Chapter IV - Computation of Total Income

Section 39

Section 39: computation of actual cost of a business asset

Section 39 defines how the "actual cost" of an asset used for business or profession is worked out - a figure that matters because depreciation and other deductions are computed with reference to it. The section reduces the cost for subsidies and input tax credits already claimed, excludes cash payments over ₹10,000, and lays down special rules for a long list of specific situations such as amalgamation, gift, demerger and asset reacquisition.

Official text

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Need advice on Section 39?

This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.

Statutory text

Bare law

(1) The actual cost of an asset used for the purposes of the business or profession shall be the actual cost to the assessee, as reduced by the following amounts:— (a) part of cost of asset, if any, met by any other person or authority, directly or indirectly; (b) goods and services tax paid in respect of which credit of input tax has been claimed and allowed under the relevant law; (c) duty of excise or additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944; (d) subsidy, grant or reimbursement, by whatever name called, if any, relatable to the acquisition of the asset, received, directly or indirectly, by the assessee from— (i) the Central Government; (ii) a State Government; (iii) any authority established under any law; or (iv) any other person. (2) The payment or aggregate of payments exceeding ₹10,000 in a day for acquisition of an asset or part thereof, made to a person in a mode otherwise than by specified banking or online mode, shall be excluded from the actual cost of that asset. (3) In a case where the subsidy, grant or reimbursement referred to in sub-section (1)(d) is not directly relatable to the asset acquired, the amount of reduction under sub-section (1)(d) shall be determined as under:

A × (B / C)

where,— A = total amount of subsidy, grant or reimbursement not directly relatable to the asset; B = cost of the asset acquired for which actual cost is to be determined; C = cost of all the assets in respect of or in reference to which the subsidy or grant or reimbursement is so received. (4) In circumstances specified under column B of the Table below, the actual cost of the asset shall be as specified in column C thereof.

Sl. No.	Specified circumstances	Determination of actual cost
1	Where capital asset is transferred by an amalgamating company to an amalgamated company being an Indian company in a scheme of amalgamation.	Actual cost to amalgamated company shall be the same as it would have been if the amalgamating company had continued to hold such capital asset for the purpose of its own business.
2	Where capital asset is transferred by a demerged company to a resulting company being an Indian company in a demerger.	Actual cost to resulting company shall be the same as it would have been, if the demerged company had continued to hold such asset for the purpose of its own business, which shall not exceed the written down value of such capital asset in the hands of demerged company.
3	Where inventory is converted into or treated as a capital asset.	Fair Market Value of such inventory as on date of conversion, as determined in the manner as may be prescribed.
4	Where asset is acquired by the assessee by way of gift or inheritance.	Actual cost to the previous owner as reduced by— (a) depreciation actually allowed in respect of tax year commencing on 1st April, 1986 or any earlier tax year; and (b) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961 (43 of 1961), as if such asset was the only asset in the relevant block of asset.
5	Where a building, being the property of the assessee, is put to use for the purpose of business or profession during the tax year.	Actual cost of the building as reduced by the depreciation— (a) that would have been allowable had the building been used for the purpose of business or profession from the date of acquisition; and (b) calculated at the rate in force on the date on which such asset was put to use for the purpose of business or profession.
6	Where capital asset is transferred by— (a) a holding company to its subsidiary company; or (b) a subsidiary company to its holding company, and the conditions of section 70(1)(c) and (d), as the case may be, are satisfied.	Actual cost to the transferee company shall be the same as it would have been, if the transferor company had continued to hold such asset for the purpose of its own business.
7	Where an asset, which previously belonged to the assessee and had been used by him for the purpose of his business or profession, is reacquired by the assessee.	(a) Actual cost of the asset in the hands of assessee, when it was first acquired, as reduced by— (i) depreciation actually allowed in respect of tax year commencing on 1st April, 1986 or any earlier tax year; and (ii) depreciation allowable for tax year commencing on or after 1st April, 1987 under this Act or under the Income-tax Act, 1961 (43 of 1961), as if such asset was the only asset in the relevant block of asset; or (b) actual price for which such asset is reacquired by the assessee, whichever is lower.
8	Where an asset is acquired by the assessee from previous owner and subsequently asset is given back to the previous owner by way of lease, hire or otherwise, and— (a) the asset was being used for the purpose of business or profession by the previous owner; and (b) depreciation has been claimed by the previous owner.	Actual cost of asset to the assessee shall be the written down value of the asset in the hands of the previous owner at the time of transfer by the previous owner.
9	Where an asset is used in business after it ceases to be used for scientific research related to that business and a deduction is allowable under section 33(3).	Actual cost of asset as reduced by deduction allowed for the capital asset under section 45(1)(a)(i) or under section 35(1)(iv) of the Income-tax Act, 1961 (43 of 1961).
10	Where the assessee had acquired an asset outside India, as a non-resident, and the asset is brought by him to India and put to use in his business or profession in India.	Actual cost of the asset as reduced by the depreciation— (a) that would have been allowable had the asset been used for the purpose of business or profession in India since the date of its acquisition; and (b) calculated at the rate in force.
11	Where capital asset is acquired under the scheme of corporatisation of a recognised stock exchange approved by the Securities and Exchange Board of India.	Actual cost of the asset, as if there was no corporatisation.
12	(a) Where deduction under section 46 was allowed or allowable in respect of the capital asset— (i) to the assessee; or (ii) to any person and the assessee acquires or receives such asset through special modes of acquisition from such person. (b) Where deduction allowed under section 46 in respect of a capital asset becomes deemed income as per section 46(9)(b).	(a) Actual cost shall be deemed to be nil. (b) Actual cost of the asset as reduced by the depreciation,— (i) that would have been allowable had the asset been used for the purpose of business since date of acquisition; and (ii) calculated at the rate in force.
13	Where any amount is paid or payable as interest in connection with the acquisition of an asset.	Actual cost shall not include so much of such amount as is relatable to any period after such asset is first put to use.

