Article explains Provisions relating to capital gains in case of depreciable assets, Capital Gain Where some assets are left in block of assets, Capital Gain When no assets are left in block of assets, How to Compute  Capital Gain in case of depreciable asset, Capital Gain on Asset on which no depreciation was ever claimed, Applicability of Section 50 in case of Sale of Land and ‘Block of assets’ for purpose of section 50 would mean assets of all units of assessee having same rate of depreciation and not assets of one division or unit having same rate of depreciation.

Capital Gains

Section 50 – Special provision for computation of capital gains in case of depreciable assets

Extract of Section 50 is as under:

“Special provision for computation of capital gains in case of depreciable assets.

50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—

 (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

 (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.”

Provisions relating to capital gains in case of depreciable assets.

According to section 50 of Income tax act if an assessee has sold a capital asset forming part of block of assets (building, machinery etc) on which the depreciation has been allowed under Income Tax Act, the income arising from such capital asset is treated as short term capital gain.

Capital Gain Where some assets are left in block of assets:

If a part of such capital asset forming part of a block of asset has been sold and after deducting the net consideration received from sale of such asset from the written down value of the block of such asset the written down value comes to NIL then the gain arising shall be treated as short term capital gain and in such case where written down value has become NIL no depreciation shall be available on such block of asset even if some assets are physically left in the block of assets.

Capital Gain When no assets are left in block of assets:

If the whole of the capital assets forming part of a block of assets have been sold during a year and the assessee has suffered a loss after deducting the net sale consideration from the written down value of the block of assets then such loss shall be treated as short term capital loss and no depreciation shall be allowed from such block of assets.

It was decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/ 83 T.T.J. 1057 if the whole of capital assets in a block have been sold in a year and some gain arises after the sale such gain shall not be treated as short term capital gain if some new asset has been purchased within the same year in the same block of assets and the total value of new and old capital assets in the same block is more than the sale consideration of the assets sold, since the block of asset does not cease to exist in such case as is required u/s 50(2).

Statement for Computing Capital Gain in case of depreciable asset

Particulars Amount
Opening WDV as on 1st April of the relevant PY
Add: Actual cost of asst purchased during the year
COST OF BLOCK
Less: Money Received for asset sold, discarded, demolished, destroyed
VALUE OF BLOCK
Less: Depreciation as per rates under Income Tax Act
CLOSING VALUE OF WDV AS ON 31st MARCH

 Some Practical Issues

1.  Asset on which no depreciation was ever claimed, could not be assessed u/s 50.

v During relevant A.Y., assessee sold certain plant & machinery (not in use) which was partly acquired in year 1997-98 and partly in year 1998-99. AO, by applying section 50, assessed gain arising on transfer of aforesaid plant and machinery as short-term capital gain. On appeal, Tribunal held that section 50 did not apply and plant and machinery (not in use) had to be regarded as long-term capital assets, when they were sold because no depreciation on those assets was ever claimed by assessee. [CIT v. Santosh Structural & Alloys Ltd. [2012] 20 taxmann.com 501 (P & H)].

2. Applicability of Section 50 in case of Sale of Land

Since land is not a depreciable asset & it cannot form part of block of assets in absence of rate of depreciation having been prescribed therefore, provisions of section 50 cannot be invoked in case of sale of land.

Land, having been held for a period of more than 36 months, surplus of sale price over indexed cost of acquisition of land was to be taxed as long­term capital gain. [CIT v. I.K. International (P.) Ltd. [2012] 20 taxmann. com 197 (Delhi)].

3. ‘Block of assets’ for purpose of section 50 would mean assets of all units of assessee having same rate of depreciation and not assets of one division or unit having same rate of depreciation

CIT v. Ansal Properties & Infrastructure Ltd. [2012] 20 taxmann.com 770 (Delhi)

Section 2(11), which defines term ‘block of assets,’ does not make any distinction between different units or different type of businesses, which may be carried on by an assessee. Only requirement is that in respect of assets which form block of assets, same percentage of depreciation should be prescribed.

All assets, which may be of different types, but in respect of which same percentage of depreciation is prescribed, are to be treated and form part of block of assets.

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Replaced with Amendments

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11 Comments

  1. Deven Bafna says:

    at what rate tax will be charged in case of Capital Gains calculated on sale of depreciable asset being factory building which is held for more than 36 months …. tax at the rate applicable on long term asset since the asset is long term and section 50 only guides the formula to compute the capital gain which needs to be calculated as if it is short term asset

  2. S.K.Sharma says:

    An assets sold for Rs.,2,00,000/- of which depreciate value was Rs.2,25,000/- . A profit of Rs. 25,000/- will shown in the books of account. In the I T Return where said profit will be deducted from income, if block of assets remian at the end of the year.

  3. Mihir Ku Sahu says:

    A company sold a depreciable house cost i lac wdv 0.7 lac sold for 1.5 lacs purchased on 2001 sold in 2017 what will be the short term and long terrm capital gain and the tax rate payable.

    1. Ganesh Shenoy says:

      On asset used for the business computed under Sec. 44AD/44AE, depreciation cant be claimed and assumed that depreciation is claimed while declaring under Sec.44AD/44AE. So when this asset is sold out, there will be arising of Short Term Capital Gains u/s 50 and for the purpose of calculating STCG, the W.D.V of Asset to be calculated applying depreciation till the year end preceeding the PY and this W.D.V to be deducted from the sale proceeds of the asset which will arrive to the STCG.

  4. Nitin Shukla says:

    Dear Sir,

    In our office, we purchase a building in year 1989, Value is Rs. 16 lakhs and in the account books we create a building fund of Rs. 16 lakhs in same year, and every year we charged deprecation of building (property) against building fund (deprecation not charge in Income and Expenditure Account) (adjusted against building fund), and in f.y. 2014-15 we sale the building (property) , Rs. 2 crore, then in this case we calculate capital gain as long term capital gain or other.

    We have a trust origination (ngo) registered in 1980 and also we have 12A Registered certificate. (registered in 12A certificate in 1980)

    Pls post your valuable comments.

    Thanks

    Regards
    =========
    Nitin Shukla

  5. RAHUL GOYAL says:

    PLEASE SUGGEST ME IF ONE CAR SOLD AT 540000/- AND ITS WDV WAS 545885.30/- AND BLOCK IS MAINTAINED WITH OTHER CARS SO PLEASE GUIDE ME ABOUT TAX TREATMENT

  6. NILESH GANDHI says:

    There is no any STCG
    TAX TREATMENT The amount of sale proceed is deducted from block of asset because asset is forming part of black at the time of sale or tramnsfer and WDV of that block reduced till 0.
    ACCOUNTING TREATMENT Profit on sale of asset of rs.5000 shd be shown in books.

  7. Rakesh Kumar says:

    Respected Sir,
    Suppose wdv of Block of assets is Rs.65000 and one asset whose individual WDV of same block is Rs. 15000 and sold during the year for Rs.20000 and blog is of 15% what will the accounting treatment and what will the treatment under income tax and whether any kind of short term capitalgain tax will be required to be paid or this excess amount will be added under the head other sources.

    Pls post your valuable comments.

    Thanking you
    Rakesh Kumar

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