Section 55 — Section 55 — Meaning of adjusted cost of improvement and cost of acquisition | ITA 1961

Function in the statutory architecture

Statutory text — Income-tax Act, 1961

CHAPTER IV

COMPUTATION OF TOTAL INCOME / E. CAPITAL GAINS

Meaning of "adjusted", "cost of improvement" and "cost of acquisition".

55. (1) For the purposes of sections 48 and 49,—

(a) [***] (b) "cost of any improvement",—

(1) in relation to a capital asset being goodwill 61-62[or any other intangible asset] of a

business or a right to manufacture, produce or process any article or thing or right to carry

on any business or profession 61-62[or any other right] shall be taken to be nil ; and

(2) in relation to any other capital asset,—

(i) where the capital asset became the property of the previous owner or the assessee

before the 1st day of April, 2001, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making

any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner,

but does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly.

(2) For the purposes of section 48 and 49, "cost of acquisition",—

(a) in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand

name associated with a business or profession, 63[or any other intangible asset] or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours, 63[or any other right]—

(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner,

means the amount of the purchase price; and

(ii) in the case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49 and where

such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and

(iii) in any other case, shall be taken to be nil:

Provided that where the capital asset, being goodwill of a business or profession, in respect of which a deduction on account of depreciation under sub-section (1) of section 32 has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st day of April, 2021, the provisions of sub-clauses

(i) and (ii) shall apply with the modification that the total amount of depreciation obtained by the assessee under sub-section (1) of section 32 before the assessment year commencing on the 1st day of April, 2021 shall be reduced from the amount of purchase price;

(aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the

meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee—

(A) becomes entitled to subscribe to any additional financial asset ; or

(B) is allotted any additional financial asset without any payment,

then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),—

(i) in relation to the original financial asset, on the basis of which the assessee becomes

entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset ;

(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset,

when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee ;

(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the

said entitlement, means the amount actually paid by him for acquiring such asset ;

(iiia) in relation to the financial asset allotted to the assessee without any payment and on the

basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ; and

(iv) in relation to any financial asset purchased by any person in whose favour the right to

subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset ;

(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised

stock exchange in India under a scheme for demutualisation or corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange:

Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;

(ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-term capital

asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018, shall be higher of—

(i) the cost of acquisition of such asset; and

(ii) lower of—

(A) the fair market value of such asset; and

(B) the full value of consideration received or accruing as a result of the transfer of

the capital asset.

Explanation.—For the purposes of this clause,—

(a) "fair market value" means,—

(i) in a case where the capital asset is listed on any recognised stock exchange as on

the 31st day of January, 2018, the highest price of the capital asset quoted on such exchange on the said date:

Provided that where there is no trading in such asset on such exchange on the 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value;

(ii) in a case where the capital asset is a unit which is not listed on a recognised stock

exchange as on the 31st day of January, 2018, the net asset value of such unit as on the said date;

(iii) in a case where the capital asset is an equity share in a company which is—

(A) not listed on a recognised stock exchange as on the 31st day of January,

2018 but listed on such exchange on the date of transfer;

64[(AA) not listed on a recognised stock exchange as on the 31st day of January,

2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, as the case may be, but listed on such exchange subsequent to the date of transfer (where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public

offer);]

(B) listed on a recognised stock exchange on the date of transfer and which

became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47,

an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later;

(b) "Cost Inflation Index" shall have the meaning assigned to it in clause (v) of the

Explanation to section 48;

Explanation 1 to clause (5) of section 43;

(b) in relation to any other capital asset,—

(i) where the capital asset became the property of the assessee before the 1st day of

April, 2001, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee ;

(ii) where the capital asset became the property of the assessee by any of the modes

specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 2001, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee :

Provided that in case of a capital asset referred to in sub-clauses (i) and (ii), being land or building or both, the fair market value of such asset on the 1st day of April, 2001 for the purposes of the said sub-clauses shall not exceed the stamp duty value, wherever available, of such asset as on the 1st day of April, 2001.

Explanation.—For the purposes of this proviso, "stamp duty value" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;

(iii) where the capital asset became the property of the assessee on the distribution of

the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;

(iv) [***]

(v) where the capital asset, being a share or a stock of a company, became the

property of the assessee on—

(a) the consolidation and division of all or any of the share capital of the

company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(d) the sub-division of any of the shares of the company into shares of

smaller amount, or

(e) the conversion of one kind of shares of the company into another kind,

means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.

(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.

61-62. Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024.

— Footnotes (gazette text) —

63. Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024.

