Implication of sale / disposal of fixed assets: Treatment under Books, Income Tax & GST

The sale or disposal of Plant, Property and Equipment (PPE) is a significant transaction for any business, with implications under accounting principles, income tax laws, and Goods and Services Tax (GST). This article explains treatment of such transactions in the books of accounts under Companies Act, under the Income Tax Act, and GST, with illustrations.

1. Books of Accounts:

When a PPE is sold, it is removed from the asset register at its carrying amount and the proceeds from the sale are recognized as income or loss as applicable in the profit and loss account. Carrying value is gross block of the PPE less accumulated depreciation till the date of disposal of asset computed as per relevant accounting principes and policy (IGAAP or Ind-AS). The reporting of gross block and depreciation of the deleted items is disclosed in the schedule of Plant, Property and Equipment in the financial statements under the columns – ‘Gross block Deletions’ and ‘Accumulated depreciation – Deletions’.

If the sale proceeds are higher than the book value (cost – accumulated depreciation), the  gain is recognized. If the sale proceeds are lower than the book value, a loss is recognized.

Example– A company sold a machine that had a cost of INR 10,00,000 and accumulated depreciation of INR 6,00,000, making its carrying value INR 4,00,000. The asset was sold for INR 5,00,000. In this case gain of INR 100,000 has to be recorded in books. Since Sales value is exceeding the carrying amount by INR 1,00,000.

In case where the PPE is scrapped/discarded for without any consideration, the entire carrying value will be recorded as loss on disposal of PPE.

2. Income Tax Act

Under the Income Tax Act 1961/2025, the gain on the sale of fixed assets is treated as a capital gain and is taxable in the year of transfer. The specific tax treatment depends on whether the asset is depreciable or non-depreciable, and its holding period.

• Depreciable Assets (Used for Business/Profession)

For fixed assets on which depreciation has been claimed under the Act, the gain or loss on sale is always treated as a Short-Term Capital Gain or Loss, regardless of how long it was held.

The sale proceeds are deducted from the Opening WDV (as per Income Tax Act) of the entire block of asset.

1. If some assets are sold but the block of assets still exists: The sale proceeds are deducted from the opening WDV of the block plus any new additions during the year. No capital gain or loss arises at this stage, but the WDV for the next year is reduced, affecting future depreciation.

2. If the entire block of assets is sold or sale consideration exceeds the WDV of the block, the excess amount is treated as a short-term capital gain.

3. If the entire block is sold and the sale consideration is less than the WDV, the difference is a short-term capital loss.

STCG from depreciable assets is taxed at the assessee’s normal income tax rates and not special rates.

Sale Proceeds for the purpose of Income tax act means any amount actually received, including insurance claim, on account of sale or disposal of asset. Illutrations are as under:

• Non-Depreciable Assets (Land/Building as Investment) (this does not include assets held as investments viz. shares and securities)

For assets where no depreciation is claimed (investments or land), the gains are classified based on the holding period.

• Short-Term Capital Asset (STCA):Held for 24 months or less (for immovable property like land/building).
• Long-Term Capital Asset (LTCA):Held for more than 24 months.

Calculation & Tax Rates

• Short-Term Capital Gain (STCG):The gain is calculated by deducting the cost of acquisition, cost of improvement, and transfer expenses from the net sale consideration. It is taxed at the assessee’s normal income tax rates.
• Long-Term Capital Gain (LTCG): For asset sold post 23 July 2024, the tax rate is 12.5%

3. Goods and Service Tax 

Under the GST Act, the sale or disposal of fixed assets can be subject to Goods and Services Tax, depending on whether the asset is used for business purposes or exempt from GST and the nature of the asset (movable vs. immovable).

• Other than Old and used motor vehicles or immovable property

 1. ITC Was Claimed on the Asset

 When a capital asset on which ITC was claimed is sold before the end of its useful life (statutorily considered as 5 years or 60 months), the business must pay an amount that is the higher of the following

• The tax on the transaction value (sale price) of the asset.
• The ITC attributable to the remaining useful life of the asset, (5% for every quarter or part thereof from the date of the invoice).

This amount is added to the output tax liability and reported in Form GSTR-1

Example: Machinery worth Rs. 9,00,000 was purchased on 11/10/2017 on which GST paid@ 18%. ITC of INR 1,62,000 was claimed.

On 05/03/2018 it sold the machinery for Rs. 7,00,000. The GST rate on sale is 18%.

Solution–

• The machinery was sold for Rs. 7,00,000. GST @ 18% is Rs. 1,26,000.
• ITC attributable to the remaining useful life of the asset: Machinery was used for two quarters. Hence, it is eligible for ITC of INR 16,200 (1,62,000* 5%* 2 quarters). Balance ineligible ITC is Rs. 1,45,800.

Therefore, amount liable to pay is higher among the two. i.e. INR 1,45,800 (as higher than Rs. 1,26,000).

4. ITC Was NOT Claimed on the Asset 

If ITC was never claimed on the asset (purchased in the pre-GST period or due to specific restrictions), GST is still applicable if the asset is sold for a consideration in the course or furtherance of business.

• Taxable Value: GST is levied on the transaction value (sale price) of the asset at the prevailing rate.
• No ITC Reversal: Since no ITC was claimed, no reversal is required.

Exemption:

• Sale of completed buildings and bare land is generally exempt from GST.

GST on Sale of Old & Used Motor Vehicle: GST on such sale applies to:

• Old and used motor vehicles supplied within the same State.
• GST is payable only on the margin of the supplier*, not on the full sale value.
• Concessional rate (as per notification) applies only if no ITC has been availed on such vehicles.
• If margin is negative it shall be ignored

* Margin of Supplier :-  It is calculated based on whether Depreciation has claimed or not on the motor vehicle.

 1. If depreciation claimed under Income-tax Act :

Margin of Supplier = Sale consideration – Depreciated value (WDV) on date of sale

2. If depreciation claimed under Income-tax Act :

Margin of Supplier = Selling price – Purchase price

Example-

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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.

The above article is written by Sakshi Khairnar and CA Shravan Suratwala. The authors can be reached at  contact@smsuratwala.com or shravan.suratwala@outlook.com.

Sakshi Khairnar is currently pursuing his Chartered Accountancy course and is currently completing internship with S.M. Suratwala & Co., Chartered Accountants, Pune.

Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.”