Section 74 — Special provision for computation of capital gains in case of depreciable assets. Successor to s.50 of the 1961 Act.
Section 74 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) sets the field: notwithstanding section 2(101), where a capital asset forms part of a block of assets on which depreciation has been allowed under the Indian Income-tax Act, 1922, the Income-tax Act, 1961 or this Act, sections 72 and 73 apply subject to sub-sections (2) and (3).
Sub-section (2) deals with the block that survives. Where in the tax year the full value of consideration for transfer of one or more assets in a block exceeds the total of the transfer expenditure incurred wholly and exclusively in connection with the transfer, the written down value of the block at the start of the year, and the actual cost of any asset in the block acquired during the year, the excess is deemed to be capital gains arising from the transfer of short-term capital assets.
Sub-section (3) deals with the block that disappears. Where a block ceases to exist because all assets in it are transferred during the year, the cost of acquisition of the block is its written down value at the beginning of the year increased by the actual cost of any asset in that block acquired during the year, and the income received or accruing from the transfer is deemed to be capital gains from the transfer of short-term capital assets.
Depreciation has already been allowed on these assets, so the ordinary capital gains machinery in sections 72 and 73 cannot run on them without giving a second benefit on the same cost. The section replaces the individual asset's cost with the block's written down value and forces the result into the short-term category.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Amount deemed to be short-term capital gains where the block survives | The excess of full value of consideration over the total of transfer expenditure, opening written down value of the block, and actual cost of assets in the block acquired during the year | Transfer during the tax year of one or more assets in the block | Sub-section (2) |
| Cost of acquisition where the block ceases to exist | Written down value of the block at the beginning of the tax year, increased by the actual cost of any asset in that block acquired during the year | All assets in the block are transferred during the tax year | Sub-section (3)(a) |
The character of the gain is fixed by the section, not by the holding period: whatever comes out of sub-section (2) or (3) is capital gains from the transfer of short-term capital assets, so a plant held for fifteen years produces a short-term gain. The two sub-sections do different arithmetic — sub-section (2) taxes only the excess over the block's written down value and additions and leaves the block running, while sub-section (3) applies only when the block is emptied and gives the whole block's written down value plus additions as the cost. Sub-section (1) reaches assets depreciated under the 1922 Act and the 1961 Act, not only under this Act.
A company's block of plant opens the tax year with a written down value of Rs. 40 lakh, it buys a machine for that block during the year for Rs. 10 lakh, and it sells one machine from the block for Rs. 65 lakh, incurring Rs. 1 lakh of brokerage on the sale. The total under sub-section (2) is Rs. 51 lakh, so Rs. 14 lakh is deemed to be capital gains from the transfer of a short-term capital asset, even though the machine sold had been held for many years. If instead every asset in that block had been sold in the same year, sub-section (3) would apply and the cost of acquisition would be Rs. 50 lakh — the opening written down value plus the year's addition.
You meet it in the capital gains schedule of a return where a depreciable asset has been sold, and in an assessment order that recharacterises a long-term gain claimed on plant, machinery or a building as short-term because the asset was in a block on which depreciation had been allowed.
such excess shall be deemed to be capital gains arising from the transfer of short-term capital assets
the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the tax year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the tax year
See the full 1961 to 2025 concordance.
See the circulars index.
See the notifications index.
