393. Whether, in computing capital gains on sale of motor car to which proviso to section 43(1) applies for the purposes of depreciation allowance, actual cost has to be historic and true cost of acquisition or actual cost as artificially reduced

1. I am directed to say that the Board has considered whether in computing the capital gains on sale of motor car to which proviso to section 43(1) applies for purposes of allowance of depreciation, the actual cost has to be historic and true cost of acquisition or the actual cost as artificially reduced under the proviso to section 43( 1).

2. Under the proviso to section 43(1), the excess of the actual cost of a motor car over Rs. 25,000 acquired by the assessee after March 31, 1967, and is used otherwise than in a business of running it on hire for tourists, is to be ignored and actual cost has to be limited to Rs. 25,000 only for the purpose of allowance of depreciation.  Sub-clause (b) of clause (1 ) of Explanation to section 32(1) provides for a proportionate adjustment of the sale price, etc., for calculation of terminal loss under section 32(1)(iii).  A similar proportionate adjustment has to be made while computing the profit under section 41(2).

3. Section 50(1) says that the cost of acquisition of a depreciable asset for the purpose of computation of capital gains, shall be taken to be its written down value as defined under section 43(6). Referring to section 43(6) the written down value is linked to the actual cost, which in the case of motor car of the nature referred to above, is subject to the limitation enacted in the proviso to section 43(1).

4. The definition given in section 43 of the words “actual cost” is relevant for computation of income from profits and gains of business or profession only.  The opening sentence of section 43 itself makes it clear that the definition is for the purpose of sections 28 to 41 and 43, unless the context otherwise requires.  It would be seen that computation of capital gains comes under section 45, which is not mentioned in section 43.

5. There cannot be any capital gains unless the consideration received by the seller of the capital asset is more than the cost of acquisition.  The use of the words “unless the context otherwise requires” in the opening sentence of section 43 also indicates that this definition has not to be extended where there is no need for the same and application of the same may lead to absurd results.

6. In view of the above, for computation of capital gains only, the historic and the true cost of acquisition of the motor car to which the proviso to section 43(1) applies, is to be taken into consideration.

To cite an example: A purchased a motor car for Rs. 50,000 in 1967 for purposes of business.  After three years’ use in carrying on the business the car is sold in 1970 for Rs. 40,000.  At the time of sale the WDV was Rs. 12,000 computed by deducting/depreciation for 3 years from Rs. 25,000 at the rate of 20 per cent.  The capital gain/loss on the sale of the car will be worked out as under :

Rs. Rs.
Sale price 40,000
Cost of acquisition :
Actual cost 50,000
Less : Depreciation allowed 12,200
Add : Profit under section 41(2) 7,200 45,000
Capital loss 5,000

Circular : No. 137 [F. No. 207/39-IT(A-II)], dated 13-6-1974.

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