(5) Irrespective of anything contained in sub-section (4), other than serial number 8 of the Table in the said sub-section, in a case where the asset is acquired by the assessee, its actual cost shall be such amount as may be determined by the Assessing Officer having regard to all the circumstances of the case, where— (a) the asset was used by any other person for the purposes of his business, before such acquisition; and (b) the Assessing Officer is satisfied that the main purpose of the transfer of the asset, directly or indirectly, was to reduce tax liability (by claiming depreciation on enhanced actual cost). (6) The determination of actual cost under sub-section (5) shall be made with the prior approval of the Joint Commissioner. (7) For the purposes of this section, “special modes of acquisition” means acquisition— (a) by way of a gift or will or an irrevocable trust; or (b) upon distribution on the liquidation of a company; or (c) by such mode of transfer as is referred to in section 70(1)(a), (c), (d), (e), (j), (zd), (ze) and (zf).

Introduction

Actual cost is the tax starting value of a business asset. It may differ from the invoice price because subsidies, third-party payments, non-compliant cash spending and special acquisition histories change the statutory figure.

Key takeaways

Actual cost baseline

Actual cost is generally the taxpayer's cost of the business asset, reduced by any part met directly or indirectly by another person or authority.

Special acquisitions

The section substitutes particular cost rules for stated transfers and reorganisations, so the purchase price alone may not be the deductible depreciation base.

The starting point: reductions from actual cost

Section 39(1) reduces the actual cost to the assessee by:

Any part of the cost met, directly or indirectly, by any other person or authority.
GST paid, where input tax credit on it has been claimed and allowed.
Customs/excise duty in respect of which credit has been claimed and allowed under the Central Excise Rules, 1944.
Any subsidy, grant or reimbursement relatable to the asset's acquisition, received (directly or indirectly) from the Central Government, a State Government, any authority established under law, or any other person.

Cash payments over ₹10,000 are excluded

Section 39(2) excludes from actual cost any payment (or aggregate of payments in a day) exceeding ₹10,000 made to a person for acquiring an asset, if not made through a specified banking or online mode.

Section 39(3) sets out an apportionment formula for subsidies/grants/reimbursements that are not directly relatable to a specific asset, allocating the reduction proportionately across the assets they relate to.

Special situations covered by the Table in Section 39(4)

Section 39(4) prescribes how actual cost is determined in specific circumstances, including:

Capital asset transferred by an amalgamating company to an amalgamated company that is an Indian company in a scheme of amalgamation — cost carries over as if the amalgamating company had continued to hold it for its own business.
Capital asset transferred by a demerged company to a resulting Indian company - similarly carries over, capped at the demerged company's written down value.
Inventory converted into a capital asset - actual cost is its fair market value on the date of conversion.
Asset acquired by gift or inheritance - actual cost to the previous owner, reduced by depreciation actually allowed/allowable over the years.
A building put to business use after being held for other purposes - actual cost reduced by notional depreciation for the period before business use.
Transfer between a holding company and its wholly owned subsidiary (subject to conditions) - cost carries over unchanged.
An asset reacquired by the assessee after previously being used in the same business - the lower of the original cost (net of allowed depreciation) or the reacquisition price.
An asset acquired from a previous owner and then leased/hired back to that previous owner - actual cost is the asset's written down value in the previous owner's hands at the time of transfer.
Assets brought into India by a non-resident and first used for Indian business - actual cost reduced by notional depreciation for the pre-India period.
Assets acquired under a stock exchange corporatisation scheme, or under Section 46 (specified business capital expenditure) - specific carry-over or nil-cost rules apply.
Interest paid or payable in connection with acquiring an asset - excluded from actual cost to the extent it relates to any period after the asset is first put to use.

