Selling of property and investment in another property.
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
04 February 2014
FACTS
1. Private Limited Company (having Jewellery Business) is having 3 Shops which are being used for Business purpose and Depreciation is being claimed on the same.
2. Now the Company wants to sell these shops.
3. On such sale, Gross Block will be negative and Company will be liable for Short Term Capital Gain.
4. For such Tax planning purpose, Company wants to invest in 2 Shops whereby investment in such 2 Shops will be higher than sales consideration of existing 3 shops.
5. Registration of 2 new shops will be done today.
6. But such 2 new shops are still under construction and possession is not being given now.
QUERIES
1. Whether such new shops whose registered agreement will be there but possession will not be given form part of “Gross Block of Assets” or not?
2. Whether we can claim Depreciation on such new shops whose possession will not be given?
3. Whether by investing in such shops whose possession will not be given, Short Term Capital Gain & Tax Liability will arise or not?
If it is included in “Gross Block of Assets” and Depreciation is taken in this financial year AND if the Company wants to give such 2 new shops on rent in the next financial year
1. Whether such 2 new shops will form part of “Gross Block of Assets” even after giving the same on Rent?
2. Can we charge Depreciation on these 2 new shops even after giving them on Rent?
3. In such case of giving such 2 new shops on Rent, will the prior liability of Short Term Capital Gain arise or not?
1. Private Limited Company (having Jewellery Business) is having 3 Shops which are being used for Business purpose and Depreciation is being claimed on the same.
2. Now the Company wants to sell these shops.
3. On such sale, Gross Block will be negative and Company will be liable for Short Term Capital Gain.
4. For such Tax planning purpose, Company wants to invest in 2 Shops whereby investment in such 2 Shops will be higher than sales consideration of existing 3 shops.
5. Registration of 2 new shops will be done today.
6. But such 2 new shops are still under construction and possession is not being given now.
QUERIES
1. Whether such new shops whose registered agreement will be there but possession will not be given form part of “Gross Block of Assets” or not?
2. Whether we can claim Depreciation on such new shops whose possession will not be given?
3. Whether by investing in such shops whose possession will not be given, Short Term Capital Gain & Tax Liability will arise or not?
If it is included in “Gross Block of Assets” and Depreciation is taken in this financial year AND if the Company wants to give such 2 new shops on rent in the next financial year
1. Whether such 2 new shops will form part of “Gross Block of Assets” even after giving the same on Rent?
2. Can we charge Depreciation on these 2 new shops even after giving them on Rent?
3. In such case of giving such 2 new shops on Rent, will the prior liability of Short Term Capital Gain arise or not?
04 February 2014
Till possession is given the shops are not put to use and therefore, no depreciation can be claimed.
As regards STCG since you are taking the new assets in the block to the extant of profit you are reducing the valuation and hence no capital gain shall be applicable.
As regards renting out the new shops you are changing your income head and from business income you will be going to income from house property where no depreciation is allowable only 30% deduction can be claimed against rent.
As regards STCG since you are taking the new assets in the block to the extant of profit you are reducing the valuation and hence no capital gain shall be applicable.
As regards renting out the new shops you are changing your income head and from business income you will be going to income from house property where no depreciation is allowable only 30% deduction can be claimed against rent.
Message likes :
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Querist : Anonymous
Querist :
Anonymous
(Querist)
10 February 2014
Any more ideas to resolve the earlier stated queries are also invited.
23 July 2025
This is a very thoughtful and multi-faceted query involving capital gains, block of assets, depreciation, and tax planning in the context of a **Private Limited Company** dealing with **commercial property used for business**.
Let’s address your queries point-by-point:
---
### ⚖️ **Legal Framework**
Relevant Sections of the Income Tax Act:
* **Section 2(11): Block of Assets**
* **Section 32: Depreciation**
* **Section 50: Capital Gains on depreciable assets**
* **Section 45 & 50C** (for capital gains)
* **Section 22 to 24** (if rental income considered under House Property)
---
### 🔍 SCENARIO SUMMARY
* Company sells 3 business-use shops (depreciable assets).
* Buys 2 under-construction shops *registered* in its name (but no possession yet).
* Shops will be let out in future.
* Company wants to avoid or defer **short-term capital gain (STCG)** arising from sale.
---
## 🔸 Query-wise Answers
---
### **Q1: Will newly purchased shops (registered but no possession) be part of Gross Block?**
**Answer:** ❌ **No**, not until possession is received **and asset is put to use** (or kept ready for use).
> As per the concept of *"ready to use"* in depreciation law, **only assets ready and available for use** at the year-end form part of the **gross block**. Registration alone is not sufficient without possession.
---
### **Q2: Can Depreciation be claimed without possession?**
**Answer:** ❌ **No.**
You can claim depreciation **only if**:
* Asset is **owned**, **AND**
* Asset is **put to use** or kept **ready for use** in the business during the year.
Since the shops are under construction and **not yet ready for use**, **depreciation cannot be claimed**.
---
### **Q3: Does investment in new shops (without possession) prevent STCG on sale of existing 3 shops?**
**Answer:** ❌ **No.**
* You sold **depreciable assets** (business-use shops), so **Section 50 applies**.
* Capital gains under Section 50 are always **short-term**, even if held for >36 months.
* **Reinvestment exemption under Section 54F or 54EC is not available** to companies for business-use depreciable assets.
