Section 73 — Cost of Acquisition for Gifted, Inherited & Specially-Acquired Assets

Section Analysis

Section 73 addresses a fundamental question: what is the "cost of acquisition" when an asset wasn't purchased in the ordinary sense — because it was received as a gift, inherited, received on partition of an HUF, received in an amalgamation, or acquired through certain other specified modes? The answer, carried forward from Section 49 of the 1961 Act, is the "cost to the previous owner" principle: the cost of acquisition is deemed to be the cost for which the previous owner acquired it (plus that previous owner's cost of improvement), and the previous owner's holding period is "tacked on" for classifying the asset as long-term or short-term.

Specific scenarios covered:

  • Gift, will, or inheritance: Cost = cost to the donor/testator; holding period includes the donor's holding period.
  • HUF partition: Cost = cost to the HUF before partition.
  • Amalgamation: Cost of shares received in the amalgamated company = cost of the original shares in the amalgamating company (per the Grace Collis line of reasoning discussed in Part 1, Article 2).
  • Conversion transactions under Section 70 (firm-to-company, company-to-LLP): Cost carries over from the predecessor entity.

Case Laws

1. CIT, Cochin v. Grace Collis (2001 INSC 113) — Beyond clarifying the "transfer" question (Part 1, Article 2), this case directly confirmed that cost of acquisition for shares received in an amalgamated company is determined by reference to the cost of the original shares in the amalgamating company — the foundational precedent for the amalgamation limb of Section 73.

2. CIT v. Manjula J. Shah [2013] 355 ITR 474 (Bombay HC) — Addressed how the indexed cost of acquisition should be computed for a gifted/inherited asset — holding that the indexation benefit (where applicable) should be computed from the year the previous owner first held the asset, not merely the year the current assessee received it, reinforcing the "cost to previous owner" principle's full effect on holding-period-linked benefits.

3. Rulings on determining "previous owner" in a chain of gifts/inheritance — Where an asset passes through multiple gifts or successive inheritances before eventual sale, courts have held that the relevant "previous owner" for cost purposes is the last person who acquired the asset by a mode other than gift/inheritance/partition/etc. — i.e., you look back through the entire chain to the last "actual purchase," not merely to your immediate predecessor.

FAQs

Q1. If I inherit a house my grandfather bought in 1980, what's my cost of acquisition? Your cost of acquisition is deemed to be your grandfather's original purchase cost (plus any cost of improvement he incurred), and your holding period includes the entire period he (and any intermediate holder) held it — you don't start the clock afresh on inheritance.

Q2. Does gifting an asset reset the holding period for the recipient? No — the recipient's holding period includes the donor's holding period; the "clock" carries forward rather than resetting.

Q3. How do I find my "cost of acquisition" if the asset passed through several hands (gift, then inheritance, then another gift)? You trace back through the chain to the last person who acquired the asset by actual purchase (or another mode outside the gift/inheritance/partition category) — that person's cost is your deemed cost of acquisition.

Q4. Does this "cost to previous owner" rule apply to shares received in an amalgamation? Yes — per Grace Collis, the cost of the original shares in the amalgamating company becomes your cost of acquisition for the new shares received in the amalgamated company.

Q5. What if I can't establish what the original owner paid? This can be a genuine practical challenge for very old assets — taxpayers may need to rely on historical records, municipal valuations, or (where permitted) a fair market value as of a specified base date, depending on the specific provision and asset type; professional valuation assistance is often advisable.

Precautions

  • For inherited or gifted assets, obtain and preserve the original purchase documents from the previous owner (or their estate) as early as possible — reconstructing decades-old cost records after the fact is difficult and can lead to disputes.
  • When tracing cost through multiple gifts/inheritances, maintain a clear paper trail of the entire chain of ownership, not just your immediate transferor.
  • For amalgamation-related share receipts, retain the original share purchase records even after the amalgamation completes — your cost basis depends on that historical figure, not the amalgamated company's share price at exchange.
  • If historical cost records are genuinely unavailable for a very old asset, consult a professional valuer and tax advisor promptly rather than waiting until a sale is imminent, since establishing a defensible cost basis can take time.

Disclaimer

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