Section 49 — Cost with Reference to Certain Modes of Acquisition

Section 49 of the Income-tax Act, 1961, deals with the determination of the cost of acquisition of a capital asset in specific circumstances. This section applies when a capital asset is acquired through modes such as gift, will, succession, inheritance, or distribution of assets on the dissolution of a firm, among others. The significance of this section lies in its provision that the cost of acquisition of such an asset shall be deemed to be the cost for which the previous owner acquired it, as increased by any cost of improvement incurred by the previous owner or the assessee. This statutory provision ensures continuity in the cost basis of assets, preventing tax avoidance through the transfer of assets at undervalued prices. The burden of proof lies on the assessee to establish the mode of acquisition and the cost incurred by the previous owner. Practically, this section is crucial for calculating capital gains tax liability accurately when the asset is eventually sold.

Common Litigation Flashpoints

1. Determination of the original cost of acquisition
2. Establishing the mode of acquisition
3. Disputes over cost of improvement
4. Interpretation of 'previous owner' in complex inheritance cases

Judgments on Section 49 — Cost with Reference to Certain Modes of Acquisition

• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• The Authority for Advance Rulings (Income Tax) and Others vs Tiger Global International II Holdings — SC,
  The DTAA between India and Mauritius allows capital gains to be taxed only in Mauritius, provided the entity holds a valid TRC.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.
• Commissioner of Income Tax, Bangalore vs B. C. Srinivasa Setty — SC,
  Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head 'capital gains'