Profit on sale of assets in business income computation

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Bazeer Ahmed (Querist)
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22 December 2018 Sir / Madam,

We normally disallow the Loss on Sale of Fixed Assets while calculating the income from Business or profession. Likewise we disallowed the profit on sale of Fixed Assets (ie. the income reduced with the profit on Sale of asset) in our computation of business Income. The IT officer CPC notify us by a communication posted in the Income Tax Site in our Login what we did is wrong. We cannot understand the logic behind why the loss on sale of assets is disallowed but profit on sale of assets cannot be disallowed while arrive the income from Business or profession.

Could you please explain the logic behind this subject.

Thanking you,

With regards,
Bazeer L

Z (Expert)
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22 December 2018 Suppose you had an asset [A] having original value as 100 Lakhs + 30 Lakhs (Other assets)
Currently, you have its WDV as 50 Lakhs+ (15 Lakhs Other assets)
You sold the asset [A] for 40 Lakhs.
So, we say that we made a loss of 10 Lakhs.
But, IF YOUR BLOCK OF ASSET DOES NOT CEASE TO EXIST, the amount which you will reduce from the block of asset would be 40 Lakhs [being money payable as referred to in S.43(6)(c)(i)(B)]
So, ultimately your block remains at 60 Lakhs+15 Lakhs, but the asset representing 50 Lakhs was removed from the block.
Therefore, in net effect, that so-called loss of 10 Lakhs is not allowed as a loss, but you will claim depreciation on that 10 Lakhs.

Now, in the same example, if the WDV is taken as same (50 Lakhs + 15 Lakhs) but we sold [A] for 60 Lakhs, then there is excess of 10 Lakhs. Since the WDV will not become zero by deducting the amount of money payable, which is 60 Lakhs, profit, in this case, will not be chargeable.

In earlier case the WDV did not became zero, but if WDV is 50 Lakhs + 15Lakhs but Sale of [A] Fetched us 70 Lakhs then we have to reduce 70 Lakhs (but, we can reduce only 50+15 Lakhs as WDV can be reduced only till zero (refer S.43(6)c(i)B and the excess 5 Lakhs shall be chargeable as short term capital gain u/s 50.

[There is more to it in this concept, the above example is just one of the several scenarios. Please refer S.50,S.43(6) and for special cases also refer S. 35AD; 41(2) & 41(3). Provisions are cited for your reference.]

S.43(6) "written down value" means—
(c) in the case of any block of assets,—

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and

(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced—

(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and

(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets,
so, however, that the amount of such decrease does not exceed the written down value;

(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).

S50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

S.41(2) Where any building, machinery, plant or furniture,—

(a) which is owned by the assessee;

(b) in respect of which depreciation is claimed under clause (i) of sub-section (1) of section 32; and

(c) which was or has been used for the purposes of business,

is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

Explanation.—Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year.

S.41(3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35, read with clause (4) of section 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (i) or, as the case may be, the amount of the deduction under clause (ia) of sub-section (2), or clause (c) of sub-section (2B), of section 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

Explanation.—Where the moneys payable in respect of any asset referred to in this sub-section become due in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

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