Section 43 of the Income Tax Act, 1961 supplies the definitions that run through every calculation of business and professional income: what counts as the actual cost of an asset, what qualifies as “plant,” when a transaction is speculative, what “paid” means, and how an asset’s tax value declines over time. These terms are used throughout Sections 28 to 41, so an error in any of them travels straight into your depreciation claim, your profit figure, and eventually your assessment. The definitions apply to every taxpayer computing income under “Profits and gains of business or profession.”
Actual Cost of an Asset
Section 43(1) defines actual cost as the amount the assessee spends to acquire an asset, reduced by any portion of that cost met directly or indirectly by another person. If a central or state government, a statutory authority, or any other party covers part of the price through a subsidy, grant, or reimbursement, that portion is stripped out before you compute depreciation.1Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 10 Buy equipment for ₹10 lakh, receive a ₹2 lakh subsidy, and your actual cost is ₹8 lakh. Where a subsidy cannot be traced to a specific asset, the reduction is spread proportionally across the assets it relates to.
Incidental expenses that bring the asset to working condition at your premises form part of the actual cost. Freight, transit insurance, and installation charges all fold into the figure on your books, provided invoices and payment records back them up.
Interest on Borrowed Capital
Interest on money borrowed to acquire an asset is added to actual cost, but only up to the date the asset is first put to use. After that date, further interest on the same loan becomes a revenue expense deductible in the year it is paid, not a capital addition. The cutoff prevents a slow inflation of the depreciable base through ongoing financing costs.
GST and Input Tax Credit
If you are eligible to claim Input Tax Credit on the GST paid for an asset, that GST amount is excluded from actual cost. Including it would overstate the asset’s value and inflate depreciation. Keep the GST invoices and proof of credit claimed for scrutiny during assessment.
Stock-in-Trade Converted to a Capital Asset
When stock-in-trade is converted into a capital asset and then used in the business, the actual cost is the fair market value on the date of conversion. Immovable property is valued at stamp duty rates, shares and securities follow Rule 11UA, and other property is valued at what it would fetch in an open market sale on the conversion date.2Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 1A
Written Down Value and the Block of Assets
Written down value under Section 43(6) is the figure your depreciation is computed on. For an asset acquired during the current financial year, WDV equals actual cost. For an asset acquired earlier, WDV equals actual cost minus all depreciation actually allowed under the Act in prior years.3Indian Kanoon. Income Tax Act 1961 – Section 43(6)
The Act tracks assets in blocks rather than one by one. Similar assets carrying the same depreciation rate are grouped, and the block moves through each year on a simple arithmetic: opening WDV, plus the actual cost of new assets acquired during the year, minus the sale proceeds and scrap value of assets sold, discarded, or destroyed during the year. What remains is the WDV on which you compute depreciation for that year.3Indian Kanoon. Income Tax Act 1961 – Section 43(6)
One guardrail: the reduction for sale proceeds cannot exceed the block’s WDV after adding new acquisitions. Any excess triggers a short-term capital gain under Section 50 rather than driving the block negative.
What Counts as Plant
Section 43(3) defines “plant” to include ships, vehicles, books, scientific apparatus, and surgical equipment used for business or professional purposes.4Income Tax Department. Income-tax Act, 1961 – Section 43(3) The word “includes” signals that the list is not exhaustive. Courts have read plant broadly to cover tools, instruments, and apparatus that a business uses in its operations, as long as the item works as equipment rather than merely housing the business.
Buildings and office furniture sit in their own categories with their own depreciation rates. Plant and machinery generally attract higher rates than buildings, so pushing an asset into the wrong category directly changes how much you can deduct each year.
The Meaning of “Paid”
Section 43(2) reads “paid” more broadly than the everyday sense of the word. It covers amounts actually paid and amounts incurred as liabilities, depending on the method of accounting used to compute business income. Under the mercantile system, an expense counts as paid once the liability crystallizes, even if no money has yet moved. Under the cash system, the money has to actually leave your hands. The definition decides the year in which deductions for salaries, rent, interest, and other business expenses can be claimed.
