Provisions relating Capital Gain u/s 50 of Income Tax Act – Depreciable Assets

Working of Capital Gain u/s 50 of Income Tax Act against sale of business assets

Section 50 of the Income Tax Act, 1961 provides for the computation of capital gain in respect of depreciable assets. If an assessee has sold a capital asset forming part of block of assets (building, machinery etc.) on which depreciation has been allowed under Income Tax Act, the gain or loss arising from transfer of such capital asset is treated as Short Term Capital Gain. In this case, Section 50 will have overriding effect in spite of anything contained in section 2(42A) which defines a short term capital asset.

If a part of block is sold i.e. where some assets are left in block of assets then the capital gain is computed by following the steps mentioned below:

1. Calculate full value of Sale consideration of the depreciable assets which have been transferred during the previous year & fall within the same block of assets
2. Calculate the total of the following:
   1. Expenditure incurred wholly & exclusively in connection with such transfer(s);
   2. The written down value of the block of assets at the beginning of the previous year;
   3. The actual cost of any asset(s) falling within the block of assets acquired at any time during the previous year.
3. If the amount calculated in Step I is more than that of Step II, than the difference is chargeable as Short Term Capital gain. But if the amount calculated in Step I is equal to or less than Step II, then Sec 50(1) is not applicable & there is no capital gain

Let us understand the Capital Gain of depreciable assets with the help of the following example:

Suppose, the opening WDV of the block as on 1^st April 2016 is Rs. 10 Lacs. Assets amounting to Rs. 2 Lacs were purchased during the year. One of the assets falling within the same block is sold for Rs. 15 Lacs. Then capital gain under section 50 shall be computed as under:

If the whole block is sold, i.e. when no assets are left in block of assets, then the capital gain or loss is computed by following the steps mentioned below:

1. Calculate the Written down value of the block of assets at the beginning of the previous year.
2. Then add the Actual Cost of any asset(s) falling within that block of assets acquired by the assessee during the previous year.
3. From the full value of Sale Consideration of the depreciable assets transferred & falling within the same block of assets deduct the following:
   1. Total of Step I & II i.e. the cost of acquisition;
   2. Expenditure incidental to transfer.
4. If the resultant figure is positive, then it is termed as Short Term Capital Gain and if the figure is negative, then such loss shall be treated as short term capital loss and no depreciation shall be allowed from such block of assets.

Claiming of Depreciation is essential for claiming the benefit u//s 50 of Income Tax Act, if no depreciation was claimed on any asset, then such assets can not get benefit u/s 50 on their sale

Following points are relevant regarding the computation of capital gain on depreciable assets:

1. If the whole of capital assets in a block have been sold in a year and some new asset has been purchased within the same year in the same block of assets, then sec. 50 shall not apply, since the block of asset does not cease to exist in such case as is required u/s 50(2) as decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/ 83 T.T.J. 1057
2. An asset could not be assessed u/s 50, if no depreciation was ever claimed by the assesee on that asset under the Income Tax Act. [CIT v. Santosh Structural & Alloys Ltd. [2012] (P & H)]
3. Section 2(11), which defines term ‘block of assets,’ does not make any distinction between different units or different type of businesses, which may be carried on by an assessee. All the assets falling within the same class on which same rate of depreciation is applicable will form block of asset, whether they belong to same unit or different units. [CIT v. Ansal Properties & Infrastructure Ltd. [2012] (Delhi)]
4. Provisions of section 50 cannot be invoked in case of sale of land since land is not a depreciable asset & it cannot form part of block of assets in absence of rate of depreciation having been prescribed. If land is held for a period of more than 36 months, then excess of sale price over indexed cost of acquisition of land is to be taxed as long-term capital gain. [CIT v. I.K. International (P.) Ltd. [2012] (Delhi)]
5. Short term capital gains arising from the transfer of depreciable assets held for more than 36 months under Section 50(2) of the Act can be set-off against brought forward loss under Section 74 of the Income Tax Act. The function of deeming provisions of section 50 cannot restrict the taxpayer to claim benefits provided under other provisions of the Act.

Related Read- Section 50C (1) of the Income Tax Act is retrospective in nature