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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

Case: Kaveri Textiles Ltd, an Indian company, sold a patent it had developed in-house to a related party for Rs 40 lakh. The patent had been written down earlier; the company's records show that depreciation on the block 'intangible assets' was claimed under the Income-tax Act, and the block still has other assets after this sale. The sale price is less than the opening WDV of the block. How is the Rs 40 lakh sale treated for income-tax purposes?

The Rs 40 lakh is simply reduced from the written down value of the intangible assets block. No capital gain arises because the block still has other assets and the sale price is below the block's WDV.

  1. AReduced from the WDV of the block of intangible assets; no capital gain arises as the block continues to existCorrect
  2. BTaxed as long-term capital gain at 12.5%
  3. CTaxed as short-term capital gain because depreciation was claimed
  4. DTaxed as business income in full in the year of sale

Explanation

For depreciable assets, the sale consideration is deducted from the WDV of the block. Capital gain arises only if the block ceases to exist or the consideration exceeds the WDV plus additions. Here other assets remain and the price is below WDV, so only the block value is reduced. The other options wrongly treat it as a gain or business income.

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