The written down value of Machinery is ₹ 12,00,000. The original cost of the Machinery is ₹ 20,00,000. It is sold for ₹ 24,00,000 during the year 2022-23. The result is :

Correct option is D

In the context of the Income Tax Act, 1961 (India), when a depreciable asset (like machinery) is sold for a price higher than its Written Down Value (WDV), the resulting profit is split into two components: Capital Gain and Revenue Profit (or business income/recoupment of depreciation).

The total profit from the sale is:

Selling Price - WDV = ₹ 24,00,000 - ₹ 12,00,000 = ₹ 12,00,000

This total profit of ₹ 12,00,000 is dissected as follows:

1. Revenue Profit (Balancing Charge / Business Income)

The portion of the profit that represents the recovery of depreciation previously allowed as a deduction (i.e., when the selling price is greater than the WDV, but not greater than the Original Cost) is treated as Revenue Profit (specifically called a Balancing Charge under Section 41(2) or simply taxed as business income under Section 50 of the Income Tax Act if it's a block of assets).

• Limit of Revenue Profit: Selling Price (up to Original Cost) minus WDV.
• Original Cost (OC): ₹ 20,00,000
• WDV: ₹ 12,00,000
• Selling Price (SP): ₹ 24,00,000

Revenue Profit = Minimum of (SP - WDV) and (OC - WDV)

Revenue Profit = Minimum of (₹ 24,00,000 - ₹ 12,00,000) and (₹ 20,00,000 - ₹ 12,00,000)

Revenue Profit = Minimum of (₹ 12,00,000) and (₹ 8,00,000)

Revenue Profit (Business Income) = ₹ 8,00,000

This ₹ 8,00,000 represents the total depreciation claimed over the years ($₹ 20,00,000 - ₹ 12,00,000$). Since the asset was sold for more than its WDV, this recovered depreciation is taxed as ordinary business income/revenue profit.

2. Capital Profit (Capital Gain)

The portion of the profit arising from the sale price exceeding the Original Cost is treated as a Capital Gain (specifically, a Short-Term Capital Gain under Section 50, since it's a depreciable asset).

• Capital Profit: Selling Price minus Original Cost.
• Selling Price (SP): ₹ 24,00,000
• Original Cost (OC): ₹ 20,00,000

Capital Profit (STCG) = SP - OC

Capital Profit (STCG) = ₹ 24,00,000 - ₹ 20,00,000

Capital Profit = ₹ 4,00,000

The total profit is:

₹ 8,00,000 (Revenue Profit) + ₹ 4,00,000 (Capital Profit) = ₹ 12,00,000

The final result is Capital Profit ₹ 4,00,000 and Revenue Profit ₹ 8,00,000.

Information Booster

• Section 50 of the Income Tax Act: For depreciable assets (assets on which depreciation is allowed), any gain arising from their transfer is compulsorily treated as a Short-Term Capital Gain (STCG), irrespective of the period for which the asset was held.
• Balancing Charge (Revenue Profit): This term refers to the taxable income that arises when the sale price of a depreciable asset (or the entire block of assets) exceeds the WDV of the asset (or block), up to the original cost. It is taxed as business income.
• Profit beyond Original Cost (Capital Profit): When the sale consideration exceeds the Original Cost, this excess amount is treated as a Capital Gain (STCG under Section 50).
• Block of Assets: Under the Indian Income Tax Act, depreciation is calculated on a group of assets falling in the same class and subject to the same rate of depreciation, called a "Block of Assets." The calculation logic applies to the entire block, but the principle of bifurcating profit between recovery of depreciation and capital gain remains.
• Balancing Loss: If the WDV of the asset exceeds the sale consideration, the difference is a Balancing Loss (or terminal depreciation), which is deductible from business income.