Assignment 2

Corporate Valuation
Muskan Valbani | PGP/24/456

Q. Rule of application of taxation of profits from the sale of depreciable assets: Capital Gains Tax, Sec50.

Answer: The rule applicable is the Section 50 of the Income Tax Act.

- The bat example and the 2 situations of Capital Gains

The example being referred to here is the one that was discussed in class of the sale of a bat machine. There were 10 machines,
each having a Book value of INR10 thus making the total block of assets equal to INR 100 and these were depreciable under WDV. 2
cases were taken pertaining to the Sales consideration from the sale of 1 machine from the block:
i) Sales consideration = INR 50; ; lesser than the BV of the asset block
Considering the total block of assets to be 100, when we reduce the net sale consideration from the WDV (which
includes opening WDV and cost of any acquired asset which stands 0 for this case) and the WDV of the block is greater
than 0 (or is a positive figure and not Nil), such a transfer of asset is not subject to any capital gains and normal
depreciation is allowed as per Sec 50.
Since in this situation, sale consideration = 50, asset block’s WDV = 100; 100-50 = 50 WHICH IS NOT Nil, the surplus on
sale of INR 40 (50-10) is not considered as a capital gain as it is treated as an incidental gain, however the BV would
reduce to 50 and thus lesser depreciation tax shield would be applicable now.
ii) Sales consideration = INR 120; ; more than the BV of the asset block
Since reduction of the WDV (opening + acquired) of the block of assets, here INR 100, from the net sales consideration
of INR 120 leaves the WDV of the block at Nil (WDV cannot be negative), the surplus of 20 will be considered as a
capital gain.

- Short-Term v. Long-Term
As per Sec 50, Income Tax At, sale of a capital asset on which depreciation is allowed by law, the income from the sale is considered
as short-term capital gain.
This has 2 consequences; No benefit of indexation (and the tax payer cannot benefit from the enhancing the cost of acquisition) and
second is the loss of benefit concessional tax rate of 20% on LTCGs as the STCGs are taxed at slab rate applicable to the tax payer.

- Sec 50 v. Sec 54 of the ITA and Income Tax Tribunal on claiming exemptions
Sec 54 entitles a tax payer to claim various exemptions if the profits from sale of properties held for more than 24 months are
invested in residential houses or specified bonds, however Sec 50 treats the surplus as STCGs only with no explicit prohibition
against a taxpayer claiming an exemption by investing in a home or capital gains bonds.
Thus, the tribunal holds that Sec 50 does not provide for the holding period to also be deemed, the profits from the sale of
depreciable assets are to be treated as short-term capital gains, however an assessee can still claim the exemptions applicable to
long-term capital assets if the asset is held for more than 24 months (as for immovable properties) and 36 months (other assets.)