Computation of Capital Gains in Case of Depreciable Assets
Introduction
Section 50 deals with how capital gains are computed when a depreciable asset is transferred. Regardless of the period of holding, any gain on the transfer of depreciable assets is always treated as short-term capital gain.
- When Part of a Block is Sold
If one or more depreciable assets forming part of a block are sold during a financial year, and the total sale consideration exceeds:
- the opening written down value (WDV) of the block,
- plus the cost of any new assets added to the block during the year,
- minus any expenses incurred on the transfer,
Then, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
- When Entire Block is Sold
If all the assets in a block are sold during the year, and no asset remains in that block:
- The WDV at the beginning of the year, plus the cost of any new asset acquired during the year, is treated as the cost of acquisition.
- The difference between the sale proceeds and this cost is treated as short-term capital gain or loss.
- Special Treatment of Goodwill
From Assessment Year 2021–22, goodwill is no longer considered a depreciable asset, and depreciation cannot be claimed on it. Therefore, any transfer of goodwill is now governed by general capital gain provisions and not by Section 50.
However, if depreciation was claimed on goodwill up to AY 2020–21 (when it formed part of the intangible block of assets), the WDV of the block and any short-term capital gains arising from the reduction of goodwill from the block must be calculated as per Rule 8AC .
As per Rule 8AC , if the depreciated value of goodwill exceeds the sum of:
- the opening WDV of the block, and
- the cost of new intangible assets acquired during the year,
then the excess is deemed short-term capital gain.
Further, if goodwill was the only asset in the block as of 01-04-2020, and no other intangible asset was acquired during the previous year 2020–21, no capital gain or loss will arise due to the cessation of the block.