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Sri S.S.Tarapore, retired Dy. Governor , Reserve Bank of India, and a popular columnist in ‘The Hindu Business Line’,  ‘Eenadu’ dailies time and again requests the RBI authorities to do justice to the poor depositors by paying them rate of interest more than the inflation rate in order to arrest erosion of their capital by inflation, by their being called upon to pay income-tax on interest on deposits ,which is less than cost of inflation.i.e.they are paying income tax on imaginary income and in fact they are losing capital by inflation ,paying income tax from capital and there is no Actual,REAL income.

Employees are somewhat  taken care by employers by paying Dearness Allowance based on Consumer Price Index. State Government employees are better placed than private sector employees ,Central  Government Employees are more privileged than their state government employee brothers.

The Income Tax Act,1961 explicitly recognize the inflation cost Chapter IV-E, CAPITAL GAINS.

Explanation (iii) toSection 48 defines “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion  as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April,1981,whichever is later;

Explanation (v) to Section 48 defines “Cost Inflation Index”, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five  percent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year , by notification in the Official Gazette, specify, in this behalf.

Lies, damn lies, Government Statistics on Consumer Price Index ,in that order. Even as per Mr.S.S.Tarapore, the real inflation is in TWO digits.

An illiterate ,innocent farmer brought one  liter pure, unadulterated milk to sell in the town. A Revenue official stopped him and informed that the King imposed tax @   30% of above one liter milk sold in town and then poured 100 ml water in the milk(inflation) ,measured the milk as more than one liter and he took(TAX) 30 ml adulterated milk as King’s Tax (being 30% of excess 100 ml over one liter. Farmer shocked and cried, Officer laughed for the King’s ingenuity in collecting taxes by adding water, out of air, Getting oil from sand grinding the gullible people ,cheating the righteous people, taking them for a ride.

Diluting milk as above ,as well US$=Rs 50 at the beginning of the year; US$=Rs 65 at the end of the year ;in both the cases assessee has not made any taxable income. We are made to believe that there is income in the eyes of King, but actually the assessee rupee equivalent lost its value and dollar gained strength.It is MAGIC of her Majesty.

An assessee invested Rs 25 lacs and made a profit before Inflation, Income tax of Rs 2.50 lacs. If inflation adjusted at 9% his profit after Inflation but before Income Tax would be Rs 25,000 which is his real income. But our present taxation is he has to cough Rs. 5,150/-

I am of the opinion that one can make a claim for inflation cost:

Section 35D,sub section (3),Explanation clause (a) defines “Cost of Project” ; clause (b) defines “ Capital employed in the business of the company “; clause (c) defines “Long-term borrowings”.

Section 37(1): Any  expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of assessee) , laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or Profession.

[emphasis supplied. words in italics we can call as negative list and inflation cost does not fall within. words in bold,in my opinion,can take inflation cost into it’s fold. Words underlined are two tests wholly, exclusively and inflation cost passes both the tests.]

Hence, inflation cost calculated either on a) Project cost OR b) Capital employed can be claimed every year. If one assessee bequeaths in one acre land ,keeps quiet for 3 years and sells. Here we calculate long term capital gains duly adjusting the cost of acquisition with the notified indices and arrive indexed cost tool acquisition and concessional taxation @ 20% with options to plan, minimise and not to pay any tax, ometimes,by complying S. 54 EA, S.54F,etc.

Assessees  adventurous younger brother, converted one acre bequeathed land into plots by observing local laws and after 3rd year he completed sale of all plots, his profit before Inflation cost and Income tax is the same as is his elder brother’s but his tax consultant, calculated tax @ 30% of ,ignoring inflation cost claim and it is almost double that of his elder brother and almost NO planning to minimize the tax outgo.

Calculation of Inflation Cost of a) Project Cost ,or, b) Capital employed in business/profession for Assessment Year 2013-14:


Cost Inflation Index for AY 2012-13  :785

Cost Inflation Index for AY 2013-14  :852

Inflation Cost =(852-785)/785 %

=8.53% of a) Project cost ;OR b) Capital employed as on 01 April,2012. Which can be claimed under section 37.

By: CA M. Raghavendra Prasad

B.Com; F.C.A; A.I.I.I; DISA(ICA); F.I.V.A.I.I.I.S.L.A

ISO Lead Auditor

Prasad Rao & Associates

Chartered Accountants

Door No. 9/183

Opp: Syndicate Bank

Gupada - 521 301

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Category Income Tax, Other Articles by - Raghavendra Prasad M