Blog / Capital Gains

Capital Gains

Computation of capital gains in case of depreciable assets

ThinkLedger Editorial
5 min read

Introduction

If capital asset is a depreciable asset, it loses its identity after becoming part of the block of asset. In case of transfer of depreciable assets, the capital gain shall arise only when the block ceases to exist or when the written down value is reduced to zero.

1. What is a depreciable asset?

Depreciable assets are the assets forming part of a block of assets in respect of which depreciation has been allowed under the Income-tax Act. As per Section 2(17), 'block of assets' means a group of assets falling under the same category in respect of which depreciation is charged at certain rate.

For current year there are 9 blocks of assets which are classified into 5 categories of tangible and intangible assets – Building, Furniture & Fittings, Machinery and Plant, Ships and Intangible Assets (not being goodwill of business or profession).

2. When does capital gain arise on transfer of depreciable asset?

2.1. In general

In case of transfer of depreciable assets, the computation of capital gain shall be done only in the following two situations:

(a) If on the last day of the tax year, written down value of the block of asset is nil; or

(b) If the block of asset ceases to exist due to transfer of all assets falling in block.

A depreciable asset is always deemed to be short-term capital asset even if period of holding of individual assets or block of asset is 24 months or more. Consequently, in every situation, the capital gain arising from sale of depreciable asset is treated as short-term capital gain.

2.2. In case of power-generating unit

The Income-tax Act allows a business entity to follow only WDV method for computation of depreciation. However, an entity, engaged in generation or generation and distribution of power, can follow either WDV method or SLM to claim depreciation on fixed assets.

If a power-generating unit claiming depreciation on the basis of straight-line basis method, transfers a tangible asset, and the money payable (plus scrap value of the asset) exceeds its written-down value such excess amount, to the extent of depreciation allowed in earlier years, is taxable as balancing charge in the tax year in which the money payable became due. If such excess amount is more than

The provisions of balance charge do not apply in case of transfer of following assets:

(a) Intangible assets;

(b) Tangible asset which is sold in the tax year itself in which it was first brought to use.

Thus, any gain arising from sale of such assets shall be taxable as short-term capital gains under this provision.

3. How to calculate capital gains?

The capital gains on transfer of a depreciable asset shall be calculated in the following manner:

3.1. Capital gains if partial block of asset is transferred

As an individual asset loses its identity when it becomes part of a block of asset, the depreciation is charged on that block and not on an individual asset. To calculate depreciation on a block of asset, the assessee needs to obtain the opening WDV at the beginning of the tax year plus the actual cost of new assets acquired during the tax year as reduced by the sale proceeds received during the tax year from sale or disposal of assets.

In case of partial sale of assets from a block of asset, the capital gains arise only if the sale consideration exceeds the aggregate of expenditure incurred in connection with transfer, opening WDV of block of asset, cost of asset acquired during the tax year and capital gains taxable under Section 67(10). If block of asset does not cease to exist and sales consideration falls short of aggregate of amounts referred to above, the short-term capital loss shall not arise and the owner shall continue to claim the depreciation on the block of asset as per provisions of Section 33.

Particulars

Amount

Full value of consideration

Less:

(a) Expenditure in connection with transfer

(b) Opening WDV of block of asset

(c) Cost of acquisition of asset acquired during the year

(d) Capital gains taxable under Section 67(10), which is attributable to the capital asset remaining with the firm, AOP or BOI after reconstitution

xxx

(xxx)

Short-term Capital Gains (if positive)

xxx

3.2. Capital gains if complete block of asset is transferred

In case of sale of complete block of assets, difference between sales consideration and aggregate of expenditure incurred in connection with transfer, opening WDV of block of asset, cost of asset acquired during the tax year and capital gains taxable under Section 67(10), shall be treated as short-term capital gains. If block of asset ceases to exist and sales consideration falls short of aggregate of amounts referred to above, the short-term capital loss shall arise.