2.2 Query
Profit on sale of a machine – its accounting treatment and tax implications.
1. An assessee company follows calendar year as its previous year. A machine, the Written Down Value of which on 1.1.1987 was Rs. 1,000/-, has been sold on 15.10.1987 for Rs. 50,000. The machine was bought in 1959 for Rs. 60,000.
2. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above, in the light of the recent relevant amendments made in the Income-tax Act
a) What will be the treatment in accounts in respect of Rs. 49,000, i.e., whether profit on sale of the machine should be credited to the profit and loss account?
b) Whether the aforesaid profit will be taxed, and
c) Whether the position will be different if instead of the machine, a vehicle is sold.
Opinion September 7, 1988
1. The Committee notes that sub-section (2) of section 41 of the Income-tax Act, dealing with chargeability to Income-tax as income of the excess of amount received over the written down value of an asset on the sale thereof, has been omitted by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986, w.e.f, 1.4.1988.
2. The Committee further notes that the aforesaid Amendment Act has inserted clause (c) to Section 43 (6) of the Income-tax Act. The said clause, provides, inter alia, as below:
“(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,- ......................... .........................
(B) by the reduction of 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 so increased ........................... .........................."
3. The Committee also notes that the expression ‘block of assets’ has been defined by new clause (ii) of section 2 of the Income-tax Act, as below:
“block of assets means a group of assets falling within a class of assets being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed.”
4. The Committee also notes that ‘motor vehicles’ are covered under the head ‘Machinery and Plant’ as per ‘Appendix I prescribed under Income-Tax (Third Amendment) Rules 1987, w.e.f 2.4.1987 [effective from the assessment year 1988-89].
5. Regarding the disclosure of profit on sale of a fixed asset in the profit and loss account, the Committee notes that para 28 of Accounting Standard 6 (AS-6) on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, recommends that “if any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus or deficiency should be disclosed separately.”
6. The Committee incidentally also notes that with the enactment of Companies (Amendment) Act, 1988, the provisions related to depreciation would be completely delinked from the relevant provisions of the Income-tax Act, 1961 or the rules made thereunder. Thus, the position regarding sale of fixed assets would be different under the said Acts. In view of this, the accounting treatment on sale of fixed assets would continue to be the same as it was prior to the enforcement of Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986.
7. On the basis of the above, the opinion of the Expert Advisory Committee, on issues raised by the querist in para 2 of the query, is as below:
a) The profit on sale of machine should be separately disclosed in the profit and loss account.
b) The profit on sale of machine, i.e., excess of sale price over the written down value thereof, is not liable to tax in respect of assessment year 1988-89, but will go to reduce the written down value of the block of assets, i.e., the class of assets in respect of which the same percentage of depreciation as applicable to the machine sold.
c) Position will not be different if instead of the machine, a vehicle is sold.
___________________________ |