Chapter IV - Computation of Total Income
Section 40
Section 40: cost of acquisition of certain assets later sold as stock-in-trade
Section 40 fixes how the "cost of acquisition" is computed, for purposes of the business income head, when an asset that came to the assessee through amalgamation, gift, will, an irrevocable trust, or partition of a Hindu undivided family is later sold as stock-in-trade.
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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) For the purposes of computation of income under the head “Profits and gains of business or profession”, cost of acquisition of an asset which becomes property of—
(a) an amalgamated company under a scheme of amalgamation; or
(b) an assessee, under a gift, or will, or an irrevocable trust, or on total or partial partition of a Hindu undivided family,
when sold as stock-in-trade shall be the sum of—
(i) cost of acquisition of the said asset in the hands of the amalgamating company in case of clause (a), or the transferor or donor in case of clause (b);
(ii) any cost of improvement made;
(iii) any expenditure incurred by the amalgamating company or transferor or donor, as the case may be, wholly and exclusively in connection with such transfer.
(2) This section shall not apply to an asset referred to in section 67(6).
Introduction
The previous owner's cost history matters when a qualifying transferred asset later becomes stock-in-trade. Section 40 supplies a continuity-based business cost, not a new market-value step-up.
Key takeaways
Stock-in-trade received by transfer
For business-income computation, an asset received through a qualifying amalgamation, gift, will, irrevocable trust or Hindu undivided family partition uses the predecessor’s acquisition cost when later sold as stock-in-trade.
What can be added
Qualifying improvement cost and expenditure wholly and exclusively connected with the transfer are added; assets covered by Section 67(6) are outside this rule.
What Section 40 covers
Section 40(1) applies to an asset that becomes the property of (a) an amalgamated company under a scheme of amalgamation, or (b) an assessee through a gift, will, an irrevocable trust, or total/partial partition of a Hindu undivided family - and which is subsequently sold as stock-in-trade.
In such cases, the cost of acquisition, for computing income under "Profits and gains of business or profession", is the sum of: the cost of acquisition of the asset in the hands of the amalgamating company (for amalgamation cases) or the transferor/donor (for gift/will/trust/partition cases); any cost of improvement made to the asset; and any expenditure incurred by that amalgamating company, transferor or donor wholly and exclusively in connection with the earlier transfer.
Exclusion
Section 40(2) states that this section does not apply to an asset referred to in Section 67(6).
Build the historical cost trail
Establish the asset's acquisition cost in the hands of the amalgamating company, transferor or donor, as applicable.
Add only the qualifying improvement cost and expenditure wholly and exclusively connected with the prior transfer, then confirm the Section 67(6) exclusion is not triggered.
Step-by-step flow for applying Section 40
- 1
How did the asset come to the assessee?
Section 40 covers assets received by an amalgamated company under a scheme of amalgamation, or by an assessee under a gift, will, irrevocable trust or total or partial partition of a Hindu undivided family.
- Other mode: Section 40 does not apply.
- One of these modes: Go to the next step.
- 2
Is the asset sold as stock-in-trade?
- No: Section 40 does not apply.
- Yes: Go to the next step.
- 3
Is it an asset referred to in Section 67(6)?
- Yes: Excluded by Section 40(2).
- No: Go to the next step.
- 4
Compute cost
Cost in the hands of the amalgamating company, transferor or donor + any cost of improvement + expenditure by them wholly and exclusively in connection with the transfer.
Practical checklist
Do
- Preserve predecessor purchase, improvement and transfer-expense records.
- Document the qualifying gift, will, trust, partition or amalgamation route and the later stock-in-trade sale.
Avoid
- Do not substitute current fair market value for the historical statutory cost without a provision permitting it.
Illustrative example
Worked example: gifted land sold as plots
Hypothetical facts (illustration only, not a real taxpayer): Ms. Gupta, a property dealer, receives land from her father by gift and sells it as stock-in-trade for ₹40,00,000. Her father had bought it for ₹20,00,000, spent ₹3,00,000 on levelling and fencing, and spent ₹50,000 on registration of the gift. Assume the land is not an asset referred to in Section 67(6).
Donor's cost
₹20,00,000.
Cost of improvement
₹3,00,000.
Transfer expenditure
₹50,000 spent wholly and exclusively in connection with the gift.
Cost under Section 40
₹20,00,000 + ₹3,00,000 + ₹50,000 = ₹23,50,000.
Profit on sale
₹40,00,000 - ₹23,50,000 = ₹16,50,000, before her other business expenses.
Outcome
- Cost of acquisition is ₹23,50,000, not nil.
- Keep the father's purchase deed and improvement bills to prove the historical cost.
Glossary
- Stock-in-trade
- An asset held for trading or sale in the business rather than as a capital investment.
- Cost continuity
- Use of a predecessor's acquisition cost rather than a fresh value after a qualifying transfer.
Frequently asked questions
When does Section 40 apply?
Only when an asset acquired through amalgamation, gift, will, an irrevocable trust, or HUF partition is later sold by the assessee as stock-in-trade (i.e., as part of a trading/business activity), and the resulting income is computed under the business income head.
How is the cost of acquisition worked out in these cases?
It is the sum of the previous owner's (amalgamating company's, transferor's or donor's) cost of acquisition, any cost of improvement made, and any expenditure that previous owner incurred wholly and exclusively in connection with the earlier transfer to the assessee.
Need help applying this provision to your situation?
Talk to our tax audit team about asset cost computationLast updated 9 October 2026