A used asset does not automatically inherit the seller's WDV
For FY 2025–26 and AY 2026–27, Explanation 3 to section 43(1) of the Income-tax Act, 1961 addresses assets previously used by another person for business or profession where the Assessing Officer is satisfied that the main purpose of their direct or indirect transfer was reducing income-tax liability through depreciation on enhanced cost. The officer may determine actual cost having regard to all circumstances, with previous Joint Commissioner approval. A price above the seller's written-down value alone is not the complete statutory test.
Read the applicable text: Income-tax Department: section 43(1), Explanations 3, 4 and 4A Income-tax Department: New Appendix I, ordinary machinery and plant.
Identify the transfer and prior business use
Trace the actual asset, seller, acquisition date, previous use, purchase terms and payment. Preserve specifications, age, condition, remaining utility, repair history and the commercial reason for buying it. A used-asset description is not itself evidence of tax-avoidance purpose. Equally, a purchase invoice does not answer a substantiated inquiry about an enhanced cost. Keep underlying facts separate from the conclusion being asserted.
Support the commercial cost rather than a convenient number
Use available valuation evidence, comparable transactions, negotiations, independent technical information and genuine acquisition economics. Explain why the seller's tax WDV, accounting carrying amount, market value and agreed price may differ. Do not assume any one of them automatically supplies the purchaser's tax cost. The provision requires the stated satisfaction, approval and circumstances-based determination; it does not prescribe a universal percentage discount on second-hand assets.
Keep adjacent actual-cost rules separate
Explanation 4 concerns reacquisition by a former owner and Explanation 4A addresses the stated prior-use and lease-back pattern. Explanation 4 uses the lower of the former owner’s depreciation-adjusted original cost and the reacquisition price. Under Explanation 4A’s qualifying prior-use, claimed-depreciation and lease-back facts, the transferee’s actual cost is the transferor’s WDV at transfer, notwithstanding Explanation 3. These rules have their own conditions and effects. Do not import a WDV substitution from another explanation into every ordinary used-asset purchase. Screen the actual structure before selecting the rule. This article focuses on Explanation 3 and does not provide a complete acquisition-cost opinion for every reorganisation, lease or related-party transaction.
Reconcile the established cost to depreciation
A supported or finally determined tax cost must flow into the correct block and depreciation computation with independently verified classification, use and eligibility. General machinery and plant outside the specified special categories carries a 15% rate in the cited New Appendix I; that is not the rate for every used asset. The examples using that rate expressly assume eligible ordinary machinery, full-rate use, no disposals and no other adjustment. A reduction in cost basis is not automatically an equal current-income addition.
Preserve the procedural and computation trail
Keep the original acquisition working, the officer's stated basis, evidence submitted, any determination and previous-approval record where applicable, and the tax-computation impact. Track disputes and available remedies from the actual order without claiming that a valuation disagreement alone proves fraud or an automatic demand. The book asset and tax block may require different workings; reconcile book depreciation and tax depreciation once, rather than adding both the entire cost difference and the same depreciation difference without a separate legal basis.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Price versus seller WDV
The purchase price is ₹12,00,000 and the seller's tax WDV is ₹4,00,000, a difference of ₹8,00,000. That difference identifies an evidence question; it does not by itself establish Explanation 3's purpose test or a purchaser cost capped at ₹4,00,000.
Illustrative example 2: Established cost and depreciation effect
Assume a valid Explanation 3 determination fixes tax cost at ₹7,00,000 instead of ₹12,00,000. For eligible ordinary machinery with the stated full-rate 15% assumptions, depreciation is ₹1,05,000 rather than ₹1,80,000: a ₹75,000 difference. The ₹5,00,000 basis reduction is not automatically a separate current addition of the same amount.
