Section 39 — Computation of Actual Cost | ITA 2025

Section 39 — COMPUTATION OF ACTUAL COST

Section 39 prescribes the methodology for computing 'actual cost' of an asset for depreciation purposes — substantive equivalent of 1961 s. 43(1). The substantive rule (sub-sections (1)-(3)): actual cost = purchase price + freight + installation + commissioning + interest on borrowings up to date of put-to-use, less any specific subsidies / incentives received from Government. Sub-section (4) lays down a 13-row TABLE prescribing actual cost in 'specified circumstances' — amalgamation, demerger, inventory-conversion, gift / inheritance, building-conversion, holding-subsidiary transfer, reacquisition, lease-back, scientific-research-cessation, NR-asset import, stock-exchange corporatisation, s. 46-deduction interaction, and pre-put-to-use interest. Each row has its own actual-cost rule.

Statutory text — Income-tax Act, 2025

Marginal note — Computation of actual cost

(1) The actual cost of an asset used for the purposes of the business or profession of the assessee shall be the actual cost of such asset to the assessee, as reduced by that portion of the cost which has been met directly or indirectly by any person or authority.

(1)(a) Such actual cost shall include all expenses incurred in bringing the asset to its present condition and location for use, including freight, insurance, installation, and pre-operative interest on borrowings.

(1)(d) Where the assessee has received any subsidy, grant, or reimbursement directly or indirectly from any person or authority that is relatable to the acquisition of the asset, such amount shall be reduced from the actual cost.

(2) Where the subsidy, grant, or reimbursement received under sub-section (1)(d) is not directly relatable to the asset acquired, the amount of reduction under that sub-section shall be computed using the formula: Reduction = (A × B) / C, where—

A = total amount of subsidy, grant or reimbursement not directly relatable to any specific asset; B = cost of the asset; C = cost of all the assets in respect of or in reference to which the subsidy or grant or reimbursement is so received.

(4) In circumstances specified under column B of the Table below, the actual cost of the asset shall be as specified in column C thereof.

TABLE

Sl. No. (A)	Specified circumstances (B)	Determination of actual cost (C)
1.	Where capital asset is transferred by an amalgamating company to an amalgamated company being an Indian company in a scheme of amalgamation.	Actual cost to amalgamated company shall be the same as it would have been if the amalgamating company had continued to hold such capital asset for the purpose of its own business.
2.	Where capital asset is transferred by a demerged company to a resulting company being an Indian company in a demerger.	Actual cost to resulting company shall be the same as it would have been, if the demerged company had continued to hold such asset for the purpose of its own business, which shall not exceed the written down value of such capital asset in the hands of demerged company.
3.	Where inventory is converted into or treated as a capital asset.	Fair Market Value of such inventory as on date of conversion, as determined in the manner as may be prescribed.
4.	Where asset is acquired by the assessee by way of gift or inheritance.	Actual cost to the previous owner as reduced by— (a) depreciation actually allowed in respect of tax year commencing on 1st April, 1986 or any earlier tax year; and (b) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961, as if such asset was the only asset in the relevant block of asset.
5.	Where a building, being the property of the assessee, is put to use for the purpose of business or profession during the tax year.	Actual cost of the building as reduced by the depreciation— (a) that would have been allowable had the building been used for the purpose of business or profession from the date of acquisition; and (b) calculated at the rate in force on the date on which such asset was put to use for the purpose of business or profession.
6.	Where capital asset is transferred by— (a) a holding company to its subsidiary company; or (b) a subsidiary company to its holding company, and the conditions of section 70(1)(c) and (d), as the case may be, are satisfied.	Actual cost to the transferee company shall be the same as it would have been, if the transferor company had continued to hold such asset for the purpose of its own business.
7.	Where an asset, which previously belonged to the assessee and had been used by him for the purpose of his business or profession, is reacquired by the assessee.	(a) Actual cost of the asset in the hands of assessee, when it was first acquired, as reduced by— (i) depreciation actually allowed in respect of tax year commencing on 1st April, 1986 or any earlier tax year; and (ii) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961, as if such asset was the only asset in the relevant block of asset; or (b) actual price for which such asset is reacquired by the assessee, whichever is lower.
8.	Where an asset is acquired by the assessee from previous owner and subsequently asset is given back to the previous owner by way of lease, hire or otherwise, and— (a) the asset was being used for the purpose of business or profession by the previous owner; and (b) depreciation has been claimed by the previous owner.	Actual cost of asset to the assessee shall be the written down value of the asset in the hands of the previous owner at the time of transfer by the previous owner.
9.	Where an asset is used in business after it ceases to be used for scientific research related to that business and a deduction is allowable under section 33(3).	Actual cost of asset as reduced by deduction allowed for the capital asset under section 45(1)(a)(i) or under section 35(1)(iv) of the Income-tax Act, 1961.
10.	Where the assessee had acquired an asset outside India, as a non-resident, and the asset is brought by him to India and put to use in his business or profession in India.	Actual cost of the asset as reduced by the depreciation— (a) that would have been allowable had the asset been used for the purpose of business or profession in India since the date of its acquisition; and (b) calculated at the rate in force.
11.	Where capital asset is acquired under the scheme of corporatisation of a recognised stock exchange approved by the Securities and Exchange Board of India.	Actual cost of the asset, as if there was no corporatisation.
12.	(a) Where deduction under section 46 was allowed or allowable in respect of the capital asset— (i) to the assessee; or (ii) to any person and the assessee acquires or receives such asset through special modes of acquisition from such person. (b) Where deduction allowed under section 46 in respect of a capital asset becomes deemed income as per section 46(9)(b).	(a) Actual cost shall be deemed to be nil. (b) Actual cost of the asset as reduced by the depreciation,— (i) that would have been allowable had the asset been used for the purpose of business since date of acquisition; and (ii) calculated at the rate in force.
13.	Where any amount is paid or payable as interest in connection with the acquisition of an asset.	Actual cost shall not include so much of such amount as is relatable to any period after such asset is first put to use.

