Question 4 OR (b)

Depreciation on a block of plant and machinery with sales and a new machine (as set, 1961 Act, AY 2017-18)

7 marks

Time to write
About 14 minutes

From an older CBCS paper

Question

Question 4 OR (b) · 7 marks

X Ltd. owns a block of plant and machinery that consists of three machines M1, M2 and M3. The following details are available regarding this block:

  1. Rate of depreciation is 15%

  2. Written down value of the block on 1-4-2016 is Rs. 25,00,000

  3. Machine M4, a new machine, was acquired for Rs. 9,00,000 on 18-4-2016; it was brought into use on 12-12-2016.

  4. Machine M1 was sold for Rs. 50,000 to a scrap dealer on 31-12-2016.

  5. Machine M2 and M3 were sold at Rs. 18,00,000 on 10-2-2017.

Compute the amount of depreciation available for previous year 2016-17, the written down value of the block on 1-4-2017 and the capital gains/loss, if any. Additional depreciation is to be ignored.

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2017-18 (previous year 2016-17), with the dates as printed. "Machine M2 and M3 were sold for Rs. 18,00,000" is as printed; it is read as one price for both machines.

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

14 minfor 7 marks

Read from the question

  • ComputeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.

Write it in this order

  1. Read the data; note exactly what is asked 1 min
  2. 1 Written down value of the block 2 marks 3 min
  3. 2 Depreciation with the 180-day rule 3 marks 5 min
  4. 3 Closing written down value 1 mark 2 min
  5. 4 Capital gain or loss (section 50) 1 mark 2 min
  6. Check: arithmetic, units (₹, %), final answer underlined 1 min

Try it first. About 14 minutes for 7 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Written down value of the block (section 43(6)(c))

The block keeps its identity as long as some asset remains in it: M4 is still in the block on 31-3-2017, so the block continues.

ParticularsRs.
Written down value on 1-4-201625,00,000
Add: M4, acquired 18-4-20169,00,000
Less: Sale of M1 on 31-12-2016(50,000)
Less: Sale of M2 and M3 on 10-2-2017(18,00,000)
Written down value before depreciation15,50,000

Depreciation for previous year 2016-17 (section 32(1)(ii), rate 15%)

M4 was put to use on 12-12-2016, that is for 110 days up to 31-3-2017, less than 180 days, so its depreciation in this year is half the rate (section 32(1)(ii), second proviso). The proviso needs both conditions: the asset was acquired during the previous year (M4 on 18-4-2016), and it was put to use for less than 180 days in that year, counted from the date it was put to use, not the date it was acquired. The sale proceeds are first taken from the opening written down value, which still leaves ₹6,50,000 of it at the full rate.

ParticularsRs.
Opening value less sales: ₹25,00,000 − ₹18,50,000 = ₹6,50,000 at 15%97,500
M4: ₹9,00,000 at 7.5% (half of 15%)67,500
Depreciation allowed1,65,000

Additional depreciation is ignored, as the question directs.

Written down value on 1-4-2017

₹15,50,000 − ₹1,65,000 = ₹13,85,000.

Capital gain or loss

None. A short-term capital gain arises on a depreciable block only where the full value of the consideration received or accruing for the assets transferred in the year exceeds the total of the expenditure on those transfers, the opening written down value and the actual cost of assets added in the year (section 50(1)), or where the block ceases to exist (section 50(2)). Here ₹18,50,000 is less than ₹25,00,000 + ₹9,00,000 = ₹34,00,000 (no transfer expenses are given), and M4 remains in the block. The sale of M1, M2 and M3 simply reduces the written down value; no loss is allowed either.

Notes

  1. M1 was sold to a scrap dealer, but the money received for it (₹50,000) is still deducted from the block.
  2. If M4 had also been sold, leaving the block empty, the difference would have been a short-term capital gain or loss (section 50(2)).

Where the 7 marks sit

#ComponentMarks
1Written down value of the block2
2Depreciation with the 180-day rule3
3Closing written down value1
4Capital gain or loss (section 50)1
Total7
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