Acquisition of business asset by way of gift or inheritance [Explanation-2 to section-43(1)]
Where any asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset shall be:
Actual cost of the asset of previous owner (-) Depreciation that would have been allowable as if the asset was the only asset in the relevant block of asset
We can also say that actual cost of asset acquired by way of gift or inheritance shall be the WDV of the previous owner computed in a manner assuming that the asset was the only asset in the block of the asset.
We will take an example to understand the provision:
Case Study-1:
Suppose Mr. X acquired a car on 01-02-2018 for Rs. 10 lakhs. He has not claimed any depreciation thereon as he has been using the car for his personal use. He gifted the car to Mr. Y on 01-05-2019. On this date the car could be sold in the open market for Rs. 6 Lakhs. Mr. Y put to use the car on the same date for the purpose of his business. Mr. Y already has assets of Rs. 4 Lakhs WDV in the block of 15%.
Answer:
- Since, a movable asset has been gifted, there will be no implication of section-56(2)(x) on Mr. Y as motor car is not covered in the specified assets u/s 56(2)(x).
- WDV of previous owner shall be computed as if he was using the car in his business. Therefore, the WDV of the previous owner will be:
Actual cost:- 10,00,000
Less: Depreciation (FY 2017-18) 75,000 @7.5% (1/2 of 15%)
Less: Depreciation (FY 2018-19) 1,38,750 @ 15% for full year
Less: Depreciation (FY 2019-20) 1,17,938 @ 7.5% for (1/2 of 15%)
WDV as on 01-05-2019 6,68,312
- For Mr. Y the actual cost of the car shall be taken at Rs. 6,68,312 and thus, WDV of the block of asset for the purpose of depreciation will be computed as follows:-
Opening Balance of WDV of the block:- 4,00,000
Add: Actual cost of addition to block:- 6,68,312
WDV for the purpose of depreciation 10,68,312
- Mr. Y will be eligible to claim deprecation at full rate of 15% as the new car purchased has been used for more than 180 days in his business.
Thus, Depreciation for the year will be: 10, 68,312 x 15% = Rs. 1, 60,247.
Case Study-2:
Suppose, it was the case of a building falling in the block of 10%. Mr. X had gifted building costing Rs. 10 Lakhs to Mr. Y on same dates as in above case study. Mr. X was also using the building for the purpose of his business. Fair Market Value of building on the date of gift is Rs. 9, 00,000. Opening balance of block of building of Mr. X is Rs. 15 Lakhs and Opening balance of block of building in case of Mr. Y is Rs. 12 Lakhs. Depreciation rate is 10%.
Answer:
- First, we will calculate WDV of building gifted by Mr. X as if he was using the building as the only asset in the block:
Actual cost of the building: 10,00,000
Less: Depreciation (FY 2017-18) 50,000 (10% for ½ year)
Less: Depreciation (FY 2018-19) 95,000 (10%)
Less: Depreciation (FY 2019-20) 85,500 (10% for ½ year)
WDV of Mr. X (previous owner) 7,69,500
- In case of Mr. X, the opening WDV of the block is Rs. 15 Lakhs which will be reduced by Rs. 7,69,500 as he has gifted the said asset to Mr. Y. Thus, the WDV of the block after gift will be Rs. 7, 30,500. So, Depreciation for the year will be 10% of 7, 30,500 i.e. Rs. 73,050.
- In case of Mr. Y, the opening WDV of the block is Rs. 12 Lakhs which will be increased by Rs. 7,69,500. Thus, WDV of block for the purpose of depreciation will be Rs. 19, 69,500.
- Mr. Y will be eligible to claim depreciation for the full year as the asset has been used for more than 180 days. Therefore, Depreciation will be 1, 96,950 (19, 69,500 * 10%).
- Mr. Y will also have to bear the implication of section-56(2)(x) as the asset gifted to him is an immovable property. According to this section, fair market value (value adopted by stamp duty authority) of the building gifted i.e. Rs. 9 Lakhs will be treated as his income under the head “Income from other sources”. However, for the purpose of depreciation, the cost of the asset will be taken as Rs. 7, 69,500.
- Mr. Y is thus able to claim cost Rs. 7, 69,500 only but he is paying tax on income of Rs. 9 Lakhs as gift. This situation creates certainly hardship for Mr. Y but there is no relief in this regard in the Income Tax Act as the determination of actual cost is guided by section-43(1) on which section-56(2)(x) does not apply. Section-49(4) dealing with deemed cost of acquisition read with section-56(2)(x) deals only with the matter covered under capital gain and is not applicable on “Business or Profession”.
Sections Referred:- Section-43(1), Section-56(2), Section-49(4) of the Income Tax Act,1961