(5) Irrespective of anything contained in sub-section (4), other than serial number 8 of the Table, where the asset is acquired by the assessee, its actual cost shall be such amount as the Assessing Officer may determine having regard to all the circumstances of the case, where—

(a) the asset was used by any other person for the purposes of his business, before such acquisition; and

(b) the Assessing Officer is satisfied that the main purpose of the transfer of the asset, directly or indirectly, was to reduce tax liability (by claiming depreciation on enhanced actual cost).

(6) The determination of actual cost under sub-section (5) shall be made with the prior approval of the Joint Commissioner.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 39	INCOME-TAX ACT, 1961 — s. 43(1)
Actual cost = purchase price + freight + installation + pre-op interest	1961 Explanation 1 — preserved
Less subsidy / grant from Government (post P.J. Chemicals)	1961 Explanation 10 — FA 1998 — preserved
s. 39(4) Table — 13 specified-circumstance rules	1961 Explanations 1-13 to s. 43(1) — consolidated into Table format
s. 39(5)/(6) — anti-avoidance + JCIT approval requirement	1961 Explanation 3 — preserved

STATUTORY ARCHITECTURE

Section 39 establishes the 'actual cost' concept — the foundation for depreciation u/s 33 and capital gains u/s 67-91. The 13-row Table in sub-section (4) consolidates what were Explanations 1-13 in 1961 s. 43(1), giving each specified-circumstance its own row. Sub-sections (5) and (6) operate as anti-avoidance overrides — where AO is satisfied that asset transfer was tax-motivated, he can substitute his own determination of actual cost (with JCIT prior approval). The 'put-to-use' date is the line — interest on borrowings up to that date is part of actual cost (capitalised); interest from put-to-use date onwards is revenue (deductible u/s 32).

JUDICIAL EVOLUTION — Capital Subsidy (P.J. Chemicals)

The Supreme Court in CIT v. P.J. Chemicals Ltd., (1994) 210 ITR 830 (SC), held that GENERAL incentive subsidies received from Government — not specifically tied to the cost of an asset — do NOT reduce the actual cost u/s 43(1) [now s. 39]. Only subsidies SPECIFICALLY tied to the asset's purchase reduce actual cost.

HELD: Subsidy received from the Government as an incentive for setting up an industry in a backward area, where there is no specific connection between the subsidy and the asset's cost, does NOT reduce the actual cost of the asset u/s 43(1). The general-purpose nature of the subsidy means the recipient retains full depreciation benefit on the asset's gross cost. (per P.J. Chemicals ¶ 23).

FA 1998 inserted Explanation 10 to s. 43(1) [now s. 39(1)(d) + s. 39(2) of 2025 Act] reversing the P.J. Chemicals position prospectively — even general subsidies now reduce actual cost. Pre-FA 1998 amalgamations and acquisitions remain governed by P.J. Chemicals.

JUDICIAL EVOLUTION — Pre-Operative Interest (Challapalli Sugars)

Challapalli Sugars Ltd. v. CIT, (1975) 98 ITR 167 (SC) — interest paid on borrowings used for acquisition of capital asset PRIOR to commencement of production is to be capitalised as part of actual cost. Codified now in s. 39(4) Sl. No. 13 — interest after put-to-use is excluded from actual cost.

PLANNING NOTES

(i) Maintain a master 'actual cost' worksheet for each asset — segregating purchase price + freight + installation + put-to-use interest. (ii) For Government subsidies, post-FA 1998, the subsidy reduces actual cost regardless of specificity (overruled P.J. Chemicals). Pre-FA 1998, only specifically-tied subsidies reduce. (iii) For amalgamation / demerger / holding-subsidiary transfers (Sl. Nos. 1, 2, 6 of Table), the actual cost preservation rule maintains transferee's depreciation continuity. (iv) For NR-bringing-asset-to-India (Sl. No. 10), the depreciation-as-if-used-in-India formula applies — track historical depreciation as if Indian. (v) For s. 46 deduction interaction (Sl. No. 12), do NOT claim depreciation on the same capital expenditure — single-route benefit. (vi) Pre-operative interest must be capitalised; post-put-to-use interest is revenue (s. 32 deduction). Track precisely.

CROSS-REFERENCES

Section 33 — Depreciation (uses 'actual cost').
Section 41 — WDV.
Section 46 — Capital expenditure of specified business (interaction with Sl. No. 12).
Section 67-91 — Capital gains computation (uses 'actual cost').
Section 70 — Holding-subsidiary transfer carve-out (Sl. No. 6 condition).
Schedule III — depreciation rates.

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