Speculative Transactions
Section 43(5) treats a transaction as speculative if it is a contract for the purchase or sale of a commodity, including stocks and shares, that is settled otherwise than by actual delivery or transfer of the commodity or scrip.5Indian Kanoon. Income Tax Act 1961 – Section 43(5) Settlement by paying or receiving only the price difference is what makes a deal speculative. The classification carries real weight: losses from speculative transactions can be set off only against speculative gains, never against other business income.
The statute carves out several deals that are not speculative even without delivery:
- Contracts for raw materials or merchandise entered into by a person in a manufacturing or merchanting business to guard against price fluctuations on actual delivery contracts.5Indian Kanoon. Income Tax Act 1961 – Section 43(5)
- Contracts in stocks and shares entered into by a dealer or investor to protect existing holdings against price drops.5Indian Kanoon. Income Tax Act 1961 – Section 43(5)
- Eligible derivatives transactions under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out on a recognized stock exchange.5Indian Kanoon. Income Tax Act 1961 – Section 43(5)
- Eligible commodity derivatives on a recognized stock exchange that attract Commodities Transaction Tax under the Finance Act, 2013.5Indian Kanoon. Income Tax Act 1961 – Section 43(5)
Special Valuation Situations
Several Explanations under Section 43(1) address cases where “the price you paid” does not describe what actually happened. These come up often in assessments.
Assets Previously Used for Scientific Research
When an asset used for scientific research related to the business is later moved into regular operations, actual cost is the original cost reduced by any deduction already claimed under Section 35 for that research.6Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 1 The adjustment prevents a double deduction on the same spend.
Assets Received by Gift or Inheritance
An asset received as a gift or inheritance does not get a fresh market-value cost base. Actual cost is the lower of the previous owner’s WDV or the market value on the date of acquisition.7Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 2 The rule stops non-commercial transfers from resetting values upward and generating fresh depreciation on an already-depreciated asset.
Amalgamation and Demerger
On amalgamation, the amalgamated company adopts the same actual cost the transferring company would have used had it kept the asset. On demerger, the same carry-over applies, capped at the WDV in the hands of the demerged company.8Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 7 and 7A Both rules apply only where the receiving entity is an Indian company.
Re-Acquired Assets
Sell an asset, then buy it back later, and you cannot claim the repurchase price as the new actual cost without limit. The Act sets actual cost at the lower of the original cost (adjusted for depreciation already allowed and any profit or loss recognized on the earlier disposal) or the repurchase price.9Income Tax Department. Income-tax Act, 1961 – Section 43 Explanation 4 This blocks the cycling of assets in and out at inflated prices.
Foreign Currency Adjustments
Section 43A overrides other provisions of the Act where an asset is acquired from outside India and the exchange rate shifts between acquisition and payment. If the rate change increases the rupee liability for the asset’s cost or for a foreign-currency loan taken specifically to acquire it, the increase is added to actual cost. If the rate change reduces the liability, the reduction is subtracted.10Income Tax Department. Income-tax Act, 1961 – Section 43A
The adjustment is made in the year of payment regardless of the accounting method followed. That is unusual: it is one of the few places where the Act sets the taxpayer’s chosen method aside. The adjusted figure then carries forward as actual cost for depreciation and every other purpose.10Income Tax Department. Income-tax Act, 1961 – Section 43A
Where a third party covers part of the foreign-currency liability, that portion is excluded from the Section 43A adjustment. Where you enter into a forward contract with an authorized dealer to lock in the exchange rate for a future payment, the contracted rate governs the adjustment, not the spot rate on the payment date.
What Happens If You Get It Wrong
Misapplying these definitions changes your taxable income, and the consequences are not confined to a revised assessment. Under Section 270A, which governs assessments from 2017-18 onward, underreporting income due to an honest mistake attracts a penalty of 50% of the tax payable on the unreported amount. If the Assessing Officer finds the underreporting stems from misreporting, such as claiming fictitious expenses, suppressing receipts, or recording a false cost for an asset, the penalty rises to 200% of the tax on the misreported income.
A taxpayer who inflates actual cost by leaving a subsidy in the figure, or who fails to reduce the cost base for depreciation already claimed on a gifted asset, faces the additional tax plus a steep penalty on top. Purchase invoices, subsidy letters, loan agreements, foreign exchange records, and depreciation schedules are the paperwork that decides how such a dispute ends.