Section 40 of the Income-tax Act, 2025 — Cost of Acquisition of Certain Assets (Amalgamation, Gift, Will, HUF Partition) Sold as Stock-in-Trade

In plain language

What Section 40 actually says

Section 40 of the Income-tax Act, 2025 is a small but important "no-loophole" rule inside the Profits and Gains of Business or Profession (PGBP) chapter. It answers one narrow question: when a business sells an asset as stock-in-trade, but that asset did not come to it through a normal purchase — it came through amalgamation, gift, will, an irrevocable trust, or a Hindu Undivided Family (HUF) partition — what cost do you deduct?

The answer: you do not get to use the market value on the date you received it. Instead, the cost of acquisition in your hands is carried over from the person who gave it to you. Specifically, the cost = the cost of acquisition of the asset in the hands of the amalgamating company / transferor / donor, plus the cost of any improvement made to it, plus any expenditure incurred wholly and exclusively in connection with the transfer (for example, stamp duty or transfer expenses borne by the transferor/donor). This inherited cost is what you subtract from the sale price to arrive at business profit.

Section 40 is the 2025 Act's re-enactment of the old Section 43C of the Income-tax Act, 1961. The substance is the same; the drafting is simpler and it adds one explicit carve-out (see below).

Who does it apply to?

• Amalgamated companies that receive an asset under a scheme of amalgamation and later sell it as stock-in-trade (inventory) in the course of business.
• Any assessee — an individual, HUF, firm or company — who receives an asset by way of a gift, under a will, through an irrevocable trust, or on total or partial partition of an HUF, and then sells that asset as stock-in-trade.

The common thread: the asset was acquired without a cost being paid (or without a market-based cost) and is now being sold as business inventory, not as a capital asset.

Key conditions and the one important exclusion

• The asset must be sold as stock-in-trade. If the same asset were sold as a capital asset, the capital-gains rules (Section 72 onward), not Section 40, would decide the cost.
• The cost is the predecessor's cost, not the receipt-date value. This blocks a "step-up" in cost that would otherwise wipe out taxable business profit.
• Section 40 does NOT apply to an asset referred to in Section 67(6). Section 67(6) deals with a capital asset that was itself converted into stock-in-trade — in that case the fair market value on the date of conversion is deemed to be the consideration and becomes the cost for the business-income leg. That situation already has its own cost rule, so Section 40 steps aside. This explicit carve-out is the main improvement over the old Section 43C.

How it interacts with related sections

• Section 67 (Capital gains) and 67(6): Section 40 governs the business-income cost; Section 67(6) governs the conversion scenario and is expressly kept out of Section 40.
• Cost-carryover for capital gains (successor to Section 49 of the 1961 Act): Section 40 mirrors that "inherited cost" logic but for the PGBP head, keeping the two heads consistent.
• Section 28 / 26–27 (business profits and how they are computed): Section 40 feeds the correct cost figure into the profit computation.

Practical implications for taxpayers

• No free step-up. A real-estate developer that receives land by gift or on HUF partition cannot claim the current market value as cost when it sells the land as inventory — it must trace back to what the donor/HUF originally paid.
• Documentation is everything. You must be able to prove the predecessor's original cost, improvement cost, and transfer expenses. Keep the amalgamation scheme, gift deed, will, trust deed, partition record, and the original purchase documents of the previous owner.
• No indexation. Because the asset is sold as stock-in-trade (business income), the cost-inflation-index benefit available to capital gains does not apply — you use the plain historical cost.