The scheme does not create a fresh tax valuation
For FY 2025–26 / AY 2026–27, section 43(1), Explanation 12 of the Income-tax Act, 1961 addresses a capital asset acquired under a SEBI-approved scheme for corporatisation of a recognised stock exchange in India. Its actual cost is deemed to be the amount that would have been regarded as actual cost had there been no corporatisation. The question is continuity of the applicable tax cost, not which scheme valuation produces the larger deduction.
Read the applicable text: Income-tax Act, 1961: section 43(1), Explanation 12.
Establish the narrow statutory population
Obtain the approved scheme, evidence of the recognised exchange and the asset-transfer schedule. The rule does not apply merely because an ordinary securities broker incorporates its business or a company buys exchange membership. Identify the acquisition that falls under the approved corporatisation scheme before applying the statutory counterfactual.
Build the no-corporatisation cost record
Start with the historical tax-cost record and trace adjustments that would remain relevant without the corporatisation. Retain invoices, ownership history and operative assessment evidence. Neither the scheme's book entry nor an independently obtained fair value establishes the tax actual cost by itself. Where historical inputs are incomplete, investigate them rather than substituting a valuation report.
Actual cost is not opening WDV
Actual cost and written-down value answer different questions. A continuing actual cost of ₹100 lakh with prior depreciation of ₹40 lakh does not make both figures ₹60 lakh. Reconcile the appropriate depreciation and block records separately. The examples isolate actual-cost continuity and treat their underlying tax inputs as fictional assumptions; they do not prescribe a fresh block entry or a depreciation rate.
Keep subsequent transactions outside the transfer comparison
A later eligible addition needs its own cost evidence, while disposals and annual depreciation require the relevant provisions. Do not fold all later expenditure into the original scheme figure. Reconcile the continuing scheme asset population to later additions so that one invoice is not counted in both populations.
Close the return-period bridge
Maintain columns for scheme asset ID, book amount, supported continuing actual cost, accumulated tax adjustments and the separately determined WDV. Explain each book-to-tax difference. This article concerns the stated earlier financial year's return under the 1961 Act and does not substitute Income-tax Act, 2025 tax-year section numbers.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Higher scheme book value
Assume a transferred exchange asset has assumed continuing actual cost ₹80 lakh and scheme book amount ₹125 lakh. Explanation 12 preserves ₹80 lakh on these assumptions. The ₹45 lakh difference is a book-to-tax reconciliation, not an automatic tax uplift.
Illustrative example 2: Lower scheme book value
Continuing actual cost is ₹60 lakh and scheme book amount ₹48 lakh. The assumed continuity result remains ₹60 lakh; the ₹12 lakh difference needs explanation. This does not determine the asset's tax WDV or current depreciation.
Illustrative example 3: Two transferred assets
Asset A has continuing actual cost ₹40 lakh and B ₹25 lakh, totalling ₹65 lakh. Scheme book amounts ₹55 lakh and ₹35 lakh total ₹90 lakh. The aggregate difference is ₹25 lakh, supported by separate asset records rather than a single unallocated balancing amount.
Illustrative example 4: Separate depreciation history
An asset has assumed tax actual cost ₹100 lakh and supported cumulative depreciation ₹40 lakh, leaving a simplified tax carrying working of ₹60 lakh. Importing ₹60 lakh into the actual-cost column understates that column by ₹40 lakh. Apply the actual statutory block calculation separately.
Illustrative example 5: Avoid an addition appearing twice
A reconciled scheme population has continuing actual cost ₹70 lakh. A distinct later eligible addition costs ₹8 lakh. Their cost-register total is ₹78 lakh. A draft total of ₹86 lakh has included the ₹8 lakh twice; remove the duplicate without treating this total as a computed depreciation allowance.
Illustrative example 6: Correct the underlying evidence
A draft continuity working uses ₹32 lakh. Assume supporting historical adjustment evidence establishes ₹29 lakh instead. The correction is ₹3 lakh. Trace it through the cost record and review consequential workings rather than simply changing the scheme book entry.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the exchange population | Recognised-exchange evidence. |
| 2 | Obtain the approved scheme | SEBI approval and operative scheme. |
| 3 | Identify transferred assets | Scheme IDs and ownership records. |
| 4 | Reconstruct historical tax cost | Invoices and prior workings. |
| 5 | Trace continuing adjustments | Evidence under the applicable tax rules. |
| 6 | Apply the no-corporatisation comparison | Explanation 12 memorandum. |
| 7 | Separate book valuation | Scheme accounting reconciliation. |
| 8 | Reconcile WDV independently | Depreciation and block records. |
| 9 | Separate later additions | Invoice-level duplicate check. |
| 10 | Close the return bridge | Signed cost and tax reconciliation. |
Sixteen practitioner FAQs
1. Does every exchange-related asset qualify?
No. Establish acquisition under the specified approved corporatisation scheme.
2. Which provision governs this comparison?
Section 43(1), Explanation 12.
3. Is an ordinary broker's incorporation enough?
No; do not equate it with the statutory scheme.
4. Must the exchange be recognised in India?
That is part of the provision's stated scope.
5. Whose approval is identified?
The Securities and Exchange Board of India.
6. Does fair value automatically become tax cost?
No. Reconstruct the no-corporatisation amount.
7. Does a lower book figure automatically reduce tax cost?
The statutory continuity test still governs.
8. Is actual cost identical to WDV?
No. Reconcile both measures separately.
9. Do these examples establish depreciation rates?
No; they isolate the cost comparison.
10. Can a single group valuation replace asset records?
It does not establish each asset's continuing tax cost.
11. What if old invoices are missing?
Reconstruct supported evidence and resolve the gap before adopting a figure.
12. Are later additions automatically scheme assets?
Separate their acquisition facts and cost evidence.
13. What does a duplicate addition do?
It overstates the cost register and may affect later workings.
14. Should accounting entries be changed merely to match tax cost?
Maintain a supported book-to-tax reconciliation under the applicable frameworks.
15. What if historical tax evidence is corrected?
Trace the correction and assess consequential computations.
16. Which return period is covered?
FY 2025–26 / AY 2026–27 under the 1961 Act.
Official sources
Income-tax Act, 1961: section 43(1), Explanation 12
Income Tax Department: section 43, including Explanation 12
Income Tax Department: transition to the Income-tax Act, 2025