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May 8, 2020

How to compute capital gains on business asset chargeable to depreciation?

by Mahesh Mara in Income Tax

How to compute capital gains on commercial or Business asset chargeable to depreciation?

Capital gain is profit from sale of property or an investment. As per section 45(1) any profit and gain arising from transfer of a capital asset shall be chargeable under the head capital gain in the previous year in which transfer took place shall be chargeable to Capital gain.

What is capital asset?

Capital asset means property of any kind held by assessee, whether or not related to business or profession. Any securities held by a Foreign Institutional Investor (FII) but capital asset does not include:

  1. Stock in trade
  2. Movable personal property (used by assessee or his dependent family member for personal purpose) excluding Jewellery, Drawings, Paintings, Sculpture, Archaeological Collection or any work of art
  3. Rural agricultural land in India
  4. Gold deposit bond, 1999 or Deposit Certificates issued under the Gold monetization scheme, 2015.

How to calculate Capital gain on sale of commercial asset?

Commercial property is capital asset used by assessee for business purpose. Capital gain on sale of property is covered under section 50 of the Income Tax Act, if an assessee sells or transfers a part or whole of capital asset like building, machinery etc. on which the depreciation has been allowed as per the Income Tax Act, the income arising from such transfer is treated as capital gain.

Capital Gain in case of depreciable asset is calculated as follows:


Particulars
Amount
Opening WDV as on 1st April of the relevant PY XXX
Add: Actual cost of asset purchased during the year XXX
Cost of Block of Asset XXX
Less: Money Received for asset sold, discarded, demolished, destroyed(XXX)
Value of Block of asset XXX
Less: Depreciation as per rates under Income Tax Act(XXX)
Closing Value of WDV as on 31st March XXX

After above calculation there can be two consequences:

1. Treatment of Capital Gain in case assets are left in block of assets:

In case after sale of capital asset from the block still assets are left in the block 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 will be NIL. And the value after such deduction 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. If after deducting the net consideration there WDV is not nil and there are assets left then depreciation shall be chargeable on the assets left.

2. Treatment of Capital Gain in case no assets are left in block of assets:

In case 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.

For instance:

Mr. X is having a block of asset of consisting of 3 commercial property. The WDV of the block as on 1st April 2019 is Rs. 75,00,000. Mr. X sold two properties for Rs. 1.5 crore. Calculate the WDV of the block or the capital gain arising from such sale.

Calculation of capital gain from sale of commercial properties:

ParticularsAmount
Opening WDV as on 1st April of the relevant PY75,00,000
Add: Actual cost of asset purchased during the year0
Cost of Block of Asset75,00,000
Less: Money Received for asset sold, discarded, demolished, destroyed1,50,00,000
Value of Block of asset(75,00,000)
Less: Depreciation as per rates under Income Tax Act0
Closing Value of WDV as on 31st March0
Short term Capital Gain75,00,000

2. Mr. X is having a block of asset of consisting of 3 commercial property. The WDV of the block as on 1st April 2019 is Rs. 75,00,000. Mr. X sold all properties for Rs. 70,00,000. Calculate the WDV of the block or the capital gain arising from such sale.

Calculation of capital gain from sale of commercial properties:

ParticularsAmount
Opening WDV as on 1st April of the relevant PY75,00,000
Add: Actual cost of asset purchased during the year0
Cost of Block of Asset75,00,000
Less: Money Received for asset sold, discarded, demolished, destroyed70,00,000
Value of Block of asset(5,00,000)
Less: Depreciation as per rates under Income Tax Act0
Closing Value of WDV as on 31st March0
Short term Capital Loss(5,00,000)

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