Check deduction history before adopting an acquisition value
For FY 2025–26 / AY 2026–27, section 43(1), Explanation 13 of the Income-tax Act, 1961 treats actual cost as nil where section 35AD deduction has been allowed or is allowable. The rule also covers specified receipts and transfer modes in another person's hands. This article concerns the tax-cost evidence inherited with an asset, rather than calculating diversion income or eligibility for a new investment deduction. The earlier-year return remains governed by the 1961 Act; do not substitute the 2025 Act's section numbering.
Read the applicable text: Income Tax Department: section 43(1), Explanation 13 Income Tax Department: earlier-year transition.
Separate three asset histories
For each asset, record accounting cost, the section 35AD history and the tax-cost conclusion. A normal commercial invoice does not prove that the special nil-cost rule is irrelevant. Equally, an asset used in a specified business is not automatically covered without establishing that deduction was allowed or allowable on that asset. Preserve the original expenditure schedule, eligibility conclusion, filed computation and subsequent orders. Where the original owner did not claim a deduction, investigate whether it was legally allowable rather than treating non-claim as conclusive.
Identify the actual receipt or transfer mode
Explanation 13 extends to receipt by gift, will or irrevocable trust, liquidation distribution and the listed section 47 transfer modes. Map the exact route instead of treating every group acquisition or every purchase as listed. The provision expressly lists section 47 clauses (i), (iv), (v), (vi), (vib), (xiii), (xiiib) and (xiv). Underlying route conditions require their own legal evidence. An ordinary sale must not be forced into this list merely because the asset once belonged to a related party.
Apply the restoration proviso only on established facts
Where the relevant deduction or part is deemed income under section 35AD(7B), the proviso reconstructs actual cost by reducing actual cost by depreciation that would have been allowable since acquisition at the applicable rates. It is not a return to full invoice cost. Establish the statutory trigger and reconstruct the historical calculation before using a positive basis. The worked reconstruction below assumes that trigger and an independently established historical depreciation total; it does not prescribe a rate or decide who qualifies for the exception.
Maintain a mixed-asset and book-to-tax bridge
A transferred undertaking may contain covered assets, ordinary depreciable assets and items requiring separate treatment. Map identifiers and amounts individually. Do not replace all values with nil just because one investment-deduction schedule exists. Do not import the book depreciation total as tax depreciation. Separate accounting entries from the legally determined tax basis and from any current-year deduction calculation.
Resolve omissions without manufacturing a basis
An absent historical schedule is an evidence gap, not proof of either ordinary cost or nil cost. Reconstruct it from the original owner's returns, expenditure records and orders. Retain the exact legal route and cost conclusion alongside the receiving register. Rate, use, depreciation-block and return-field questions must then be checked under their own applicable provisions. No return row or utility validation is assumed in this article.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Nil tax basis versus book balance
Assume an asset cost ₹100 lakh, section 35AD deduction was allowed on it, and current book carrying value is ₹80 lakh. Explanation 13 applies with no restoration exception: tax actual cost is nil. The book-versus-tax-cost difference is ₹80 lakh, not a fresh ₹80 lakh depreciation claim.
Illustrative example 2: Allowable but unclaimed
Assume legal review establishes that ₹75 lakh expenditure on the asset was allowable under section 35AD, although the original return omitted the claim. Non-claim does not create ₹75 lakh ordinary depreciation cost: the Explanation 13 cost remains nil on these assumptions. Correcting the omitted deduction is a separate issue.
Illustrative example 3: Mixed receipt population
Assume assets with book values ₹25 lakh are established as covered nil-cost receipts, while a separate ordinary asset has independently verified book and tax cost of ₹8 lakh. Total book values are ₹33 lakh; the working's tax-cost total is ₹8 lakh, a ₹25 lakh difference. Do not apply nil to the ordinary asset by association.
Illustrative example 4: Specified-transfer price
Assume the asset and transfer are established as covered by Explanation 13, with no proviso exception. A ₹60 lakh transfer price does not replace nil tax actual cost. Adopting that price would introduce an unsupported ₹60 lakh basis; commercial consideration and tax cost need separate columns.
Illustrative example 5: Restoration reconstruction
Assume the proviso applies, actual cost is ₹100 lakh and properly reconstructed depreciation that would have been allowable since acquisition totals ₹36 lakh. Reconstructed actual cost is ₹64 lakh. If the book carrying value is ₹65 lakh, the basis difference is ₹1 lakh; neither figure alone computes current depreciation.
Illustrative example 6: Book depreciation is not a nil-basis tax allowance
Assume books charge ₹8 lakh depreciation on a covered asset with nil tax cost and no restoration exception. The working reverses that ₹8 lakh book expense when deriving taxable business income, with no ordinary tax depreciation on the nil basis. Reversing it twice would overstate the adjustment by ₹8 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the period | FY 2025–26 / AY 2026–27 and applicable enactment. |
| 2 | Identify every asset | Serial number, expenditure and ownership history. |
| 3 | Establish deduction status | Allowed or allowable section 35AD expenditure evidence. |
| 4 | Review non-claims | Legal eligibility distinguished from return omission. |
| 5 | Map the receipt route | Exact transfer mode and relevant conditions. |
| 6 | Test the proviso | Established section 35AD(7B) trigger, where relevant. |
| 7 | Reconstruct historical depreciation | Rate, period and asset-specific working for the proviso. |
| 8 | Separate mixed populations | Covered and ordinary assets with individual conclusions. |
| 9 | Bridge accounting charges | Book depreciation versus legally determined tax allowance. |
| 10 | Close the evidence file | Prior returns, orders and final asset-cost reconciliation. |
Sixteen practitioner FAQs
1. Is every specified-business asset automatically nil cost?
Establish that deduction was allowed or allowable on the particular asset.
2. Can non-claim alone establish ordinary depreciation cost?
No. The wording includes an allowable deduction.
3. Does the current book carrying value decide tax actual cost?
No. Keep accounting and statutory tax measurements separate.
4. Does an acquisition valuation override Explanation 13?
Not merely because it supports a commercial price.
5. Are all asset purchases covered transfer modes?
No. Identify the exact listed receipt or transfer route.
6. Why retain the original deduction schedule?
It links the specific asset to the investment-deduction history.
7. Can a group transfer be treated as covered without conditions?
No. Verify the actual statutory route and its conditions.
8. Does liquidation receipt appear in the rule?
Yes, distribution on liquidation is expressly addressed.
9. What if only some transferred assets are covered?
Reach asset-specific conclusions and preserve the mixed population.
10. Does a missing old return prove nil cost?
No. It creates an evidence gap requiring reconstruction.
11. When is the restoration proviso relevant?
When the statutory section 35AD(7B) deemed-income condition is established.
12. Does restoration mean full historical invoice cost?
No. The proviso requires the hypothetical depreciation reduction.
13. Can the latest depreciation rate be applied to all historic years automatically?
No. Reconstruct applicable rates and periods for the statutory calculation.
14. Does a positive reconstructed cost compute current depreciation?
No. Current eligibility, use, block and rate questions remain separate.
15. Should book depreciation be added back twice?
No. Reconcile each book expense to one supported tax adjustment.
16. Does this article determine the diversion-income amount?
No. Its distinct task is the actual-cost and transferee evidence working.
Official sources
Income Tax Department: section 43(1), Explanation 13 Income Tax Department: earlier-year transition