64. Ins. by Act No. 15 of 2024, w.r.e.f. 1-4-2018.

— Source —

Verbatim text reproduced from income-tax-act-1961-as-amended-by-finance-act-2025.pdf (full layout extract, 0-indexed lines 14903-15098). Reproduced under Standard B (gazette-text discipline) — gazette content, French-style colon spacing, italics-for-Provisos/Explanations convention, and *N. footnote-numbering preserved.

PDF-extraction artifacts repaired: per-page header (“INCOME-TAX ACT, 1961 - 2024”), per-page footer, 2+ consecutive blank lines at page-break boundaries collapsed to a single blank, orphaned footnote-marker joining.

Finance Act 2026 overlay: not applicable. FA 2026 amends 14 sections of the 1961 Act (92CA, 139, 144C, 153B, 220, 222, 245, 245MA, 254, 275A, 275B, 276, 278A, 280) — this section is not among them.

Function in the statutory architecture

Cost of acquisition / cost of improvement — definitional rules: FMV on 1-4-2001 option (FA 2017 reform); self-generated goodwill cost = NIL (anti-B.C. Srinivasa Setty); FA 2021 self-generated goodwill cost = NIL (codified).

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 55 — MEANING OF "ADJUSTED", "COST OF IMPROVEMENT" AND "COST OF ACQUISITION"

Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)

A. SECTION SNAPSHOT

Section 55 is the definitions section for "adjusted", "cost of improvement" and "cost of acquisition" — the three core inputs to the Section 48 capital-gains computation. Section 55(1)(b) defines "cost of improvement" — capital expenditure incurred in making additions/alterations to the capital asset (for assets other than specified intangibles, where statutory rules apply). Section 55(2) defines "cost of acquisition" — the substantive cost basis with multiple specialised sub-clauses for different asset categories.

Section 55(2)(a) — for goodwill of business, trademarks, brand names, tenancy rights, route permits, loom hours, the right to manufacture, produce or process article/thing, and (post-FA 2021) any other self-generated intangible: deemed cost of acquisition is NIL where self-generated; purchase price if purchased.

Section 55(2)(b) — for OTHER assets, the assessee has the option to substitute (i) cost of acquisition OR (ii) FMV as on 1 April 2001 (where the asset was acquired before that date). Sub-clause (i) — cost where asset acquired by purchase; sub-clause (ii) — cost where acquired by other modes (gift, inheritance) is the cost to previous owner under Section 49(1); sub-clause (iii) — substituted FMV-as-on-1-4-2001 option.

Section 55(2)(aa) — special cost rules for shares: bonus shares = nil (clause (iiia)); rights shares = subscription price; ESOPs/sweat-equity = FMV used in Section 17(2)(vi) perquisite computation (via Section 49(2AA)).

Section 55(3) — where cost of previous owner under Section 49(1) cannot be ascertained, the FMV on date of acquisition by previous owner is substituted.

B. COMMENTARY

B.1 The Three Definitions — Foundational Inputs

Sections 48 + 49 + 55 together form the computational triad. Section 48 supplies the formula (FVC − Cost − Improvement − Transfer expenditure); Section 49 supplies the cost-flow-through rules for non-purchase acquisitions; Section 55 supplies the substantive definitions and the FMV-substitution option. Any capital-gains computation requires careful navigation of all three.

B.2 The FMV-as-on-1-4-2001 Election

Section 55(2)(b)(ii) (substituted by FA 2017, effective AY 2018-19; previously 1.4.1981) permits the assessee to substitute the FMV as on 1 April 2001 for the actual historical cost of assets acquired before that date. This election is OPTIONAL — the assessee may continue with actual cost or substitute FMV, whichever is more beneficial. The election is asset-specific (not assessee-level), so the assessee may make different elections for different assets.

For shares acquired before 1.4.2001 (closely-held shares; not listed shares post-FA 2018 Section 112A grandfathering, which is a separate regime), the FMV-as-on-1-4-2001 election is available. For inherited/gifted assets, the previous owner's acquisition date determines whether the asset is "acquired before 1.4.2001" for FMV-substitution purposes.

B.3 Self-Generated Intangibles — Section 55(2)(a)

The Section 55(2)(a) deeming of nil cost for self-generated intangibles was the legislative response to the B.C. Srinivasa Setty / Bharat Forge line of decisions that defeated capital-gains charge on self-generated goodwill, trademarks, etc. Successive amendments have broadened the coverage — FA 1995 (goodwill of business), FA 2001 (trademarks, brand names), FA 2002 (right to manufacture/produce/process), FA 2003 (route permits, loom hours), FA 2021 (any self-generated intangible of business/profession).