Illustrative example 3: Book-to-tax reconciliation
Assume book depreciation is ₹1,00,000 and the correct tax depreciation from the preceding facts is ₹1,05,000. Removing the book charge and deducting tax depreciation gives a net ₹5,000 deduction relative to book profit for this item. Do not add the ₹75,000 comparison to an unclaimed tax-depreciation figure as though it were another independent adjustment.
Illustrative example 4: Asset-specific history
A six-asset purchase has established prior business-use evidence for four assets and incomplete history for two. Two histories remain unresolved. Neither the six-asset invoice nor the four completed files proves the factual condition for all six.
Illustrative example 5: Separate components of a bundle
A bundle is priced at ₹8,00,000 for a used machine and ₹2,00,000 for separately identified components, totalling ₹10,00,000. Assume the established tax-cost analysis reduces only the machine component to ₹5,00,000 and independently supports the other ₹2,00,000. Aggregate tax cost is ₹7,00,000, a ₹3,00,000 difference. The allocation and each component's treatment require evidence.
Illustrative example 6: Block continuity
Assume an eligible ordinary-machinery block opens at ₹5,00,000 and receives a supported ₹7,00,000 addition qualifying for the full 15% rate, with no other movements. The base is ₹12,00,000, depreciation ₹1,80,000 and closing WDV ₹10,20,000. Reconcile the addition to the established tax cost rather than the unreconciled purchase invoice.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the period | FY 2025–26 and AY 2026–27. |
| 2 | Identify the assets | Specifications, seller, invoice and payment records. |
| 3 | Establish prior use | Business or professional use evidence for each asset. |
| 4 | Explain commercial purpose | Acquisition need, negotiations and transaction economics. |
| 5 | Support the agreed price | Valuation, condition and comparable evidence. |
| 6 | Screen adjacent rules | Reacquisition, lease-back or another actual-cost provision. |
| 7 | Review procedural requirements | Stated satisfaction and previous approval where applicable. |
| 8 | Record the supported tax cost | Original position, determination and dispute status. |
| 9 | Compute depreciation separately | Block, applicable rate, use conditions and other movements. |
| 10 | Reconcile once to the return | Book charge, tax deduction and closing WDV evidence. |
Sixteen practitioner FAQs
1. Does every used purchase invoke Explanation 3?
No. Apply its full factual and procedural conditions.
2. Is seller WDV automatically the purchaser's cost?
Not under Explanation 3 merely because it is lower than the price.
3. What prior use is relevant?
Use by another person for business or profession before acquisition.
4. What purpose test does the provision state?
The main purpose of the transfer must be the stated reduction of tax liability through depreciation on enhanced cost, as the officer is satisfied.
5. Can indirect transfers be relevant?
The provision expressly refers to direct or indirect transfer.
6. Whose previous approval is specified?
The Joint Commissioner's previous approval for the determination described.
7. Is a fixed used-asset haircut prescribed?
No. The officer determines the amount having regard to all circumstances on the stated terms.
8. Does an invoice answer every cost question?
No. Preserve underlying commercial and asset evidence.
9. Are accounting value and tax WDV identical measures?
No. Identify each measure and its purpose.
10. Is a lease-back automatically governed only by Explanation 3?
No. Examine Explanation 4A and other applicable provisions separately.
11. Does reacquisition have its own rule?
Explanation 4 addresses its stated former-owner situation.
12. Is 15% the rate for every used asset?
No. It is used here only for the identified ordinary-machinery category under the stated assumptions.
13. Does a basis reduction equal an immediate income addition automatically?
No. Compute the actual legal and depreciation effects.
14. Can the cost and depreciation differences be added twice?
Do not duplicate the same effect without a separate supported basis.
15. Should all bundle components follow one unsupported allocation?
No. Establish component identity, value and treatment.
16. What should the reviewer reproduce?
The asset history, purpose evidence, applicable rule, procedure, tax cost and depreciation bridge.
Official sources
Income-tax Department: section 43(1), Explanations 3, 4 and 4A Income-tax Department: New Appendix I, ordinary machinery and plant