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Taxation Exam  >  Taxation Notes  >  Income Tax for assessment (Inter Level)  >  Nil Depreciation, Comprehensive Questions, Section 38 - Taxation

Nil Depreciation, Comprehensive Questions, Section 38 - Taxation | Income Tax for assessment (Inter Level) PDF Download

Nil depreciation
1. if on the last of the previous year (closing WDV) WDV is nil or negative; or
2. on the last of the previous year block of asset is empty.

  Block of assets last day of PY W.D.V last day of PY
Case 1 (See example 1) is not empty Zero
Case 2 (See example 2) is Empty  More than zero

 

Example 1 Example 2
Opening W.D.V. [6] 2,00,000 Opening W.D.V. [6] 6,00,000
(+) Purchases [2] 1,00,000 (+) Purchases [2] 1,00,000
(–) Sale of assets [1] (4,00,000) (–) Sale of assets [8] (2,00,000)
Closing W.D.V. [7] 1,00,000 Closing W.D.V. [0] 5,00,000
(–) Depreciation nil (–) Depreciation nil
Opening W.D.V. [7] nil Opening W.D.V. [7] nil

 

 Section 50. CAPITAL GAIN ARISING ON Sale of Depreciable Assets
1. Section 50 is applicable only when
a. The Block of Assets on the last day of the PY is empty; or
b. The W.D.V. of BoA on the last day of the PY is Zero.

2. Sale of depreciable assets shall always give rise to Short Term Capital Gain, since always treated as short term capital asset.

3. Gain is always computed for Block of Assets and not for individual assets.

4. Computation of STCG

Example 1 Example 2
Sale Consideration 4,00,000 Sale Consideration 2,00,000
(–) Opening WDV (2,00,000) (–) Opening WDV (6,00,000)
(–) Purchases (1,00,000) (–) Purchases (1,00,000)
(–) Transfer expenses Nil (–) Transfer expenses Nil
STCG 1,00,000 STCG 5,00,000

 

P1: Compute depreciation and capital gain for the AY 2017-18.

  Case 1 Case 2 Case 3 Case 4
Rate of Depreciation 10% 15% 100% 40%
W.D.V. as on 1-4-2016        
• Plant A 10000 20,000 60,000 1,00,000
• Plant B 10000 50,000 nil 30,000
Purchase of assets on 15-5-2016        
• Plant C 70,000 nil 10,000 1,00,000
Sale of assets on 1-12-2016        
• Plant A 20,000 20,000 20,000 50,000
• Plant B Not sold 70,000 Not sold 70,000
• Plant C Not sold NA Not sold 10,000

Ans: (1) Dep 7,000; Capital gain nil (2) Dep : Nil; Capital Gain 20,000 (3) Dep 50,000; Capital gain nil ( 4) Dep
Nil, since on the last day of the PY BOA is empty; (1,00,000).

Solution

Computation of depreciation

  Case 1 Case 2 Case 3 Case4
Rate of Depreciation  10%  15%  100% 40%
Opening W.D.V. as on 1-4-2016  20,000  70,000  60,000  1,30,000
Add: Purchases  70,000  nil 10,000  1,00,000
Less: Sale of assets  (20,000)  (90,000)  (20,000)  (1,30,000)
Closing W.D.V. as on 31-3-2017  70,000  (20,000)  50,000  1,00,000
Less: Depreciation  70,000  nil  50,000  nil
Opening W.D.V. as on 1-4-2017  63,000  nil  nil  nil

Note: No STCG shall arise in Case 1 and Case 3 since depreciation is not nil.

Computation of STCG for the AY 2017-18

  Case 1 Case 2 Case 3 Case 4
Sale Consideration NA 15% NA 40%
Less : W.D.V. of BoA as on 1-4-2016 70,000 1,30,000
Less : Cost of assets acquired during the
PY 2016-17		   1,00,000
Less : Expenses on transfer (90,000) 1,30,000
STCG (20,000) 1,00,000

 

P2(Page 5.5): From the following data calculate the depreciation admissible to an individual carrying on business, for the AY 2017-18:
(i) Factory Building w.d.v. on 1-4-2016 (Rate 10%)  -  10,00,000

(ii) Plant and Machinery (Rate 15%) :
• Written down value on 1-4-2016 - 8,00,000

• Additions on 30-6-2016  - 1,00,000
• Additions on 31-12-2016 - 1,00,000
• Sale of old plant on 1-12-2016  - 6,00,000

(iii) Motor car (Rate 15%) :
• Written down value on 1-4-2016 1,20,000
• Sale of car on 30-9-2016 1,50,000

Ans: 1,52,500; 30,000.

