Computation of Capital gain in Case of Depreciable Assets [Sec. 74]

Section 74 of the Income-tax Act, 2025 provides a special method for computing capital gains arising from the transfer of depreciable capital assets forming part of a block of assets on which depreciation has been allowed. The normal capital-gain provisions relating to computation and cost are subject to this special rule. Where the consideration from transfer exceeds the prescribed aggregate of transfer expenses, opening written down value (WDV), and actual cost of additions during the tax year, the excess is treated as capital gain arising from short-term capital assets. Special treatment also applies where the entire block ceases to exist.

1. Where Sale Consideration Exceeds the Block Value

Where one or more depreciable assets belonging to a block of assets are transferred during the tax year, capital gain arises if the total sale consideration exceeds the prescribed aggregate. This aggregate consists of transfer expenses, the opening WDV of the block, and the actual cost of assets added to that block during the tax year. The amount by which the sale consideration exceeds this aggregate is deemed to be short-term capital gain (STCG). This treatment applies under Section 74 irrespective of the period for which the individual depreciable asset was held. Thus, even a depreciable asset held for several years may generate STCG.

Computation Table

2. Where the Entire Block of Assets Ceases to Exist

Where all assets forming part of a block are transferred during the tax year and consequently the block ceases to exist, Section 74 provides a special computation rule. The cost of acquisition of the block is taken as its opening written down value, increased by the actual cost of any asset added to that block during the tax year. The income received or accruing from transfer is considered for determining the resulting capital gain or loss under the prescribed mechanism. Any capital gain arising under this provision is treated as gain from short-term capital assets, regardless of the actual holding period of individual assets.

3. Nature of Capital Gain

A significant feature of Section 74 is that capital gain computed on transfer of depreciable assets under the section is treated as short-term capital gain. The normal distinction between short-term and long-term capital assets based upon their period of holding does not determine the character of the gain for this special computation. The rule applies because depreciation has already been allowed on assets forming part of the relevant block. Consequently, where the prescribed conditions result in a capital gain, such gain is deemed to arise from the transfer of short-term capital assets. This special treatment overrides the ordinary holding-period classification for these depreciable assets.

illustration

Suppose the opening WDV of a block is ₹8,00,000. New machinery costing ₹2,00,000 is added during the year. Assets are sold for ₹12,00,000 and transfer expenses are ₹50,000.

Therefore, ₹1,50,000 is deemed to be short-term capital gain under Section 74.