22 January 2019
One of my client (A sole Proprietor) had an office premises as his business asset; Cost Of Acquisition : Rs. 20,00,000/- , Purchased on 01/04/2010 WDV as on 31/03/2014 = Rs 13,12,200/-.
Now, this property was transferred to his personal balance sheet (at WDV) as an investment on closure of business (31/03/2014) and thereafter he stopped claiming depreciation on the same.
Now, he wants to sell this house property for Rs. 50,00,000/-.
Kindly help in computing Capital gain for A.Y. 2019-20. Kindly give reference to section, if any.
22 January 2019
If we interpret the provisions literally then, once the property has become the personal asset of the assessee, it shall be governed by the provisions of the income under the head of capital gains. Now, as per S.48, the words used are the "cost of acquisition," which means the original cost of acquisition and not the WDV value.
But if we apply this interpretation, then it would mean that for the same amount, the assessee is claiming the deduction twice, i.e., once by way of depreciation and the other by way of Cost (that too indexed). Courts will not allow the double benefit, and as held in several judgements it can never be considered as the intent of the law to allow the assessee to claim double benefit.
Although S.43 is not applicable in this case, it clarifies the intent of the law. My recommendation would be to use the WDV (at the time of transfer to the personal asset) as the cost of acquisition.
S.43 Explanation 5.—Where a building previously the property of the assessee is brought into use for the purpose of the business or profession after the 28th day of February, 1946, the actual cost to the assessee shall be the actual cost of the building to the assessee, as reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been used for the aforesaid purposes since the date of its acquisition by the assessee.
Let's see what course can AO take-
As per S.142A. (1) The Assessing Officer may, for the purposes of assessment or reassessment, make a reference to a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit a copy of report to him.
As per S.142A(4) The Valuation Officer shall, estimate the value of the asset, property or investment after taking into account such evidence as the assessee may produce and any other evidence in his possession gathered, after giving an opportunity of being heard to the assessee.
I guess, VO will consider the Stamp duty value of that area & the WDV, but WDV might be lower. So it would be a safe choice.
I agree on your point of taking WDV as the cost of acquisition at the time of sale of the said property.
But can we take indexation benefit on this WDV while computing capital gain?
Further will the entire gain be treated as capital gain only or will the difference between original cost and WDV be treated as business income and balance as Capital Gain?
What shall be the nature of such gain; STCG or LTCG?
23 January 2019
"But can we take indexation benefit on this WDV while computing capital gain?" It should be allowed if it's a long term capital asset as now the computation would be as per the provisions of capital gains.
"Further will the entire gain be treated as capital gain only or will the difference between original cost and WDV be treated as business income and balance as Capital Gain?" The difference between the original cost and the WDV has already been considered in PGBP income by way of depreciation.
The difference between the WDV (after indexation) and the sale consideration should be cap gain.
Further, for reckoning the period of holding and the indexation, kindly use the period in which the asset became the personal property of the assessee. Otherwise, there may be disputes, and a literal interpretation would allow it, but AO won't.
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