Chapter 14- Disposal of Assets & Liabilities. Question 1- Page 137

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1 Question 1- Page 137 There are four types of assets covered by Income Tax Act, 2058; the gain on disposal of which attracts income tax. In case any asset does not fall under any of the categories of such assets, the gain on disposal of such assets are beyond the ambit of Income Tax Act, and income tax is levied on such gain. The types of assets covered by Income Tax Act are as follows: 1. Business Asset 2. Non Business Chargeable Asset 3. Trading Stock 4. Depreciable Asset Since Mr. Sundar s wife possesses the jewelry, which does not fall under any of the categories of asset above; the gain on disposal of such asset is not taxable in both the case. As Mr. Sundar has carried on business of jewelry by injecting his wife s jewelry as capital in his business, there must be an agreement between his wife and him to consider the jewelry as trading stock, on which case the cost of trading stock would be market value of asset. In either of the cases listed in the question, the cost of trading stock is Rs. 30 Million. The gain on Disposal is: Sales Proceed: 37,500,000 Less: Cost of Trading Stock (30,000,000) Gain 7,500,000 Since it is trading stock, the sales are considered part of Sales income u/s 7 (2) (kha) and cost of trading stock is calculated u/s 15 of the Act. As such, Mr. Sundar is responsible to pay tax on business income.

2 Question 1- Page 140 In this question, there are two assets- business asset (land) and depreciable asset (building) and the gain on disposal for each of the assets is calculated separately. Gain on Disposal of Land- Business Asset: Incomings for the Land= 1,500,000 Outgoings for the land= 1,000, ,000 = 1,150,000 Gain = Incomings Outgoings = 450,000 Gain on Disposal of Building Building is depreciable asset falling under Pool A as per Schedule 2 of Income Tax Act. As the question states, there are other buildings as well in the Pool since many years, and the disposal of building is for Rs. 2.5 Million, the gain on disposal of new building cannot be calculated on standalone basis, but rather on Pool basis. As all relevant information related to Pool A is given, the gain is calculated as under: A. Opening Depreciation Base of Pool A for IY 20X3/X4 3,385,000 B. Absorbed additions - C. Disposal Proceeds 2,500,000 D. Depreciation base (A + B C) 885,000 Since, the depreciation base as calculated by the formula given in Schedule 2 of the Act is positive with some asset remaining in the pool, there shall be no gain on disposal. Working Note: A. Opening Depreciation Base of Pool A for IY 20X2/X3 1,000,000 B. Absorbed additions (new building-100% as before Poush 20X2) 2,500,000 C. Disposal Proceeds - D. Depreciation base (A + B C) 3,500,000 E. 5% (D * 5%) 175,000 F. Excess Repair & Improvement as given in question 60,000 G. Opening Depreciation Base for 20X3/X4 (D-E+F) 3,385,000

3 Question 1- Page 141 As per Sec. 43, in the event of transfer of asset to the spouse of ex-spouse as a result of bonafide separation or divorce and when any of the spouses elects the provisions of Sec. 43 to be applied in writing, the transferor of asset is deemed to receive the Outgoings for the assets at the time of disposal, and the transferee s Outgoings for the assets so received is deemed to be the amount equal to that received by the transferee. In the event of failure to elect Sec. 43 to be applied in writing by either of the spouses, then provisions of Sec. 45 (1) comes into effect, which means the transferor is deemed to receive an amount equal to higher of market value of asset or Outgoings to date of such assets. The transferee, in other hand, is deemed to incur cost equivalent to the amount that is deemed to be received by transferor. In the given question, since Mr. Ram has transferred his asset as a result of divorce with his wife Ms. Sita without any financial consideration, if Mr. Ram notifies IRD of the application of provisions of Sec. 43, the incomings for the disposal of the assets in his hand is deemed to be the amount equal to the Outgoings incurred by him for the asset, which means Incomings for Assets = 10,000,000 Outgoings for Assets= 10,000,000 Gain = Incomings Outgoings = Zero, in the hand of Mr. Ram While Ms. Sita is deemed to pay the amount equivalent to that received by Mr. Ram, i.e. outgoings at the time of transfer of asset to Ms. Sita is incomings considered for Mr. Ram and any additional cost for the asset borne by Ms. Sita, i.e. Rs. 10,000,000 plus Rs. 20,000 of transfer cost. Incomings for Sita (sales of land on ) = 15,000,000 Gain = Incomings Outgoings = 15,000,000 10,020,000= 4,980,000 In case Mr. Ram fails to notify IRD of his application of Sec. 43, then Sec. 45 (1) comes into effect, which means, Incomings for Mr. Ram at the time of Transfer = Higher of Market Value of Asset or Outgoings incurred for the asset Outgoings for Ms. Sita at the time of Transfer = Amount considered as Incomings for Mr. Ram + Any cost incurred by Sita in the process of Transfer Gain for Mr. Ram (on ) = Incomings derived after calculation as above 10,000,000 Gain for Ms. Sita (on ) = 15,000,000- Outgoings as calculated above As the market value at the time of transfer is not given, the problem cannot be solved to derive the amount. The treatment is well explained above.