Anti-abuse rule for artificially inflated cost

Section 39(5) empowers the Assessing Officer to determine the actual cost independently (with the prior approval of the Joint Commissioner, per Section 39(6)) where an asset was previously used by another person for their business, and the Assessing Officer is satisfied the transfer's main purpose was to reduce tax liability by inflating the cost for depreciation purposes.

Section 39(5) expressly excludes the sale-and-leaseback situation in table serial number 8 from this override. The applicable row and the prior-use and main-purpose conditions should therefore be checked before using the Assessing Officer determination rule.

Step-by-step flow for applying Section 39

1
Start with the amount the assessee actually paid for the asset
Collect the purchase invoice, installation and other costs incurred to acquire the asset.
2
Was any part met by another person, or is there a GST input credit or relatable subsidy?
Reduce cost met by others (clause (a)), GST input credit claimed and allowed (clause (b)), excise/CVD credit (clause (c)) and subsidy, grant or reimbursement relatable to the asset (clause (d)). If the subsidy is not directly relatable, apportion it using the formula in Section 39(3).
3
Were any payments above ₹10,000 in a day made otherwise than by specified banking or online mode?
- Yes: Exclude those payments from actual cost under Section 39(2).
- No: Go to the next step.
4
Was the asset acquired in a special situation listed in the Table in Section 39(4)?
For example, transfer from an amalgamating company or a demerged company.
- Yes: Use the actual cost specified in the Table.
- No: Use the reduced figure as the actual cost for depreciation and WDV.

Practical checklist

Do

Create a cost bridge from invoice price to statutory actual cost, itemising subsidy and third-party funding.
Identify any special transfer or reorganisation rule before entering an acquired asset into its depreciation block.

Avoid

Do not include a cost paid by another person or authority in the taxpayer's actual cost.
Do not assume a related-party transfer price automatically becomes the depreciation base.

Illustrative example

Worked example: machine with GST credit, subsidy and a cash part-payment

Hypothetical facts (illustration only, not a real taxpayer): A company buys a machine for ₹20 lakh plus ₹3.6 lakh GST, and claims and is allowed the full GST input credit. A State Government scheme gives it a ₹2 lakh subsidy directly for this machine. The installer's charge of ₹15,000 is paid in cash on one day.

GST
The ₹3.6 lakh GST was claimed and allowed as input credit, so it is not part of actual cost (Section 39(1)(b)).
Subsidy
The ₹2 lakh subsidy relates directly to the machine, so it is reduced under Section 39(1)(d).
Cash payment
The ₹15,000 cash payment exceeds ₹10,000 in a day and was not made through specified banking or online mode, so it is excluded under Section 39(2).

Outcome

Actual cost = ₹20 lakh - ₹2 lakh = ₹18 lakh (the cash-paid installation charge is left out).
This ₹18 lakh enters the block of assets for depreciation under Section 33 and WDV under Section 41.

Glossary

Actual cost: The statutory cost of a business asset after the reductions and special rules in section 39.
Written down value: The depreciation-adjusted value determined under section 41; certain section 39 transfers use the previous holder’s written down value.
Special modes of acquisition: The acquisitions listed in section 39(7), including gift, will, irrevocable trust, liquidation distributions and the specified section 70 transfers.

Frequently asked questions

Does GST paid on a business asset always increase its depreciable cost?

No - if input tax credit has been claimed and allowed on the GST paid, that amount is excluded (reduced) from the asset's actual cost under Section 39(1)(b).

What happens if I pay more than ₹10,000 in cash for a business asset?

Under Section 39(2), any payment (or aggregate of payments in a day to one person) exceeding ₹10,000 that is not made through a specified banking or online mode is excluded from the asset's actual cost for depreciation purposes.

How is the actual cost determined for an asset received as a gift?

Under section 39(4), table row 4, start with the previous owner’s actual cost. Reduce depreciation actually allowed for the tax year commencing on 1 April 1986 or any earlier tax year, and depreciation allowable for tax years commencing on or after 1 April 1987 under this Act or the Income-tax Act, 1961, as if the asset were the only asset in its relevant block.

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Last updated 10 October 2026

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