Special Cost of Acquisition

Section 40 — SPECIAL PROVISION FOR COMPUTATION OF COST OF ACQUISITION OF CERTAIN ASSETS

Section 40 prescribes the special-cost-of-acquisition rules for assets acquired by gift / will / inheritance / amalgamation / demerger / etc. — situations where there is no actual cost paid. The substantive rule: cost is the previous owner's cost (cost-base preservation), with the holding period of the previous owner tacked on for capital gains purposes.

STATUTORY ARCHITECTURE

Section 40 ensures continuity of cost across gift / inheritance / amalgamation / demerger / partition transfers — the recipient inherits the original transferor's cost. Combined with s. 67(2) for capital gains purposes, the previous owner's holding period is also tacked on. This matters for both depreciation continuity (where the asset is used in business) and capital-gains LTCG/STCG classification.

JUDICIAL EVOLUTION — Holding Period Continuity

CIT v. Manjula J. Shah, (2013) 355 ITR 474 (Bombay HC) — for inherited assets, indexation runs from the year of FIRST OWNERSHIP by the previous owner, not the year of inheritance. Codified now in 2025 s. 71(2) (capital gains side).

PLANNING NOTES

(i) For inherited / gifted depreciable assets, retain the previous owner's depreciation worksheet to establish historical cost. (ii) For amalgamation / demerger, ensure the scheme-of-arrangement explicitly preserves the cost-continuity (legal documentation of asset transfer at written-down value, not market value). (iii) Cite Manjula J. Shah for inherited-asset indexation period.

CROSS-REFERENCES

• Section 39 — Computation of actual cost (general rule).
• Section 41 — Written down value (next section).
• Section 67-91 — Capital gains framework.