capital gain doubt
This query is : Resolved
17 February 2011
cost of acquisition in the case of depreciable assets[sec.50]
-situation 1- on the last day of the previous year,wdv of the block of assets is zero[sec.50(1)]
when 50(1) will be applicable?if anyone could give an example or explain in simple words . .i would b thankful :-)
-situation 1- on the last day of the previous year,wdv of the block of assets is zero[sec.50(1)]
when 50(1) will be applicable?if anyone could give an example or explain in simple words . .i would b thankful :-)
18 February 2011
Hi,
Will get back to you with complete info & workings,
Regards
CA. LOHITH.J
B.Com,ACA,CS,(ICWA),SAPM Hons,ITF Hons
Will get back to you with complete info & workings,
Regards
CA. LOHITH.J
B.Com,ACA,CS,(ICWA),SAPM Hons,ITF Hons
18 July 2024
Section 50(1) of the Income Tax Act, 1961 deals with the computation of capital gains or losses when a depreciable asset (such as machinery, plant, etc.) has a Written Down Value (WDV) of zero on the last day of the previous year. Let's break down the scenario and explain it in simple terms:
### Understanding Section 50(1):
1. **Depreciable Assets**: These are assets used for business or profession, for which depreciation is allowed as per the Income Tax rules.
2. **Written Down Value (WDV)**: This is the value of the asset after deducting depreciation over the years from its original cost. Each year, depreciation is calculated and deducted from the original cost of the asset to arrive at the WDV.
3. **Zero WDV**: If, at the end of a financial year, the WDV of a block of depreciable assets becomes zero, it means that the cumulative depreciation claimed on those assets equals their original cost.
### Example Scenario:
Let's take an example to illustrate:
- **Original Cost**: Suppose a company purchases machinery for Rs. 10,00,000.
- **Depreciation**: Over the years, depreciation is claimed on the machinery, reducing its WDV annually.
- **Zero WDV**: After several years of claiming depreciation, the WDV of the machinery reaches zero. This happens when the total depreciation claimed equals the original cost of Rs. 10,00,000.
### Application of Section 50(1):
When the WDV of a block of depreciable assets becomes zero:
- **Capital Gains Computation**: If any asset within that block is sold or transferred, Section 50(1) applies to compute the capital gains or losses.
- **Cost of Acquisition**: According to Section 50(1), the cost of acquisition for the purpose of computing capital gains or losses is taken as **nil**. This means that for tax purposes, the asset is treated as if it was acquired at no cost.
### Why is Section 50(1) Important?
- It ensures that when depreciable assets have been fully depreciated (WDV becomes zero), any subsequent sale or transfer of those assets reflects the economic reality that they have been fully written off for tax depreciation purposes.
- It simplifies the tax computation by not requiring to track the original cost after full depreciation, and instead, considering the asset's cost as nil ensures that no unintended tax consequences arise due to historical depreciation.
### Conclusion:
Section 50(1) of the Income Tax Act applies when the Written Down Value (WDV) of a block of depreciable assets becomes zero. In such cases, for computing capital gains or losses on the sale or transfer of any asset within that block, the cost of acquisition is considered as nil. This provision simplifies tax calculations and ensures that tax liabilities are aligned with the economic value of the assets after full depreciation.
### Understanding Section 50(1):
1. **Depreciable Assets**: These are assets used for business or profession, for which depreciation is allowed as per the Income Tax rules.
2. **Written Down Value (WDV)**: This is the value of the asset after deducting depreciation over the years from its original cost. Each year, depreciation is calculated and deducted from the original cost of the asset to arrive at the WDV.
3. **Zero WDV**: If, at the end of a financial year, the WDV of a block of depreciable assets becomes zero, it means that the cumulative depreciation claimed on those assets equals their original cost.
### Example Scenario:
Let's take an example to illustrate:
- **Original Cost**: Suppose a company purchases machinery for Rs. 10,00,000.
- **Depreciation**: Over the years, depreciation is claimed on the machinery, reducing its WDV annually.
- **Zero WDV**: After several years of claiming depreciation, the WDV of the machinery reaches zero. This happens when the total depreciation claimed equals the original cost of Rs. 10,00,000.
### Application of Section 50(1):
When the WDV of a block of depreciable assets becomes zero:
- **Capital Gains Computation**: If any asset within that block is sold or transferred, Section 50(1) applies to compute the capital gains or losses.
- **Cost of Acquisition**: According to Section 50(1), the cost of acquisition for the purpose of computing capital gains or losses is taken as **nil**. This means that for tax purposes, the asset is treated as if it was acquired at no cost.
### Why is Section 50(1) Important?
- It ensures that when depreciable assets have been fully depreciated (WDV becomes zero), any subsequent sale or transfer of those assets reflects the economic reality that they have been fully written off for tax depreciation purposes.
- It simplifies the tax computation by not requiring to track the original cost after full depreciation, and instead, considering the asset's cost as nil ensures that no unintended tax consequences arise due to historical depreciation.
### Conclusion:
Section 50(1) of the Income Tax Act applies when the Written Down Value (WDV) of a block of depreciable assets becomes zero. In such cases, for computing capital gains or losses on the sale or transfer of any asset within that block, the cost of acquisition is considered as nil. This provision simplifies tax calculations and ensures that tax liabilities are aligned with the economic value of the assets after full depreciation.
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