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Treatment of Fixed Assets

17 December 2020

Hello ,

In case of Proprietorship , if changes in ownership of fixed assets without consideration I.e proprietor passes assets in the name of his relative without any monetary consideration .

What should be effect in the books of accounts ??

What is treatment of depreciation ?

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27 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 18 December 2020

Fixed asset can’t be registered as related party’s. A business owns all assets. If the proprietor is using an asset which belongs to his relative, it can be recorded as a lease agreement or hire purchase agreement.

ayusmita (Tax consultant) (5885 Points)
Replied 18 December 2020

You give fixed assets to your relative with out consideration ??

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 18 December 2020

Write off the asset as a loss which is not possible without impairment, so legally this might not be possible to give away assets due to tax advantage. So book it under charity or sponsorship expenses showing that related party needs this asset because the relative will promote your business using this asset

1 Like

ayusmita (Tax consultant) (5885 Points)
Replied 18 December 2020

Out of book just yese hi

If shown as drawing and deduct from capital then

It's wrong but still want to know

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 18 December 2020

It depends upon the partners agreement. If it is drawings and the owner will reduce his profit share, the partners might agree. But till now I never saw a fixed asset withdrawn for personal use. Because fixed assets are giving tax benefits through depreciation and must be accounted as per the partnership act or PPE standard in. I checked partnership acts, distribution of fixed assets happens on dissolution only. Here sponsorship/promotional activities can transfer an asset when there is an economic mic benefit.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 18 December 2020

@ Ayusmita- this partnership accounting is not IndAS. I’m mean it has common principles like IndAS has.

Section14
THE PROPERTY OF THE FIRM.
Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
Section15
APPLICATION OF THE PROPERTY OF THE FIRM.
Subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. (Here partners can derecognise an asset as there appears to be no standard)

https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf

ayusmita (Tax consultant) (5885 Points)
Replied 18 December 2020

But it's been a proprietorship firm and partnership firm

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 18 December 2020

I was answering out of book question. Sole proprietor is just the same. He is free to do anything which will not disrupt tax codes like overcharging depreciation above the tax department rates and in this case,

if you derecognise the asset only, there will balance sheet mismatch

if you write off the asset as a loss, and derecognise it, it is fraud as your reducing tax liability

if your you sell the asset and not pay the tax on gain, it becomes a fraud.

So, using tax as a constricting factor, it is treated as

Promotional expenses/ internal goodwill a/c

To Fixed assets a/c

here internal goodwill is like expenses incurred to generate benefits eg customer relationship development. So, he can give the asset to relatives to promote business

anil jain (Partner) (1067 Points)
Replied 18 December 2020

Drawing Account Dr ( with differential amount i.e. wdv)

Depreciation Reserve Cr (with Value lying in books)

Fixed Assets account Cr (with value lying in books)

Pass this entry to account for the gifting.

1 Like

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 19 December 2020

Ok so it is a gift treatment, the entries are complex

ayusmita (Tax consultant) (5885 Points)
Replied 19 December 2020

But it can't consider as a gift in my opinion

1 Like

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 19 December 2020

Your correct but somehow ppl write things as as a normal idea. Even I get confused to understand what the question is.

1 Like

ayusmita (Tax consultant) (5885 Points)
Replied 19 December 2020

Han people will give their idea and it's normal

Even sometimes I don't understand few questions and answers wrongly too

And what ans sir says or entities did is correct but in my opinion it's cannot be as in business without proper method you can't gift anything so says

Jalpa Joshi ( ) (86 Points)
Replied 23 December 2020

My question is in case of deletion of fixed asset in proprietorship without consideration.

I.e under proprietorship , proprietor passes ownership of car to his wife and car valued in books of account Rs 2 lakh.

Now what can be treatment for car ?

As there is no sale so we can't recognize profit or loss.

As there is sale without consideration so if we will recognize profit or loss under capital gain at fair market value and have to pay tax on that.

As if we will ignore the change of ownership then we should continue with asset and charge depreciation on the same . But as per actuality there is no asset exist.

So I am confused in this case as regards to tax audit .