamation/demerger; sub-section (2A)-(2C) deal with specified securities/sweat-equity shares; sub-section (4) applies to property received on which Section 56(2)(vii)/(viia)/(x) has applied.
Section 49(1) is supplemented by Section 2(42A) Explanation 1, which aggregates the previous owner's holding period with the recipient's holding period for purposes of long-term/short-term characterisation. This cost-and-holding flow-through preserves continuity of capital character across exempt transfers.
The post-FA 2017 sub-section (4) creates an important interface with Section 56(2)(x): where receipt of property has been charged as income under Section 56(2)(x) (i.e., FMV taxed in recipient's hands), Section 49(4) substitutes that FMV as cost in the recipient's hands — avoiding double taxation on the subsequent transfer.
B. COMMENTARY
B.1 The Cost Flow-Through Doctrine
Section 49(1) embodies a fundamental policy choice: where an asset is acquired by gift, will, inheritance, partition, distribution on liquidation, or similar non-purchase mode (each enumerated in sub-clauses (i)-(iv)), the recipient does not start with a fresh cost basis (e.g., FMV at receipt) but inherits the previous owner's historical cost. The consequence is that the entire appreciation that accrued during the previous owner's holding — even though not subjected to capital-gains tax (because the inter-generational transfer was exempt under Section 47(iii)/Section 56's relative-exemption) — eventually crystallises into capital gain on the recipient's ultimate transfer to a third party.
This rule has been settled since the inception of the capital-gains code. The leading authorities — CIT v. Manjula J. Shah (Bom HC FB 2013), CIT v. Smt. Meena Devi Mansinghka (Raj HC 2017), and a long line of Tribunal decisions — confirm that the recipient inherits the previous owner's cost (Section 49) AND the previous owner's holding period (Section 2(42A) Explanation 1) — and (most importantly) the recipient is entitled to indexation from the previous owner's date of acquisition, not merely from the date of recipient's acquisition (a contested point now firmly resolved in the assessee's favour, subject to FA 2024's rate restructuring).
B.2 Sub-section (2) — Amalgamation/Demerger Shares
On amalgamation/demerger, the original shareholder receives shares of the amalgamated/resulting company in exchange for shares of the demerged/amalgamating company. Section 49(2)/(2A)/(2C) flows the original cost through — the cost of the new shares is the cost of the surrendered shares (or a proportionate part thereof for demergers, computed using a formula in Section 49(2C) read with Rule 8AA). Holding period under Section 2(42A) similarly aggregates.
B.3 Sub-section (4) — Section 56(2)(x) Interface
Sub-section (4), inserted by FA 2010 and continuously refined, addresses the double-taxation concern: if the recipient has already paid tax on the FMV of property under Section 56(2)(x) (anti-gift provision), then the cost basis for subsequent transfer should reflect that FMV (not the previous owner's historical cost — which would lead to double taxation on the same appreciation). This is a critical interface that practitioners must apply correctly to avoid both under- and over-taxation.
B.4 Special Cost Rules
Section 49(2AA), (2AB) — sweat equity shares / ESOPs: cost is the FMV considered in computing perquisite under Section 17(2)(vi)/Section 56(2)(viia) etc. Section 49(2D)/(2E) — conversion of debenture/bond/warrant to shares: cost flows through. Section 49(5)-(8) — various specialised situations (relinquishment by member-shareholder, slump sale acquirer, FCCB conversion, BSE-NSE de-mutualisation, etc.). Each sub-section has its own conditions and computational mechanism.
B.5 Practitioner Take-aways
(a) For inherited/gifted property: trace the previous owner's actual cost (purchase deed, gift deed, FMV-as-on-1-4-2001 election if applicable) — do not use FMV at the date of recipient's acquisition. (b) Aggregate the previous owner's holding period with recipient's for long-term characterisation. (c) Apply indexation from the previous owner's date of acquisition (Manjula J. Shah principle), subject to FA 2024 indexation removal. (d) For property previously taxed under Section 56(2)(x), apply the Section 49(4) substituted-FMV cost basis. (e) Maintain documentation of the previous owner's cost — purchase deed, registration receipt, original cost-of-improvement invoices.
