Sale purchase of capital asset in proprietership

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This discussion clarifies the accounting treatment for a proprietorship selling a business car and purchasing a new one. The profit from the sale of the old car, after accounting for depreciation, is treated as a short-term capital gain (STCG) for income tax purposes. The new car is then recorded as a new asset. The STCG is shown in the firm's balance sheet under a specific ledger, typically 'STCG on car', and taxed at the individual's slab rate.

Ashish Agarwal

Ashish Agarwal (Querist)

22 August 2024 I have a proprietorship firm engaged in exports of handicrafts. I had a car in the name of the firm with book value 3 lakhs. I sold it for 4 lakhs (1 lakh profit) . After 4 days I purchased a new car for 10 lakhs.
How do I account for it ? After claiming depreciation till date of sale , do I show profit on sale of fixed asset (old car) ? Or do I just make an entry for sale of old car and a new entry for purchase of new car in my books in which case I won't have to show profits ? Thanks for clarifying.

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

22 August 2024 As you purchased it after the sale of old car, you need to declare the profit of Rs. 1 lakh as STCG. The new car can be posted under new block of assets.

Ashish Agarwal

Ashish Agarwal (Querist)

22 August 2024 Thank you sir. This is for income tax . Can you help me with the accounting. How do I show it in my books ? This is not my business profit . So where and how do I show this profit in my books ? Thanks

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

22 August 2024 Your old car account will be having credit balance of Rs. 1 lakh when the sell amount of 4 lakhs gets credited to it.
Debit it with 1 lakh short term capital gain & close the account.
Finally you will have credit of Rs. 1 lakh under STCG.

Ashish Agarwal

Ashish Agarwal (Querist)

22 August 2024 Thank you sir.
It's a 6 years old car so it will be LTCG. Where do I show this LTCG in my firm's balance sheet and under which head?
One more thing sir. For income tax purposes, while calculating LTCG , do I take the book value as cost or the purchase value as cost since as per income tax, capital gain is consideration received less cost of acquisition. Does income tax act recognise the depreciated value as per books of accounts as cost of acquisition? Thank you and really sorry for bothering you.

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

22 August 2024 Though the car was 6 years old, but you were taking depreciation over it. So when any asset sold over which depreciation were taken, the gain will be STCG.
Question of LTCG and original cost of acquisition doesn't arise in the business assets, where depreciation be claimed.

Ashish Agarwal

Ashish Agarwal (Querist)

22 August 2024 Thank you sir. My last question - what is the current rate of tax for this stcg ? The rates have been changed in this budget. Secondly you missed the 1st part of my last reply - Where do I show this STCG in my firm's balance sheet and under which head?

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

22 August 2024 As replied earlier it will be under ledger 'STCG on car.'
It will be taxed as per slab rate.

Ashish Agarwal

Ashish Agarwal (Querist)

22 August 2024 Thank you so much for your replies and patience.

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

22 August 2024 You are welcome.

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