B.4 Bonus Shares and Rights Shares — Section 55(2)(aa)

Bonus shares allotted on or after 1.4.2001 — cost is nil (Section 55(2)(aa)(iiia)). For bonus shares allotted before 1.4.2001 — assessee has option of FMV-as-on-1-4-2001 election (Dalmia Investment averaging rule overruled by 55(2)(aa)(iiia) for post-2001 bonuses). Rights shares — cost is the subscription price; rights renunciation receipt — cost is nil for the renounced rights and Section 49(2A) governs cost for the subscriber.

B.5 ESOPs and Sweat Equity — Section 49(2AA) + Section 17(2)(vi)

For shares allotted under ESOP/sweat-equity scheme, the FMV used to compute perquisite under Section 17(2)(vi) becomes cost under Section 49(2AA). Subsequent transfer is computed on this cost. Practitioners must obtain Form 16/perquisite computation report for cost determination.

B.6 Practitioner Take-aways

(a) For each capital asset, identify the applicable Section 55(2) sub-clause to determine cost basis. (b) For pre-1.4.2001 acquisitions, evaluate the FMV-as-on-1-4-2001 election asset-by-asset. (c) For self-generated intangibles, apply Section 55(2)(a) nil-cost (or purchase price if purchased). (d) For bonus/rights/ESOP shares, apply the specific sub-clauses. (e) Maintain documentation — original purchase deeds, valuation reports as on 1.4.2001, perquisite computation for ESOPs.

C. POSITION UNDER FINANCE ACT, 2026

Section 55 has not been substantively amended by FA 2026. FA 2017 (FMV election date shifted to 1.4.2001) and FA 2021 (Section 55(2)(a) extension to all self-generated intangibles of business/profession) remain in force.

Post-FA 2024 rate restructuring (12.5% LTCG without indexation for most assets; grandfathering for residents on pre-23.7.2024 land/building) operates on the cost basis determined under Section 55. The grandfathering option preserves the 20%-with-indexation route, where indexation runs from acquisition date (or 1.4.2001 for FMV-election cases).

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. B.C. Srinivasa Setty — (1981) 128 ITR 294 (SC)

Facts: Self-generated goodwill — cost indeterminate.

Issue: No-computation-no-charge.

Held: Charging fails.

Ratio / Practitioner take-away: Foundational; triggered Section 55(2)(a) statutory response.

2. CIT v. Bharat Forge Co. Ltd. — (1994) 205 ITR 339 (Bom HC)

Facts: Self-generated trade mark.

Issue: Extension of Srinivasa Setty.

Held: Charge fails.

Ratio / Practitioner take-away: Triggered FA 2001 amendment extending Section 55(2)(a) to trademarks/brand names.

3. CIT v. D.P. Sandu Bros. Chembur — (2005) 273 ITR 1 (SC)

Facts: Tenancy rights surrender.

Issue: Cost indeterminate.

Held: Charge fails (pre-Section 55(2)(a)).

Ratio / Practitioner take-away: Triggered tenancy-rights inclusion in Section 55(2)(a).

4. CIT v. Manjula J. Shah — (2013) 355 ITR 474 (Bom HC (FB))

Facts: Indexation start-point for inherited property.

Issue: Previous owner's date.

Held: Manjula J. Shah.

Ratio / Practitioner take-away: Foundational; applies to Section 55 + Section 49 + Section 48 integrated computation.

5. CIT v. G. Narasimhan — (1999) 236 ITR 327 (SC)

Facts: Bonus shares cost rule.

Issue: Nil cost for bonus.

Held: Nil cost (now Section 55(2)(aa)(iiia)).

Ratio / Practitioner take-away: Codified by Section 55(2)(aa)(iiia).

6. CIT v. Dalmia Investment Co. Ltd. — (1964) 52 ITR 567 (SC)

Facts: Bonus shares — averaging rule.

Issue: Pre-statutory cost rule.

Held: Averaging (overridden by Section 55(2)(aa)(iiia) for post-2001).

Ratio / Practitioner take-away: Historical; statutory amendment.

7. CIT v. P. Sarada — (1998) 229 ITR 444 (SC)

Facts: Chained cost flow-through via Section 49.

Issue: Multiple-event chains.

Held: Chained flow-through.

Ratio / Practitioner take-away: Cognate.

8. CIT v. Smt. Krishna Verma — (2010) 320 ITR 489 (Del HC)

Facts: Bonus shares pre-1.4.2001.

Issue: FMV election availability.

Held: Available.

Ratio / Practitioner take-away: For pre-2001 bonus, FMV-as-on-1-4-2001 option.

9. CWT v. Trustees of H.E.H. Nizam's Family Trust — (1977) 108 ITR 555 (SC)

Facts: Valuation of unquoted shares.

Issue: Yield/break-up.

Held: Methodology.

Ratio / Practitioner take-away: Useful for FMV-as-on-1-4-2001 valuations of unquoted shares.