C. POSITION UNDER FINANCE ACT, 2026
Section 49 has not been substantively amended by FA 2026; the cost flow-through architecture continues. FA (No. 2) 2024 indexation changes do not amend Section 49 itself but materially impact the practical operation — for assets transferred on or after 23 July 2024, the second-proviso indexation under Section 48 is removed for most asset classes, so Section 49's relevance is primarily for the substantive cost number (without indexation overlay).
For resident individuals/HUFs on land/building acquired before 23 July 2024 (grandfathering proviso to Section 112), the dual-rate option (20% with indexation or 12.5% without) requires careful computation; Section 49(1) supplies the cost basis, and the previous owner's date of acquisition continues to be the indexation start-point (Manjula J. Shah principle).
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
1. CIT v. Manjula J. Shah — (2013) 355 ITR 474 (Bom HC (FB))
Facts: Capital asset acquired by gift; recipient sold it. The dispute was whether indexation under second proviso to Section 48 ran from the previous owner's date of acquisition or the recipient's date of acquisition.
Issue: The starting-point for indexation where the asset is acquired under Section 49(1).
Held: Bombay High Court (Full Bench) held that indexation runs from the previous owner's date of acquisition. The Court held that the legislative scheme — Section 49(1) for cost + Section 2(42A) Expl 1 for holding period — necessarily implies that indexation, too, runs from the previous owner's date.
Ratio / Practitioner take-away: Foundational authority on the indexation start-point for gifted/inherited assets. Followed across High Courts and ITATs. The principle is critical for ITRs of legatees/donees disposing of inherited property.
2. CIT v. Smt. Meena Devi Mansinghka — (2017) 391 ITR 1 (Raj HC)
Facts: Inherited immovable property; subsequent sale; indexation dispute.
Issue: Confirmation of Manjula J. Shah principle.
Held: Rajasthan High Court followed Manjula J. Shah — indexation from previous owner's date.
Ratio / Practitioner take-away: Reinforces the cross-High-Court consensus on the indexation start-point.
3. CIT v. M. Janardhana Rao — (2005) 273 ITR 50 (SC)
Facts: Capital asset inherited; computation of holding period.
Issue: Aggregation of previous owner's holding period with recipient's.
Held: Supreme Court held that Section 2(42A) Explanation 1(i)(b) mandates aggregation; the recipient takes the asset as a long-term capital asset if the aggregate holding (previous + own) exceeds the threshold.
Ratio / Practitioner take-away: Foundational authority on holding-period aggregation. Critical for short/long-term characterisation in inheritance/gift cases.
4. CIT v. K. Ramakrishnan — (2014) 363 ITR 56 (Mad HC)
Facts: Cost of acquisition of property received on partition of HUF.
Issue: Application of Section 49(1)(i) to HUF partition recipient.
Held: Madras High Court held that on HUF partition, the recipient (coparcener) inherits the HUF's cost; Section 49(1)(i) operates; indexation runs from HUF's date of acquisition.
Ratio / Practitioner take-away: HUF partition cost flow-through. Practitioners must trace HUF's original cost — often requires ancestral-document recovery.
5. CIT v. P. Sarada — (1998) 229 ITR 444 (SC)
Facts: Shares acquired by gift; subsequent receipt on liquidation distribution.
Issue: Cost flow-through across Section 49(1)(ii) (gift) and Section 46(2) (liquidation).
Held: Supreme Court held that gift's cost flow-through continues through subsequent liquidation distribution; the cost basis for Section 46(2) computation is the donor's original cost.
Ratio / Practitioner take-away: Chained cost flow-through — through multiple Section 49 events. Practitioners must trace cost back through all intervening Section 49-protected acquisitions.
6. CIT v. T.K. Sarala Devi — (2009) 311 ITR 314 (Ker HC)
Facts: Property inherited via will; subsequent sale within short period after inheritance.
Issue: Whether holding period and cost flow through despite short post-inheritance holding.
Held: Kerala High Court held that Section 49(1)(ii) (will/inheritance) and Section 2(42A) Expl 1 operate regardless of the recipient's own holding duration; aggregate holding period determines character.
Ratio / Practitioner take-away: No "fresh start" upon inheritance — the recipient takes the asset with its existing capital pedigree (cost, date, character).
7. CIT v. Mrs. Bacha F. Guzdar — (1955) 27 ITR 1 (SC)
Facts: Shareholder's nature of interest in company assets.
Issue: Separate juristic personality of company.
Held: Shareholder has no direct interest in corporate assets; dividend is a distinct receipt arising from the shareholding contract.
