: Sections 74–75 — Capital Gains on Depreciable Assets & the "Block of Assets" Concept

Section Analysis

Sections 74 and 75 carve out a special computation regime for assets on which depreciation has been claimed by a business — such assets are governed by the "block of assets" concept rather than being tracked individually. Key features carried forward from Sections 50 and 50A of the 1961 Act:

  • Deemed short-term capital gain: Regardless of how long a depreciable asset was actually held, any gain arising from its transfer (or from the transfer of the entire block) is deemed to be short-term capital gain, computed with reference to the Written Down Value (WDV) of the block rather than the individual asset's original cost.
  • Block survives individual asset transfer: If some (not all) assets in a block are sold and the block still contains other assets with positive WDV, there's typically no immediate capital gains charge — the sale proceeds simply reduce the block's WDV for future depreciation purposes.
  • Block extinguished: If the entire block is sold, or if sale proceeds exceed the block's opening WDV plus additions, a short-term capital gain arises on the excess.
  • Section 75: Where the depreciable asset was itself acquired through a Section 70-type transaction (e.g., succession, amalgamation), specific rules govern how the "actual cost" carries forward for depreciation and eventual capital gains purposes.

Case Laws

1. CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210 (Bombay HC) — Held that even though gain on transfer of a depreciable asset is deemed short-term under this provision, the taxpayer can still claim exemption under long-term-gain-oriented provisions (like the Section 82/54 or 85/54EC lineage) if the asset was, in substance, held for a long-term period before transfer — establishing that the "deemed short-term" fiction for tax-rate purposes does not automatically disqualify otherwise-eligible long-term exemptions, a taxpayer-favourable clarification frequently relied upon in practice.

2. Rulings on partial block sales — Tribunals have consistently held that as long as the block of assets continues to exist (i.e., other depreciable assets remain in that block after a partial sale), no capital gains arises merely from selling one asset within the block — the sale consideration is simply adjusted against the block's WDV.

3. Cases on goodwill's inclusion in a depreciable block — Following legislative changes removing goodwill from the definition of a depreciable asset, courts and tribunals have had to address transitional issues on how existing goodwill blocks (previously eligible for depreciation) should be treated on eventual transfer — an evolving area requiring careful case-specific analysis.

FAQs

Q1. If I've owned a depreciable business asset for 10 years and sell it at a profit, is the gain long-term or short-term? It is deemed short-term capital gain under Section 74, regardless of the actual 10-year holding period, because depreciation was claimed on it.

Q2. Can I still claim exemption under Section 82 (residential house reinvestment) if my depreciable asset gain is deemed short-term? Per the principle in ACE Builders, courts have permitted such exemptions where the asset was, in substance, a long-term holding, despite the "deemed short-term" computation fiction for rate purposes — but this remains a nuanced, fact-specific area warranting professional advice.

Q3. What happens if I sell just one machine out of a block containing several machines? If the block still has a positive WDV and other assets remain after adjusting the sale proceeds, generally no immediate capital gains tax arises — the sale proceeds reduce the block's WDV for future depreciation calculation.

Q4. What if the sale proceeds of one asset exceed the entire block's WDV? The excess over the block's WDV (plus the year's additions) is charged to tax as short-term capital gain.

Q5. Is goodwill still part of a depreciable block of assets? Goodwill of a business or profession was specifically excluded from being treated as a depreciable asset by legislative amendment; transitional provisions govern how pre-existing goodwill blocks are wound down.

Precautions

  • Maintain block-wise (not merely individual-asset) records of WDV, additions, and disposals — capital gains computation for depreciable assets depends entirely on accurate block-level bookkeeping.
  • Before assuming a depreciable-asset sale gain must be treated as ineligible for long-term exemptions, review the ACE Builders line of reasoning with a tax professional — the "deemed short-term" fiction has important, taxpayer-favourable limits.
  • If your business holds a mixed block (some assets that still have significant WDV, others fully depreciated), model the tax impact carefully before selling any single asset, since the consequences depend heavily on whether the block survives or is extinguished by the sale.
  • Track any legislative or transitional guidance on goodwill treatment closely if your business carries legacy goodwill in its depreciable asset records.

Disclaimer

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