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Section 50: Capital Gain on sale of depreciable asset

Khush Trivedi , Last updated: 20 May 2024  
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Introduction

As we are all aware, the sale of any capital asset results in capital gain and is taxable under the Capital Gains of Income Tax Act of 1961. But have you heard that the sale of depreciable assets also results in capital gains in some circumstances? Let's understand what it is!

Section 50: Computation of capital gains in the case of depreciable assets

If the person sells a capital asset that forms part of the block of assets on which depreciation has been allowed as per the provisions of the Income Tax Act, gain arising out of sale may result in capital gain.

Section 50: Capital Gain on sale of depreciable asset

It can be categorized as follows:

  1. Where some assets are sold out of block.
  2. Where all assets are transferred and the block of assets ceases to exist.

Let's understand it in detail.

When the full value of consideration received on transfer exceeds the aggregate of the following amounts, namely:

  1. Expenditure incurred wholly and exclusively in connection with such a transfer
  2. WDV of the block of assets at the beginning of the previous year
  3. 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.

Where all assets in the block are transferred during the previous year and the block itself will cease to exist. In such a situation, the difference between the sale value of assets and the WDV of a block of assets, including assets acquired during the year, will be deemed to be short-term capital gain.

Let's understand it in a simple way.

First, check whether the (V) full value of consideration > (C) OPG WDV + actual cost of asset during PY+ expense in connection with the transfer of asset.

  • If yes, then (V)-(C) is short-term capital. Gain
  • If not, check whether the block ceases to exist.
  1. If no, then (C)-(V) is the closing WDV of the block.
  2. If yes, then (C)-(V) is short-term capital loss.
 

Let's understand with the help of one illustration:

Illustration

Suppose Mr. X owns six machines that will be used for business in March 2022. Depreciation is to be charged at 15%.

Opening WDV: Rs. 8,50,000

Three machines were sold on June 10, 2023, for Rs. 11,00,000.

One machine was bought for Rs. 8,50,000 on November 30, 2023.

Calculate

1. Depreciation for AY 24.25

2. What if three machines were sold off for Rs. 21 lakhs?

3. What if all machines were sold for Rs. 16 lakh?

Solution

1. Calculation of Depreciation for AY: 24–25

Particulars Amount
OPG WDV as of 01-04-23 8,50,000
Add: Purchase of machines during the year (< 180 days) 8,50,000
Total 17,00,000
Less: Sales Consideration of 3 Machines Sold 11,00,000
Closing WDV 6,00,000
Depreciation @ 7.5% (<<180 Days) 45,000
 

2. Calculation of Capital Gains for AY: 24–25

Particulars Amount
OPG WDV as of 01-04-23 8,50,000
Add: Purchase of machines during the year (< 180 days) 8,50,000
Total 17,00,000
Less: Sales Consideration of 3 Machines Sold 21,00,000
Short-Term Capital Gain 4,00,000

3. Calculation of Capital Gains for AY: 24–25

Particulars Amount
OPG WDV as of 01-04-23 8,50,000
Add: Purchase of machines during the year (< 180 days) 8,50,000
Total 17,00,000
Less: Sales Consideration of 6 Machines Sold 16,00,000
Short-Term Capital Loss (as blocks cease to exist) 1,00,000
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Khush Trivedi
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Category Income Tax   Report

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