Chapter 14- Disposal of Assets & Liabilities

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.
2.
3.
4.

Business Asset
Non Business Chargeable Asset
Trading Stock
Depreciable Asset

Since Mr. Sundars 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 wifes 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:
Less: Cost of Trading Stock
Gain

37,500,000
(30,000,000)
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.

Chapter 14- Disposal of Assets & Liabilities

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 + 150,000 = 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.
B.
C.
D.

Opening Depreciation Base of Pool A for IY 20X3/X4

Absorbed additions
Disposal Proceeds
Depreciation base (A + B C)

3,385,000
2,500,000
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.
B.
C.
D.
E.
F.
G.

Opening Depreciation Base of Pool A for IY 20X2/X3

Absorbed additions (new building-100% as before Poush 20X2)
Disposal Proceeds
Depreciation base (A + B C)
Depreciation @ 5% (D * 5%)
Excess Repair & Improvement as given in question
Opening Depreciation Base for 20X3/X4 (D-E+F)

1,000,000
2,500,000
3,500,000
175,000
60,000
3,385,000

Chapter 14- Disposal of Assets & Liabilities

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 transferees 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 2069.12.15) = 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 2069.10.15) = Incomings derived after calculation as above 10,000,000
Gain for Ms. Sita (on 2069.12.15) = 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.

Chapter 14- Disposal of Assets & Liabilities

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 31st Chaitra 20X1. This means, an income return of the income of Mr. X
from the operation of business from 1st Shrawan 20X1 till 31st 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. Xs 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. Xs death separately.

Chapter 14- Disposal of Assets & Liabilities

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.
B.
C.
D.

Outgoings of the Disposed Asset

Incomings on involuntary disposal of Asset
Outgoings while acquiring similar other asset within one year of disposal
Incomings of the Disposed Assets (as per Sec. 46)
Since, B>C, A+B-C, Else it would be value of A
E. Outgoings of the Disposed Asset (as per Sec. 46)
Since. B>C, Value of A, else it would be A+C-B
F. Gain on Disposal (D E)

5,000,000
8,000,000
6,000,000
7,000,000
5,000,000
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)