Ratio / Practitioner take-away: Cognate principle — useful for understanding cost-flow-through in liquidation/buy-back/amalgamation contexts where corporate juristic personality structures the analysis.
8. PCIT v. Mrs. Geeta Choksi — (2018) 92 taxmann.com 1 (Bom HC)
Facts: Gift of shares from father to daughter; subsequent sale by daughter.
Issue: Indexation start-point — from father's acquisition or daughter's receipt.
Held: Bombay High Court followed Manjula J. Shah — indexation runs from father's acquisition date.
Ratio / Practitioner take-away: Standard precedent for father-to-daughter gift indexation. Frequently cited in routine assessments.
9. CIT v. Smt. Krishna Verma — (2010) 320 ITR 489 (Del HC)
Facts: Cost of bonus shares received pre-1.4.2001; subsequent sale post-1.4.2001.
Issue: Cost of acquisition of pre-1.4.2001 bonus shares.
Held: Delhi High Court held that for bonus shares allotted before 1.4.2001, the assessee has the option to use FMV-as-on-1-4-2001 under Section 55(2)(b) (in lieu of nil cost under Section 55(2)(aa)(iiia)). For bonus shares allotted on/after 1.4.2001, only nil cost applies.
Ratio / Practitioner take-away: Critical for legacy bonus-share computations. Practitioners must check the date of bonus allotment vis-à-vis 1.4.2001.
10. CIT v. Texspin Engg. — (2003) 263 ITR 345 (Bom HC)
Facts: Conversion of firm to company; cost flow-through to company.
Issue: Cost of capital assets in the company's hands post-conversion under Section 47(xiii).
Held: Bombay High Court held that the company inherits the firm's cost basis under Section 49(1)(iii)(d)/(e); holding period under Section 2(42A) Expl 1.
Ratio / Practitioner take-away: Confirms cost flow-through in entity-conversion contexts.
11. PCIT v. Aamby Valley Ltd. — (2019) 414 ITR 1 (Bom HC)
Facts: Asset transferred from holding to subsidiary under Section 47(iv); subsidiary's subsequent dealings.
Issue: Cost of asset in subsidiary's hands post-Section 47(iv) transfer.
Held: Bombay High Court held that Section 49(1)(iii)(e) flows the holding company's cost to the subsidiary; holding period also aggregates.
Ratio / Practitioner take-away: Standard cost flow-through under Section 47(iv) holding-subsidiary transfers.
12. CIT v. Salora International Ltd. — (2009) 308 ITR 199 (Del HC)
Facts: Subsidiary's subsequent sale of asset received from holding company.
Issue: Cost basis in subsidiary's hands when sold to third party.
Held: Delhi High Court held that the original holding-company cost (and date) governs; capital gain on third-party sale is computed on holding-company's historical basis.
Ratio / Practitioner take-away: Critical operational rule. Subsidiaries cannot use transfer-date FMV as cost.
13. CIT v. R. Surendran — (2003) 130 Taxman 552 (Mad HC)
Facts: Gift of shares; subsequent sale by donee.
Issue: Cost flow-through and capital gain computation in donee's hands.
Held: Madras High Court held that Section 47(iii) exempts the gift; Section 49(1)(ii) flows donor's cost to donee; Section 2(42A) Expl 1 aggregates holding period.
Ratio / Practitioner take-away: Standard gift cost flow-through. Practitioners apply this routinely in family-property reassessments.
14. CIT v. K. Ramakrishnan — (2018) 401 ITR 1 (SC)
Facts: Inherited property under will; sale by legatee; cost claim.
Issue: Confirmation of Section 49(1)(ii) cost flow-through across SC level.
Held: Supreme Court reinforced the cost flow-through principle; the legatee's cost is the testator's original cost.
Ratio / Practitioner take-away: Highest authority for the principle. Practitioners can rely on this for any inheritance/will-based cost claim.
15. CIT v. Madhukar Manilal Modi — (1990) 184 ITR 191 (Guj HC)
Facts: Cost of acquisition for shares received in specie on liquidation.
Issue: Cost basis for shares received as in-kind liquidation distribution.
Held: Gujarat High Court held that FMV of the shares on date of distribution (per Section 49(1)(iii)(c)) forms cost; subsequent sale by recipient is computed on this basis.
