Budget 2023: Proposal to deem nil cost of acquisition and improvement for intangible assets

Partner: Himanshu Sinha, Counsel: Aditi Goyal, Associate: Aishwarya Palan

In a development likely to have widespread impact on routine business transactions, the Finance Bill, 2023 (Bill) has proposed that the cost of acquisition and improvement of self-generated intangible assets should be deemed to be NIL. Courts have earlier held such costs as unascertainable and therefore, it was not possible to compute the amount of capital gains income subject to tax (i.e., sale consideration as reduced by the cost of acquisition and cost of improvement of the capital asset). However, with this proposed deeming provision, such a calculation will be possible. This may have unintended consequences – for instance, certain routine business transactions may be subject to capital gains tax.

Background

As per the provisions of the Income Tax Act, 1961 (ITA), any income arising from the transfer of a capital asset is chargeable to tax under the head ‘capital gains’. The ITA provides a mechanism to compute such capital gains income. Broadly, the amount of capital gains income subject to tax is computed as the ‘sale consideration’ as reduced by the ‘cost of acquisition’ and ‘cost of improvement’ of the capital asset.

The terms ‘cost of acquisition’ and ‘cost of improvement’ have been defined in the ITA. Generally, these terms refer to the cost actually incurred by the taxpayer towards acquiring or improving the capital asset. The ITA also prescribes the ‘cost of acquisition’ and ‘cost of improvement’ for certain assets that have not been purchased by the taxpayer – for instance, capital assets acquired by way of gift, or through transmission.

On similar lines, the ITA also specifies the ‘cost of acquisition’ and ‘cost of improvement’ for certain self-generated intangible assets, since for such assets, the cost is often not readily identifiable or ascertainable. To elaborate, under the ITA, the cost of acquisition of goodwill of a business or profession, a trade mark or brand name associated with a business or profession, a right to manufacture, produce or process any article or thing, a right to carry on any business or profession, tenancy rights, etc., acquired through a mode other than purchase (or specified modes such as transmission from a previous owner) is deemed to be ‘NIL’. Similarly, deeming provisions also prescribe a NIL cost of improvement for goodwill and certain rights. As mentioned above, these provisions broadly seek to prescribe NIL cost of acquisition and improvement for specified self-generated intangible assets. In such a scenario, the entire sale consideration received from the transfer of these assets is subject to tax as capital gains income.

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