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Sale of asset

viral sheth (CA) (57 Points)

07 September 2011

i have an asset worth rs.90000 which i sold it

i received an insurance claim of rs55000

scrap value rs 30000

and loss of rs 5000

i passed the entry

bank 85000

loss on asset 5000

to asset 90000

i want to know is the treatment right..? and what would be the tax imp-lication

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11 Replies

(Guest)

One needs to delve into issues like

1) Which entity - company or not (Application of Sch XIV, Gross Block, Accumulated Depreciation, Net Block, depreciation calculation based on 365 days )

2) Application of accounting standards (AS-6, AS-10, AS-22)

3) Presentation of Loss on sale of asset under Extraordinary Items

4) Effect on Current Tax and Deferred Tax calculation

5) Whether asset has been revalued or not earlier

6) Disclosure in Note to Accounts

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 07 September 2011

If you have received from Insurance Rs 55,000 and cash on sale Rs 30,000, your entry is right...

Keval (Consultant) (120 Points)
Replied 07 September 2011

First of it need to be clear how there was an insurance receipt it the asset is sold.

So far tax implications are considered

If there is loss of asset and

Entity has claimed deduction of loss of assets earlier than now whole insurance receipt will be taxable as per Section 41(1).

If case of sale of depreciable asset

The receipt of sale are reduced from the WDV of Block of assets if block of assets ceases to exist i.e. if receipt are more than WDV, it will be taxable as short term capital gain

Raj Kumar (Student) (102 Points)
Replied 07 September 2011

Agree with Mr. Keval

When an asset is sold out it birth gain/loss, not insurance claim.

Insurance claim is receivable when the asset is destroyed by fire,flood or whatever...

Thanxx..

Raj

viral sheth (CA) (57 Points)
Replied 08 September 2011

the asset is destroyed. and the money received is thus received from the insurance company.

the block does not cease to exist so i think there would not arise the matter of stcg..

please guide me if i am correct or not

thank you

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 08 September 2011

When Mr. Viral mentioned about Insurance, it is apparent that Asset was damaged and he had claimed for Insurance, and he sold the asset for some value. With Insurance and scrap value, he could gain only Rs 85,000 and the book value is Rs 90,000 and obviously has loss of Rs 5,000. As far as I know, this loss wil be included for tax consideration also.

(Entity has claimed deduction of loss of assets earlier than now whole insurance receipt will be taxable as per Section 41(1).) : Keval, please clarify if the whole insurance receipt will be taxable or any difference between book value and amount received on asset (including insurance) will be considered for tax consideration.

Keval (Consultant) (120 Points)
Replied 08 September 2011

In case of Loss of asset and insurance claim the year of loss of asset and the year of insurance claim is the important.

Acc to Section 41(1) if the company had claim deduction for loss of asset earlier then whole of the receipt of insurance will be taxable hence by this mechanism the assessee get deduction automatically for loss on asset.

But if the year of the loss of asset and insurance claim is same then I agree with Mr. Bhaskar that Loss of Rs 5000 would have tax implication.

Hence in this case Rs 5000 will be eligible for deduction.

Regards.

1 Like

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 08 September 2011

Dear Keval,

Good Explanation Indeed. Further, can you clarify, for the first case, i.e. if the company had claim deduction for loss of asset earlier how it should appear in the Accounts? Shall we show it as current asset as "Insurance claim Receivable" and remove it when we receive the claim amount in subsequent year?

Keval (Consultant) (120 Points)
Replied 09 September 2011

Dear Bhaskar,

Thanks.

Insurance Receivable can be shown on the assets side of the balance sheet only when there is virtual certainity that the amount of insurance will be received and it can be estimated, else, it would not be prudent to show it as receivable. For eg:- In some cases Insurance company does not pay the insured amount if the loss of asset is due to lax from organisation's side then organisation cannot show it as receivable.

But if there is virtual certainity that the insurance claim would be received, I think, it can be shown as Receivable on the asset side of the balance sheet and will be subsequently removed when the Insurance is received.

Regards.