4 Question 1- Page 142 Transfer in case of death (Sec. 44) In case of death of a natural person, the asset and liability of the natural person is deemed to be disposed just before his death (Sec. 40 (3) (a)). Sec. 44 requires the disposal of such asset in market value. The section is silent about the value of disposal of liability after death. In the given question, right before the death of Mr. X, the asset and liability owned and owed by Mr. X was deemed to be disposed on 31 st Chaitra 20X1. This means, an income return of the income of Mr. X from the operation of business from 1 st Shrawan 20X1 till 31 st Chaitra 20X1 and the gain on disposal of asset calculated as per Sec. 44 of the Act, shall be submitted by the legal heir or any person acting in authorized or personal capacity to manage the property of such person. In this case, as Mr. X s son are legal heir deciding to take 50% ownership by each of them, the assets and liabilities of the concern shall be transferred from Mr. X to them on the date of death of Mr. X. The cost of acquiring the various assets of Mr. X by his sons is deemed to be the market value of such assets taken; and for the period after his death, his sons are responsible to pay tax on business after completion of legal formality. As such, the act of the sons of Mr. X submitting the income return in the name of their father even for the period after his death is not correct as per the Act. They should make an arrangement to address the provision of the Act, and divide the property as agreed and pay tax on the business conducted after Mr. X s death separately.

5 Question 1- Page 146 If all the following conditions are satisfied, the Incomings and Outgoings for the disposed asset shall be calculated as follows: Conditions: 1. The asset shall be disposed by way of conditions mentioned in Sec. 40 (1) 2. The disposal shall be due to involuntary, i.e. without the will of disposer, 3. The person disposing the asset shall acquire similar type of asset within one year of the involuntary disposal of asset, and 4. The disposer shall elect the provisions of Sec. 46 to be applied in writing Incomings for the disposed Assets: If the disposal proceeds of the disposed assets is greater than the cost of acquiring similar other asset within one year: Outgoings of the disposed Assets Plus: Incomings received at the time of involuntary disposal of asset Less: Outgoings incurred to acquire similar other asset within one year of disposal If the disposal proceeds of the disposed assets is less than the cost of acquiring similar other asset within one year: Outgoings of Disposed Assets Outgoings for the Disposed Assets: If the disposal proceeds of the disposed assets is greater than the cost of acquiring similar other asset within one year: Outgoings of the Disposed Assets If the disposal proceeds of the disposed assets is less than the cost of acquiring similar other asset within one year: Outgoings of the Disposed Assets Plus: Outgoings incurred while acquiring similar other asset within one year of disposal Less: Incomings from the involuntary disposal of asset In the given question, since all the above conditions are satisfied, the calculation of incomings and incomings of disposed assets shall be calculated as per Sec. 46, i.e. as per above: Calculation of gain on Disposal A. Outgoings of the Disposed Asset 5,000,000 B. Incomings on involuntary disposal of Asset 8,000,000 C. Outgoings while acquiring similar other asset within one year of disposal 6,000,000 D. Incomings of the Disposed Assets (as per Sec. 46) 7,000,000 Since, B>C, A+B-C, Else it would be value of A E. Outgoings of the Disposed Asset (as per Sec. 46) 5,000,000 Since. B>C, Value of A, else it would be A+C-B F. Gain on Disposal (D E) 2,000,000 In case Mr. Ram failed to elect Sec. 46 in writing, the gain would be Rs. 8 Million less Rs. 5 Million (as calculated u/s 37, 38 & 39 of the Act). In case Mr. Ram could not acquire similar other asset within a year of involuntary disposal, the gain would be Rs. 8 Million less Rs. 5 Million (as calculated u/s 37, 38 & 39 of the Act)