If the value of the asset transferred to the company exceeds the value of the shares issued by the company, the company incurs a capital gain equal to the excess value (section 24BA(3)(a)).

Section 40CA allows the company to add the capital gain under section 24BA(3)(a) to the tax cost of the asset. This restores tax symmetry for the company, as the company will get a tax benefit for the increased cost of the asset, either by way of additional allowances (such as wear and tear) or by way of a reduced capital gain when the company sells the asset.

However, a problem arises where section 42 also applied to the asset-for-share transaction. Section 42 allows a tax-free asset-for-share transaction in certain circumstances. Where section 42 applies, the company must claim allowances on the asset on the same basis as the transferor claimed such allowances. This means that the company may not be able to claim allowances on the increased amount for the asset established under section 40CA.

It is proposed that these provisions be amended to make it clear that the allowances can be claimed on the increased cost of the asset in these circumstances.