04 January 2014
A company incorporated for cement business got various licences from government such as mining etc. It also had land and machineries. But before coming into operations, due to certain reasons the business is being sold out. Now the question is whether it would be taxable under capital gains or Business Profits? An illustration, if it could be given would make the understanding clear.
18 July 2024
In the scenario described, where a company is incorporated for cement business, obtains various licenses including for mining, and acquires land and machinery, but before commencing operations decides to sell the business, the tax treatment will depend on whether the assets being sold are considered capital assets or part of the business assets.
Here’s how the tax treatment would typically apply:
### Capital Gains vs Business Income
1. **Capital Gains:** - If the assets sold are considered capital assets under the Income Tax Act, 1961, any profit or gain arising from their transfer would be categorized as capital gains. - Capital assets generally include assets like land, buildings, machinery, investments, etc., held for long-term investment purposes rather than for business operations. - The computation of capital gains would involve deducting the indexed cost of acquisition and improvement (if any) from the sale consideration to arrive at the taxable capital gain. - Long-term capital gains (if assets were held for more than 3 years) are taxed at 20% with indexation benefit, while short-term capital gains are taxed at applicable slab rates.
2. **Business Profits:** - If the assets sold are considered part of the business assets (like machinery and land used for business purposes), the profit or gain arising from their sale would generally be treated as business income. - Business income is subject to tax as per the normal provisions of the Income Tax Act applicable to the particular type of business entity (corporate tax rates for companies, individual tax rates for individuals).
### Illustration:
Let's assume the company sells the following assets:
- **Land and Building:** Purchased in 2010 for Rs. 1 crore, sold in 2023 for Rs. 2.5 crore. - **Machinery:** Purchased in 2011 for Rs. 50 lakhs, sold in 2023 for Rs. 75 lakhs.
**Capital Gains Calculation:** - **Land and Building:** - Indexed Cost of Acquisition = Cost of acquisition * (CII for year of sale / CII for year of purchase) - Indexed Cost of Acquisition = Rs. 1 crore * (317 / 167) = Rs. 1.89 crore - Long-term Capital Gain = Sale Consideration - Indexed Cost of Acquisition - Long-term Capital Gain = Rs. 2.5 crore - Rs. 1.89 crore = Rs. 61 lakh - Tax on Long-term Capital Gain (assuming 20% with indexation benefit)
- **Machinery:** - Short-term Capital Gain = Sale Consideration - Cost of Acquisition - Short-term Capital Gain = Rs. 75 lakhs - Rs. 50 lakhs = Rs. 25 lakhs - Tax on Short-term Capital Gain (assuming applicable slab rates for business assets)
**Business Profits Calculation:** - For machinery sold as part of business assets, the entire profit of Rs. 25 lakhs would be considered as business income and taxed at corporate tax rates (if it’s a company) or individual tax rates (if it’s a proprietorship or partnership).
### Conclusion:
- **Capital Gains:** Apply when the assets sold are considered capital assets held for investment purposes. - **Business Profits:** Apply when the assets sold are considered part of the business assets used in the business operations.
The determination of whether an asset qualifies as a capital asset or business asset depends on various factors including the intention behind acquisition, use during the holding period, and the nature of the business. It's advisable to consult with a tax advisor or chartered accountant for specific guidance based on the detailed circumstances of the transaction.
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