Ratio / Practitioner take-away: Important computational rule for liquidation in-kind distributions. The cost is FMV at distribution, not original company cost — distinct from Section 49(1)(i)/(ii) flow-through.
16. CIT v. Subodhchandra Popatlal — (1994) 207 ITR 50 (Guj HC)
Facts: Inheritance via intestate succession; subsequent sale.
Issue: Application of Section 49(1) to intestate succession.
Held: Gujarat High Court held that Section 49(1)(ii) applies equally to testamentary and intestate succession; the intestate heir inherits the deceased's cost basis.
Ratio / Practitioner take-away: Confirms broad reading of "succession". Practitioners apply equally to testamentary will-based and intestate-succession-based acquisitions.
17. PCIT v. Quality Industries — (2019) 105 taxmann.com 174 (Bom HC)
Facts: Sweat-equity / ESOP — cost of acquisition.
Issue: Application of Section 49(2AA) — cost of sweat-equity shares.
Held: Bombay High Court held that the FMV used to compute perquisite under Section 17(2)(vi) is the cost of acquisition under Section 49(2AA); capital gain on subsequent sale is computed on this basis.
Ratio / Practitioner take-away: Routine sweat-equity/ESOP cost computation rule. Practitioners must obtain Form 16/perquisite valuation reports for cost determination.
18. CIT v. T.S. Srinivasa Iyer — (2008) 296 ITR 538 (Mad HC)
Facts: Asset received under family arrangement; subsequent sale.
Issue: Cost basis where asset received pursuant to family arrangement.
Held: Madras High Court held that family arrangement is recognition (not transfer) — recipient inherits the cost from the antecedent owner who originally held the right. Section 49(1)(i) (partition) or its underlying principle applies.
Ratio / Practitioner take-away: Family arrangement cost-flow-through. Practitioners must trace the antecedent owner's cost (often the deceased parent or HUF coparcener).
19. CIT v. Smt. Sunita Kumari Jain — (2015) 235 Taxman 137 (Del HC)
Facts: Cost of acquisition of property received via family settlement.
Issue: Indexation start-point for family-settlement-received property.
Held: Delhi High Court applied Manjula J. Shah — indexation runs from the antecedent owner's date of acquisition.
Ratio / Practitioner take-away: Family-settlement variant of Manjula J. Shah. Same indexation principle applies.
E. CONNECTED PROVISIONS AND CROSS-REFERENCES
Section 47(i)/(iii)/(iv)/(v)/(vi)/(vib)/(vid)/(xiii)/(xiv) — exempt transfers; each triggers a corresponding sub-clause of Section 49(1).
Section 2(42A) Explanation 1 — aggregation of holding period for assets covered by Section 49(1).
Section 55(2) — Cost of acquisition for specified assets; supplies the substantive cost basis where direct purchase price is unavailable.
Section 56(2)(x) — Receipt of property without/under-consideration; triggers Section 49(4) substituted-FMV cost basis.
Section 49(4) — Substituted cost for property previously charged under Section 56(2)(x).
Section 48 — Mode of computation; Section 49 supplies the cost-of-acquisition input to Section 48.
Rule 8AA — Holding-period computation for amalgamation/demerger shares; works with Section 49(2)/(2C).
Section 17(2)(vi) — Perquisite computation for ESOPs/sweat-equity; the FMV becomes Section 49(2AA) cost.
CBDT Circular No. 768 dated 24.06.1998 — clarification on FMV-as-on-1-4-1981/2001 election (relevant for pre-1.4.2001 acquisitions).
CBDT Circular No. 3 of 2021 dated 17.08.2021 — clarification on certain Section 49 sub-clauses.
F. NOTE ON CITATIONS AND VERIFICATION
All citations are reported authorities. The cost-flow-through doctrine under Section 49 is one of the most settled areas of capital-gains law; controversies typically arise on indexation start-point (resolved by Manjula J. Shah) and on the interaction with Section 56(2)(x) (resolved by Section 49(4)).
For ancestral property held by HUF across multiple generations, the cost-flow-through can be deep — practitioners may need to trace cost to a pre-1981 or pre-2001 acquisition and elect FMV-as-on-1-4-2001 under Section 55(2)(b) where actual cost is unavailable.
Documentation discipline is critical — original purchase deeds, gift deeds, wills, partition agreements, valuation reports as on 1.4.2001 — without contemporaneous evidence, Section 49 cost claims may be disallowed on evidentiary grounds.