 

P3(Page 5.6): K industries owned six machines which were in use in its business in March, 2016. Depreciation on these machines was available as “plant”. The written down value of these machines at the end of previous year relevant to assessment year 2016-17 was Rs. 6,50,000. A new plant was bought for Rs. 6,50,000 on November 30, 2016.
Three of the old machines were sold on June 10, 2016 for Rs. 9,00,000. Required :
a. Compute the claim to depreciation for assessment year 2017-18 and
b. Capital gains liable to tax for the same assessment year.
c. If K industries had sold the three machines in June, 2016 for Rs. 14,00,000, will there be any difference in your working ? Explain.

Ans: 22,688; no capital gain; 1,97,500.

Section 38(2). Asset Used Partly for Business
Where the asset is partly used for personal purpose and partly for business purpose then depreciation is restricted to a fair proportionate part thereof which the Assessing Officer may determine, having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession.

Note : WDV is not restricted only depreciation shall be restricted since usage of asset for business purpose might change in every financial year.

P1: Mr. Taxcrazy purchases two computers on 1-7-2015 for Rs. 1,00,000 for business purpose. The computers are also used for personal purpose to the extent of 20% of its total use. Compute depreciation allowed for the AY 2016-17 and AY 2017-18.
Ans: 48,000; 24,960.

The document Nil Depreciation, Comprehensive Questions, Section 38 - Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).
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FAQs on Nil Depreciation, Comprehensive Questions, Section 38 - Taxation - Income Tax for assessment (Inter Level)

1. What is nil depreciation insurance?
Ans. Nil depreciation insurance, also known as zero depreciation or bumper-to-bumper insurance, is an add-on coverage for car insurance policies. It provides comprehensive coverage without factoring in the depreciation of the car's value. In case of an accident, the insurer will cover the full cost of repairs or replacement without deducting any depreciation value.
2. How does nil depreciation insurance differ from comprehensive insurance?
Ans. Nil depreciation insurance is an add-on to comprehensive insurance policies. While comprehensive insurance covers damages caused to the car due to accidents, theft, natural disasters, etc., it factors in the depreciation value of the car during claim settlements. On the other hand, nil depreciation insurance provides coverage without considering the depreciation, ensuring that the policyholder receives the full claim amount without any deduction.
3. Does nil depreciation insurance cover all types of damages?
Ans. Nil depreciation insurance covers damages caused to the insured vehicle due to accidents, collisions, and other unforeseen events. However, it may not cover damages resulting from regular wear and tear, mechanical breakdown, or damages caused by driving under the influence of alcohol or drugs. It is essential to thoroughly review the policy terms and conditions to understand the specific coverage provided.
4. Is nil depreciation insurance beneficial for older vehicles?
Ans. Nil depreciation insurance is generally more beneficial for newer vehicles, as the rate of depreciation is higher during the initial years. However, it can still be advantageous for older vehicles, especially if they have high market value or if the owner wants to ensure maximum coverage without any deduction for depreciation. It is advisable to evaluate the cost of the policy against the potential benefits before opting for nil depreciation insurance for older vehicles.
5. Does nil depreciation insurance impact the premium amount?
Ans. Yes, nil depreciation insurance typically increases the premium amount of the comprehensive insurance policy. Since it provides additional coverage without factoring in depreciation, the insurance company is exposed to a higher risk of claim payouts. As a result, the premium for nil depreciation insurance is usually higher compared to a standard comprehensive policy. However, the higher premium can be justified by the comprehensive coverage and peace of mind it offers to the policyholder.
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Nov 16, 2024 Last updated
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