Section 43 of Income Tax Act 1961: Key Business Income Definitions Explained

Section 43(1): Meaning of actual cost

Broadly, "actual cost" is the actual cost of an asset to the assessee after reducing any part of that cost which has been met, directly or indirectly, by another person or authority. The provision then contains detailed rules for particular acquisition situations.

Important rules affecting actual cost

• Subsidy, grant or reimbursement: the portion of asset cost met by another person or authority is generally excluded from the assessee's actual cost. Where a subsidy cannot be directly linked to one asset, the statutory proportionate allocation rule applies.
• Specified cash expenditure: expenditure for acquiring an asset may be ignored for determining actual cost where payment beyond the statutory threshold is made otherwise than through the permitted banking or prescribed electronic modes, subject to the wording applicable to the relevant year.
• Scientific research asset later used in business: the cost is adjusted for the deduction already allowed for scientific research expenditure.
• Asset received by specified modes: special rules determine cost where an asset is received by gift, inheritance, qualifying reorganisation or other modes covered by the provision.
• Transfer designed to inflate depreciable cost: where a previously used asset is transferred mainly to reduce tax liability through enhanced depreciation, the Assessing Officer may determine the actual cost with the required prior approval.
• Re-acquisition: where an assessee re-acquires an asset previously owned and used by it, the special ceiling in the provision applies.
• Sale and lease-back type cases: Explanation 4A restricts actual cost in specified cases involving a previously used depreciable asset.
• Holding-subsidiary transfers, amalgamation and demerger: tax-neutral transfers covered by section 47 are subject to continuity-based cost rules.
• Interest before and after first use: interest attributable to the period after an asset is first put to use is not included in actual cost under the specific rule in Section 43(1).
• Assets linked to Section 35AD: special rules can result in nil or adjusted actual cost where deduction has been allowed or is allowable under section 35AD.

Section 43(2): Meaning of paid

For the provisions to which Section 43 applies, "paid" covers an amount actually paid or incurred according to the method of accounting on the basis of which business or professional profits are computed. The definition therefore has to be read with the assessee's applicable method of accounting and the particular deduction provision involved.

Section 43(3): Meaning of plant

The expression "plant" is inclusive. It covers ships, vehicles, books, scientific apparatus and surgical equipment used for business or profession. The statutory definition excludes tea bushes, livestock, buildings, furniture and fittings.

Whether a particular item qualifies as plant can affect depreciation and related business-income computations. The answer may depend on the statutory definition, the nature of the item and the function it performs in the taxpayer's business.

Section 43(4): Meaning of scientific research

Section 43(4) gives a broad meaning to scientific research. It includes activities directed at extending knowledge in natural or applied sciences, including agriculture, animal husbandry and fisheries.

The provision also explains the scope of expenditure on scientific research and when research is regarded as related to a business or class of business. Research may qualify where it can lead to or facilitate extension of the business, and the definition also addresses medical research specially connected with the welfare of workers employed in the business.

Section 43(5): Meaning of speculative transaction

A speculative transaction is broadly a contract for purchase or sale of a commodity, including stocks and shares, which is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. The clause then excludes specified transactions from that definition.

Transactions specifically addressed by the exceptions

• Qualifying hedging contracts in raw materials or merchandise connected with manufacturing or merchanting business.
• Qualifying hedging contracts in stocks and shares entered into by a dealer or investor to guard against price fluctuation in holdings.
• Specified jobbing or arbitrage transactions by members of a forward market or stock exchange.
• Eligible derivative transactions carried out on a recognised stock exchange, subject to the statutory conditions.
• Eligible commodity derivative transactions on a recognised stock exchange, subject to the applicable conditions; the Act contains a specific rule for agricultural commodity derivatives.

Section 43(6): Meaning of written down value

Written down value, commonly called WDV, is the statutory value used for depreciation computations. For an asset acquired in the relevant previous year, the starting point is generally its actual cost. For older assets, the provision reduces actual cost by depreciation actually allowed, subject to the detailed statutory rules.

Block of assets

For depreciable assets falling within a block of assets, Section 43(6) contains rules for adjusting the opening WDV for additions, disposals and specified transfers. It also contains continuity rules for succession, holding-subsidiary transfers, amalgamations, demergers and qualifying conversion of a company into a limited liability partnership.