* Moreover, since the **block becomes NIL or ceases to exist**, **STCG is taxable**, regardless of reinvestment.
✅ **Conclusion:** STCG will be **taxable in the year of sale**, regardless of new investment.
---
### **Q4: If 2 new shops are given on rent next year:**
#### (a) Will they be part of Gross Block?
✅ **Yes**, if they are used or kept ready for use for **business purposes**, including letting as business asset (not house property income).
#### (b) Can Depreciation be claimed on them?
✅ **Yes**, as long as rental is treated as **business income** (as in leasing business, not mere passive renting).
If treated as **House Property income**, depreciation **under Section 32 is not allowed**. Only standard deduction u/s 24 (30%) is available.
#### (c) Will this impact STCG of earlier year?
❌ **No.** Tax on STCG under Section 50 **will not be reversed or adjusted** once it has accrued and is taxable.
---
## 📝 Summary Table
| Query | Answer |
| --------------------------------------------------- | ---------------------------------------------------- |
| New shops part of Gross Block (without possession)? | ❌ No |
| Depreciation allowed before possession? | ❌ No |
| Reinvestment prevents STCG? | ❌ No, Section 50 overrides |
| New shops let out later – part of Gross Block? | ✅ Yes, if used for business |
| Depreciation on shops given on rent? | ✅ Yes (if business income), ❌ No (if house property) |
| Will giving on rent affect STCG tax? | ❌ No |
---
## ✅ Recommendations
1. **STCG is unavoidable** under current setup – plan to **absorb with losses**, if available.
2. You may consider **leasing** through business model (if letting is a regular activity), to retain depreciation claim.
3. Record the **capital asset addition** in fixed asset register only **after possession**.
---
Let me know if you’d like a sample journal entry, depreciation computation, or tax planning route.
Let’s address your queries point-by-point:
---
### ⚖️ **Legal Framework**
Relevant Sections of the Income Tax Act:
* **Section 2(11): Block of Assets**
* **Section 32: Depreciation**
* **Section 50: Capital Gains on depreciable assets**
* **Section 45 & 50C** (for capital gains)
* **Section 22 to 24** (if rental income considered under House Property)
---
### 🔍 SCENARIO SUMMARY
* Company sells 3 business-use shops (depreciable assets).
* Buys 2 under-construction shops *registered* in its name (but no possession yet).
* Shops will be let out in future.
* Company wants to avoid or defer **short-term capital gain (STCG)** arising from sale.
---
## 🔸 Query-wise Answers
---
### **Q1: Will newly purchased shops (registered but no possession) be part of Gross Block?**
**Answer:** ❌ **No**, not until possession is received **and asset is put to use** (or kept ready for use).
> As per the concept of *"ready to use"* in depreciation law, **only assets ready and available for use** at the year-end form part of the **gross block**. Registration alone is not sufficient without possession.
---
### **Q2: Can Depreciation be claimed without possession?**
**Answer:** ❌ **No.**
You can claim depreciation **only if**:
* Asset is **owned**, **AND**
* Asset is **put to use** or kept **ready for use** in the business during the year.
Since the shops are under construction and **not yet ready for use**, **depreciation cannot be claimed**.
---
### **Q3: Does investment in new shops (without possession) prevent STCG on sale of existing 3 shops?**
**Answer:** ❌ **No.**
* You sold **depreciable assets** (business-use shops), so **Section 50 applies**.
* Capital gains under Section 50 are always **short-term**, even if held for >36 months.
* **Reinvestment exemption under Section 54F or 54EC is not available** to companies for business-use depreciable assets.
* Moreover, since the **block becomes NIL or ceases to exist**, **STCG is taxable**, regardless of reinvestment.
✅ **Conclusion:** STCG will be **taxable in the year of sale**, regardless of new investment.
---
### **Q4: If 2 new shops are given on rent next year:**
#### (a) Will they be part of Gross Block?
✅ **Yes**, if they are used or kept ready for use for **business purposes**, including letting as business asset (not house property income).
#### (b) Can Depreciation be claimed on them?
✅ **Yes**, as long as rental is treated as **business income** (as in leasing business, not mere passive renting).
If treated as **House Property income**, depreciation **under Section 32 is not allowed**. Only standard deduction u/s 24 (30%) is available.
#### (c) Will this impact STCG of earlier year?
❌ **No.** Tax on STCG under Section 50 **will not be reversed or adjusted** once it has accrued and is taxable.
---
## 📝 Summary Table
| Query | Answer |
| --------------------------------------------------- | ---------------------------------------------------- |
| New shops part of Gross Block (without possession)? | ❌ No |
| Depreciation allowed before possession? | ❌ No |
| Reinvestment prevents STCG? | ❌ No, Section 50 overrides |
| New shops let out later – part of Gross Block? | ✅ Yes, if used for business |
| Depreciation on shops given on rent? | ✅ Yes (if business income), ❌ No (if house property) |
| Will giving on rent affect STCG tax? | ❌ No |
---
## ✅ Recommendations
1. **STCG is unavoidable** under current setup – plan to **absorb with losses**, if available.
2. You may consider **leasing** through business model (if letting is a regular activity), to retain depreciation claim.
3. Record the **capital asset addition** in fixed asset register only **after possession**.
---
Let me know if you’d like a sample journal entry, depreciation computation, or tax planning route.
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