Special provision for cost of acquisition in case of depreciable asset.

75

If depreciation has been obtained under section 33(2) for a capital asset in any tax year, the provisions of sections 72 and 73 shall apply subject to the modification that the written down value, as defined in section 41, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.

Explanation

Section Summary:

This section addresses how the cost of acquisition is determined for depreciable assets when calculating capital gains. Specifically, it applies when depreciation has been claimed under Section 33(2) for a capital asset. The section modifies the application of Sections 72 and 73 by using the written down value (WDV) of the asset, as adjusted, as the cost of acquisition for tax purposes.

Key Changes:

• Modification of Cost of Acquisition: Previously, the cost of acquisition for depreciable assets was determined based on the original purchase price. This section now mandates that the written down value (WDV) of the asset, as adjusted, will be considered the cost of acquisition if depreciation has been claimed under Section 33(2).
• Interaction with Sections 72 and 73: The section modifies how Sections 72 and 73 (related to capital gains) are applied in cases involving depreciable assets.

Practical Implications:

• Taxpayers with Depreciable Assets: Taxpayers who have claimed depreciation on capital assets under Section 33(2) will now use the WDV (adjusted) as the cost of acquisition when calculating capital gains. This could result in higher capital gains and, consequently, higher tax liability upon the sale of such assets.
• Businesses: Businesses that own depreciable assets need to ensure accurate tracking of the WDV and adjustments to comply with this provision. This may require updates to accounting systems and processes.

Critical Concepts:

• Written Down Value (WDV): The WDV is the value of an asset after accounting for depreciation over time. It is calculated as the original cost of the asset minus accumulated depreciation.
• Section 33(2): This section allows taxpayers to claim depreciation on capital assets used for business or profession.
• Sections 72 and 73: These sections govern the computation of capital gains and losses. This section modifies their application for depreciable assets.

Compliance Steps:

1. Track Depreciation: Ensure accurate records of depreciation claimed under Section 33(2) for all depreciable assets.
2. Calculate WDV: Determine the written down value of the asset at the time of sale or transfer.
3. Adjust WDV: Make any necessary adjustments to the WDV as per the provisions of Section 41.
4. Use Adjusted WDV as Cost of Acquisition: When calculating capital gains, use the adjusted WDV as the cost of acquisition instead of the original purchase price.

Example:

• Scenario: A business purchased machinery for ₹10,00,000 and claimed depreciation of ₹4,00,000 over 4 years under Section 33(2). The WDV of the machinery is now ₹6,00,000. The business sells the machinery for ₹8,00,000.
• Application of Section 75: The cost of acquisition for calculating capital gains will be the adjusted WDV of ₹6,00,000, not the original purchase price of ₹10,00,000.
• Capital Gains Calculation:
  Sale Price: ₹8,00,000
  Cost of Acquisition (Adjusted WDV): ₹6,00,000
  Capital Gains: ₹2,00,000

This capital gain of ₹2,00,000 will be subject to tax as per the applicable provisions.