Taxpublishers.in - Monday Corner Answer to the Quiz for the week (26 May 2025)

Share via Whatsapp 556 Views

Back to Monday Corner


Quiz for the week (26 May 2025): Naresh (P) Ltd is a domestic company engaged in manufacture of garments with job working units located at various places belonging to outsiders providing it the required support service. The company owned only one manufacturing factory (constructed in FY 2010-11) and it was decided in May, 2025 that the factory building be sold for Rs.120 lakhs (stamp duty value of land Rs.80 lakhs and the balance relates to factory building). The WDV of the building as per income-tax records was Rs.20 lakhs and the original cost of acquisition of land was Rs. 10 lakhs (acquired in March 2001). Suggest possible course of action for minimizing the tax liability. Best Answer : In the query given above, it is not stated whether Naresh (P) Ltd is governed by section 115BAA or section 115BAB. In case, it is governed by section 115BAA then the long-term capital gain is liable to tax at the regular rates applicable to it. In case, it is governed by section 115BAB then for short-term capital gain, if any, the rate of tax is 22% plus surcharge @10% and HEC @4% and the resultant effective rate is 25.168%. Without taking note of section 115BAB which is applicable for new manufacturing companies only, it is presumed that the assessee Naresh (P) Ltd is governed by section 115BAA or by any other provision as applicable except section 115BAB and therefore the capital gain is chargeable to tax at the regular rates specified in section 112. The company has proposed the sale of factory building in May, 2025 and therefore the benefit of indexation is not available. The benefit of indexation is applicable only in the case of individual and HUF taxpayers in respect of capital assets acquired before 23rd July, 2024 and hence the aspect of indexation need not be looked into for companies, LLPs, AOPs w.e.f. 23.07.2024. The sale consideration is bifurcated towards land and building viz. Rs.80 lakhs for land and Rs.40 lakhs for building. It is given clearly in the query that the building was constructed in the financial year 2010-11 and therefore the factory building is a long-term capital asset by virtue of its holding period exceeding 24 months. The sale consideration less cost of acquisition is liable to tax @12.5% for both land and building since both the assets fall in the category of long-term capital asset. The sale consideration of Rs.120 lakhs less cost of acquisition of land Rs.10 lakhs and building Rs.20 lakhs (WDV) would result in long-term capital gain of Rs.90 lakhs which is liable to tax @12.5% plus surcharge @ 10% thereon and HEC @4%. The effective rate is 14.30%. The assessee has to pay tax on long-term capital gain @14.30% on Rs.90 lakhs being Rs.12.87 lakhs. The assessee may take note of section 54G if applicable based on the facts of the case. On the long-term capital gain of Rs.90 lakhs, the assessee-company may subscribe for capital gain bonds notified under section 54EC with maximum limit of Rs.50 lakhs and with a lock in period of 5 years. On the balance of Rs.40 lakhs in such case the tax is payable @12.5% plus HEC thereon @4%. The effective rate is 13%. The tax liability in respect of long-term capital gain would be Rs.5.20 lakhs (13% of Rs.40 lakhs). It is possible that the factory building is treated as a depreciable asset and therefore the resultant capital gain is short-term capital gain which is liable to be taxed at the regular rates as applicable for business income. In such case, the reinvestment under section 54EC would be with reference to long-term capital gain from sale of vacant land being Rs.70 lakhs. The other consequences with regard to reinvestment must be planned in the same manner as discussed hereinbefore and the tax is payable accordingly. In case the company has business loss it is possible to set off the business loss against long-term capital gain. In the absence of relevant details in this regard, this aspect cannot be discussed further.

Quiz for the week (26 May 2025):

Naresh (P) Ltd is a domestic company engaged in manufacture of garments with job working units located at various places belonging to outsiders providing it the required support service. The company owned only one manufacturing factory (constructed in FY 2010-11) and it was decided in May, 2025 that the factory building be sold for Rs.120 lakhs (stamp duty value of land Rs.80 lakhs and the balance relates to factory building). The WDV of the building as per income-tax records was Rs.20 lakhs and the original cost of acquisition of land was Rs. 10 lakhs (acquired in March 2001). Suggest possible course of action for minimizing the tax liability.

Best Answer :

In the query given above, it is not stated whether Naresh (P) Ltd is governed by section 115BAA or section 115BAB. In case, it is governed by section 115BAA then the long-term capital gain is liable to tax at the regular rates applicable to it. In case, it is governed by section 115BAB then for short-term capital gain, if any, the rate of tax is 22% plus surcharge @10% and HEC @4% and the resultant effective rate is 25.168%. Without taking note of section 115BAB which is applicable for new manufacturing companies only, it is presumed that the assessee Naresh (P) Ltd is governed by section 115BAA or by any other provision as applicable except section 115BAB and therefore the capital gain is chargeable to tax at the regular rates specified in section 112.

The company has proposed the sale of factory building in May, 2025 and therefore the benefit of indexation is not available. The benefit of indexation is applicable only in the case of individual and HUF taxpayers in respect of capital assets acquired before 23rd July, 2024 and hence the aspect of indexation need not be looked into for companies, LLPs, AOPs w.e.f. 23.07.2024.

The sale consideration is bifurcated towards land and building viz. Rs.80 lakhs for land and Rs.40 lakhs for building. It is given clearly in the query that the building was constructed in the financial year 2010-11 and therefore the factory building is a long-term capital asset by virtue of its holding period exceeding 24 months.

The sale consideration less cost of acquisition is liable to tax @12.5% for both land and building since both the assets fall in the category of long-term capital asset.

The sale consideration of Rs.120 lakhs less cost of acquisition of land Rs.10 lakhs and building Rs.20 lakhs (WDV) would result in long-term capital gain of Rs.90 lakhs which is liable to tax @12.5% plus surcharge @ 10% thereon and HEC @4%. The effective rate is 14.30%.

The assessee has to pay tax on long-term capital gain @14.30% on Rs.90 lakhs being Rs.12.87 lakhs. The assessee may take note of section 54G if applicable based on the facts of the case.

On the long-term capital gain of Rs.90 lakhs, the assessee-company may subscribe for capital gain bonds notified under section 54EC with maximum limit of Rs.50 lakhs and with a lock in period of 5 years. On the balance of Rs.40 lakhs in such case the tax is payable @12.5% plus HEC thereon @4%. The effective rate is 13%. The tax liability in respect of long-term capital gain would be Rs.5.20 lakhs (13% of Rs.40 lakhs).

It is possible that the factory building is treated as a depreciable asset and therefore the resultant capital gain is short-term capital gain which is liable to be taxed at the regular rates as applicable for business income. In such case, the reinvestment under section 54EC would be with reference to long-term capital gain from sale of vacant land being Rs.70 lakhs. The other consequences with regard to reinvestment must be planned in the same manner as discussed hereinbefore and the tax is payable accordingly.

In case the company has business loss it is possible to set off the business loss against long-term capital gain. In the absence of relevant details in this regard, this aspect cannot be discussed further.