Which cost survives a qualifying group transfer?
For FY 2025–26 / AY 2026–27, section 43(1), Explanation 6 of the Income-tax Act, 1961 preserves the actual cost that would have applied had the transferor continued to hold the capital asset, subject to section 47(iv) or (v). A group invoice or valuation is not an automatic new depreciation base. This article addresses the two-company tax-cost handoff, rather than amalgamation or demerger accounting. The earlier financial year's return remains under the 1961 Act; the tax-year numbering of the 2025 Act must not be substituted into it.
Read the applicable text: Income Tax Department: section 43, Explanations 6 and 2 Income-tax Act, 1961: section 47(iv) and (v) Income Tax Department: transition and AY 2026–27.
Establish the direction and statutory gateway
Under section 47(iv), the parent or its nominees must hold the subsidiary's whole share capital and the receiving subsidiary must be an Indian company. Under section 47(v), the holding company must hold the subsidiary's whole share capital and the receiving holding company must be Indian. The stock-in-trade proviso also needs review. Common directors, accounting control or a majority stake alone does not establish either gateway. Record the share-capital evidence and transfer direction before calculating anything. Other exclusions, subsequent events and any withdrawal provisions require a separate transaction review; this cost working is not a blanket exemption opinion.
Keep actual cost distinct from the block rule
Section 43(6), Explanation 2 separately governs a qualifying transfer of a block of assets. Notwithstanding clause (1), it takes the transferee's block cost from the transferor's immediately preceding previous-year block WDV, reduced by depreciation actually allowed for that preceding year. Identify whether the statutory block-transfer case actually exists. Do not turn this into an unsupported asset-wise allocation formula for every isolated asset movement. Neither the book carrying amount nor the transfer price replaces that calculation.
Build a two-company evidence pack
Obtain the transferor's acquisition-cost history, depreciation computation, relevant filed-return schedules, orders affecting allowances, complete block composition and disposal movements. Match the exact asset identifiers and receiving company. A certificate saying only tax WDV is insufficient if it does not disclose the period and whether the stated figure is before or after the preceding year's depreciation. For the illustrations below, all statutory conditions are assumed satisfied unless an exception is expressly described. Figures are evidence-reconciliation models, not full current-year depreciation calculations.
Reconcile books without posting a tax uplift
Use separate columns for invoice consideration, accounting recognition, continuing historical actual cost and applicable block basis. Record the explanation for every difference. A valuation report can support the commercial transaction without authorising depreciation on its uplift. Depreciation eligibility, rates, put-to-use facts, timing and allocation across entities must be established independently; this article supplies no assumed rate or ITR row. Similarly, a book gain is not a substitute for the transferor's separately documented tax result.
Close exceptions before return preparation
Resolve ownership gaps, inconsistent prior-year allowances, missing assets and ambiguous block coverage with the underlying records. Distinguish an unresolved cost from an actual zero basis. Keep later tax orders and corporate ownership changes on a follow-up register. A reconciled handoff makes the return supportable; it does not eliminate the need to check the transfer's continuing legal conditions.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Invoice uplift
Assume continuing actual cost of ₹10 lakh, a ₹14 lakh invoice and ₹9 lakh book carrying value. The invoice uplift over continuing cost is ₹4 lakh; its difference from book carrying value is ₹5 lakh. Neither difference is automatically tax depreciation.
Illustrative example 2: Whole block transferred
Assume a qualifying block transfer with immediately preceding previous-year WDV of ₹20 lakh before that year's depreciation of ₹3 lakh actually allowed. The Explanation 2 block handoff is ₹17 lakh. A ₹25 lakh transfer invoice would exceed that basis by ₹8 lakh.
Illustrative example 3: Avoid a second reduction
A tax schedule already shows ₹17 lakh after ₹3 lakh prior-year depreciation from ₹20 lakh. Subtracting ₹3 lakh again gives ₹14 lakh, understating the handoff by ₹3 lakh. First establish the schedule's measurement point.
Illustrative example 4: Two separate blocks
Assume two independently qualifying transferred blocks: ₹12 lakh less ₹2 lakh allowed depreciation, and ₹8 lakh less ₹1 lakh. Their handoff amounts are ₹10 lakh and ₹7 lakh, total ₹17 lakh. Preserve separate block identities rather than creating one blended block.
Illustrative example 5: Ownership exception
A parent holds 9,900 of 10,000 shares, with the other 100 held by an independent investor. Its 99% interest does not meet the whole-share-capital assumption. The ₹100 lakh invoice cannot be assigned the qualifying continuity basis merely because the parent controls the company.
Illustrative example 6: Record-count reconciliation
The transfer deed lists 14 assets, the tax pack identifies 12 and the receiving register identifies 13. There are two deed assets missing from the tax pack and one missing from the receiving register. Match identities before calculating a block or assuming the missing items are identical.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the period | FY 2025–26 / AY 2026–27 and the 1961 Act. |
| 2 | Identify both companies | Legal names, tax identifiers and transfer direction. |
| 3 | Test the share-capital condition | Register, nominees and independent holdings. |
| 4 | Check Indian-company status | Receiving entity under the applicable clause. |
| 5 | Review the asset character | Capital asset and stock-in-trade exception analysis. |
| 6 | Recover historical cost | Acquisition trail and statutory cost adjustments. |
| 7 | Identify block coverage | Exact transferred population and relevant Explanation 2 analysis. |
| 8 | Verify the WDV measurement point | Prior-year computation and depreciation actually allowed. |
| 9 | Bridge invoice and books | Separate differences from the statutory tax basis. |
| 10 | Close the handoff | Both-company reconciliation and unresolved-condition register. |
Sixteen practitioner FAQs
1. Does a 99% holding suffice?
No. It does not establish the whole-share-capital condition described here.
2. Does control under accounting standards prove section 47 eligibility?
No. The statutory share-capital and receiving-company tests must be evidenced separately.
3. Can nominees be ignored?
No. Identify their legal capacity and the precise language of the relevant transfer clause.
4. Which company must be Indian on a downstream transfer?
Section 47(iv) requires the receiving subsidiary to be an Indian company.
5. Which must be Indian on an upstream transfer?
Section 47(v) requires the receiving holding company to be an Indian company.
6. Does a transfer invoice establish actual cost here?
It records consideration, but does not override the continuity provision.
7. Is historical actual cost necessarily the same as current WDV?
No. Keep those distinct statutory concepts in separate columns.
8. What additional rule applies to a qualifying block transfer?
Section 43(6), Explanation 2 provides the specific block-basis calculation.
9. Why label WDV before or after depreciation?
An unlabeled figure can cause the same prior-year depreciation to be deducted twice.
10. Can a valuation uplift automatically be depreciated?
No. A valuation does not itself override statutory tax-cost continuity.
11. Can separate tax blocks be pooled for convenience?
Preserve their statutory identities and calculations in the tax working.
12. Does the block illustration determine current-year depreciation?
No. Rates, use, timing and any allocation must be checked independently.
13. Does a missing cost certificate mean nil basis?
No. It means the evidence is incomplete; reconstruct and resolve it.
14. Does an isolated asset automatically qualify as a whole-block transfer?
Do not make that assumption. Establish the precise statutory facts.
15. Does this article cover a demerger?
No. Demerger cost and block rules require their own analysis.
16. Is the initial eligibility check the end of the review?
No. Track later events and any applicable withdrawal consequences separately.
Official sources
Income Tax Department: section 43, Explanations 6 and 2 Income-tax Act, 1961: section 47(iv) and (v) Income Tax Department: transition and AY 2026–27