Businesses and Capital Assets

A capital asset is often owned for its contribution to the ability of the business to make a profit. Additionally, it is anticipated that the asset's advantages will last longer than a year. On a business's balance sheet, capital assets are represented by the property, plant, and equipment

Examples of PP&E include land, buildings, and machinery. These assets may be liquidated in worst-case scenarios, such as if a company is restructuring or declares bankruptcy. In other cases, a business disposes of capital assets if the business is growing and needs something better. For example, a business may sell one property and buy a larger one in a better location.

Capital assets may be disposed of by businesses through sales, exchanges, abandonment, or loss through foreclosure. Condemnation can occasionally be considered a disposition as well. The majority of the time, when a business sells an asset that it has owned for more than a year, it will experience a capital gain or loss. The IRS does, however, occasionally classify the gain as normal income.

Also possible are damage or obsolescence of capital assets. When an asset is impaired, its fair value drops, causing the book value on the balance sheet to change. Additionally, a loss will be recorded on the income statement. If the carrying amount is higher than the recoverable amount, a period-based impairment charge equal to the discrepancy is recorded. No impairment is recognised if the carrying amount is lower than the recoverable amount.

here should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer.,

B) It should be transferred by the taxpayer during the previous year;

C) There should be profits or gain as a result of transfer.

Ingredients of Section 45(1).

Section 45(1) of the Income tax Act.1961 provides than any profit and gains arising from the transfer of a capital assets effected in previous year shall be chargeable to tax under the head of capital gain and shall be deemed to be the income of the previous year in which the transfer took place.

2. Three Condition for chargeability of capital gains:

(a) There exists a capital assets.

(b) There is effected transfer of such asset during the previous year.

Capital gains tax is leviable on transfer of a capital assets. The assets should be a capital assets as defined in section 2(14) of Income tax act. 1961 and transfer thereof should be in accordance with any of the modes of transfer as laid down in section 2(47) of Income tax act. 1961.

These primary conditions must be fulfilled or satisfied before levying capital gains as held by Hon’ble Madras High court in C A Natrajan V CIT (1973) 92 ITR 347 (Mad).

As held by Hon’ble Culcatta High Court in CIT v Chunilal Prabhudas & Co (1970) 76 ITR 566 (Cal) there have four primary tests in order that any amount is taxable as capital gains under section 45, namely

i. Profit or gain
ii. Capital asset
iii. such profit or gain arising out of any
iv. sale, exchange or transfer by any modes.

“Capital Asset” (Section 2(14)):

Section 2(14) provides a very vide definition of the expression capital asset accordingly, capital assets means.—

a. Property of any kind held by an assessee, whether or connected with his business or profession
b. Any securities held by a foreign Institutional investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act,1992.

b. Any securities held by a foreign Institutional investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act,1992.

(i) Stock in trade (Finished goods, Raw Material WIP etc.)
(ii) Personal effects (Including wearing apparel and furniture)
(But excluding:)
a) Jewellery,)
b) Archaeological collections)
c) drawings )
d) Paintings,)
e) sculptures or )
f) any work of art held or personal use by the assessee or any member of his family

(a) Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals whether or not containing any precious or semi-precious stone and whether or not worked or sewn into any wearing apprarel.

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
(iii) Agricultural land in India, provided it is not situated (From AY 2014- 2015)
- a) in any area which is comprised within situated the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified are committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of less than ten thousand; or
  (c) in any area within the distance, measured aerially,-
  - (i) not being more than two kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
  - (ii) not being more than six kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
  - (iii) not being more than eight kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakhs.
iv. 6.5 per cent Gold Bonds,1977; 7 per cent Gold Bonds,1980 and National Defence Gold Bonds 1980 issued by the Central Government.
v. Special Bearer Bonds,1991 issued by Central Government.
vi. Gold deposit Bond issued under Gold Deposit Scheme, 1999 notified by the Central Government. The Finance Act, 2016 has amended section 2(14) from the assessment year 2016-17 so as to provide that deposit certificates issued under the Gold Monetization Scheme, 2015 shall not be treated as capital assets.
Significant items of property such as houses, cars, rental properties, stocks, bonds, and even antiques or works of art are considered capital assets. An asset with a useful life longer than a year that is not intended for sale during normal business operations is referred to as a capital asset for enterprises. It is also a form of production expense as a result. For instance, a computer purchased by a firm for use in its workplace is a capital asset. The same computer is regarded as inventory if it is purchased by another company to resell.

KEY PPOINTS:

Capital assets are assets that are used in a company's business operations to generate revenue over the course of more than one year.
They are recorded as an asset on the balance sheet and expensed over the useful life of the asset through a process called depreciation.
Expensing the asset over the course of its useful life helps to match the cost of the asset with the revenue it generated over the same time period.