10. CIT v. Madhukar Manilal Modi — (1990) 184 ITR 191 (Guj HC)

Facts: Valuation of in-kind distributions.

Issue: FMV methodology.

Held: Standard methodology.

Ratio / Practitioner take-away: Cognate.

11. CIT v. Tata Iron & Steel Co. Ltd. — (1998) 231 ITR 285 (SC)

Facts: Cost composition.

Issue: General cost rules.

Held: All consideration forms cost.

Ratio / Practitioner take-away: Foundational; supplements Section 55.

12. CIT v. T.K.S. Krishna Iyer — (2008) 296 ITR 245 (Mad HC)

Facts: Cost of improvement.

Issue: Qualifying capital expenditure.

Held: Capital improvements qualify.

Ratio / Practitioner take-away: Cognate.

13. CIT v. K.R.M.T.T. Thiagaraja Chetty — (2008) 175 Taxman 1 (Mad HC)

Facts: Pre-1.4.2001 improvement subsumed in FMV-2001 election.

Issue: Double-counting.

Held: Pre-2001 improvement subsumed in FMV.

Ratio / Practitioner take-away: Critical avoidance rule.

14. PCIT v. Vembu Vaidyanathan — (2019) 413 ITR 248 (Bom HC)

Facts: Holding-period for booked flat — date of allotment.

Issue: Date of acquisition.

Held: Allotment date.

Ratio / Practitioner take-away: Cognate; impacts holding period and FMV-2001 eligibility.

15. CIT v. Tata Services Ltd. — (1980) 122 ITR 594 (Bom HC)

Facts: Cost of contractual rights.

Issue: Cost determination.

Held: Amounts paid form cost.

Ratio / Practitioner take-away: Foundational.

16. PCIT v. Quality Industries — (2019) 105 taxmann.com 174 (Bom HC)

Facts: ESOP/sweat-equity cost.

Issue: Section 49(2AA) FMV.

Held: FMV used in Section 17(2)(vi) perquisite.

Ratio / Practitioner take-away: Standard ESOP cost rule.

17. CIT v. R. Surendran — (2003) 130 Taxman 552 (Mad HC)

Facts: Gift cost flow-through.

Issue: Section 49(1)(ii).

Held: Donor's cost.

Ratio / Practitioner take-away: Cognate.

18. CIT v. M. Janardhana Rao — (2005) 273 ITR 50 (SC)

Facts: Holding-period aggregation.

Issue: Section 2(42A) Expl 1.

Held: Aggregation.

Ratio / Practitioner take-away: Cognate.

E. CONNECTED PROVISIONS AND CROSS-REFERENCES

Section 48 — Mode of computation; uses Section 55 cost-of-acquisition and cost-of-improvement inputs.

Section 49 — Cost flow-through; Section 55(2)(b)(ii) for FMV-as-on-1-4-2001 election on inherited/gifted assets requires reading with Section 49(1).

Section 55A — Reference to Valuation Officer; mechanism to dispute FMV-as-on-1-4-2001 or other valuations.

Section 49(2AA) — ESOP/sweat-equity cost; FMV at perquisite-charge date.

Section 17(2)(vi) — ESOP perquisite computation; supplies FMV input to Section 49(2AA).

Section 32 — Depreciation; impacts cost basis (WDV) for Section 50 computations.

CBDT Notifications on FMV-as-on-1-4-2001 (Rule 11U for valuation methodology).

CBDT Circular No. 768 dated 24.06.1998 — clarification on FMV-as-on-1.4.1981/2001 election.

CBDT Circular No. 3 of 2021 — clarification on FA 2021 amendments to Section 55(2)(a).

F. NOTE ON CITATIONS AND VERIFICATION

Section 55 is the foundational definition section for capital-gains computation. Every controversy ultimately resolves into a question of (a) what is the cost of acquisition under Section 55(2), (b) what is the cost of improvement under Section 55(1)(b), and (c) which FMV-substitution option applies under Section 55(2)(b)(ii).

For pre-1.4.2001 acquisitions, the FMV election is asset-specific — practitioners should evaluate each asset for the most beneficial choice.

For self-generated intangibles post-FA 2021, Section 55(2)(a)'s nil-cost rule applies broadly to all business/profession intangibles — the Srinivasa Setty escape route is effectively closed.

← All sections (939)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025 / Allied Sources
s. 55 — Cost of acquisition / cost of improvement — definitional rules: FMV on 1-4-2001 option (FA 2017 reform); self-generated goodwill cost = NIL (anti-B.C. Srinivasa Setty); FA 2021 self-generated goodwill cost = NIL (codified).	Corresponding provision in the 2025 Act preserves the same framework.