Assets and Depreciation Chapter- 10
PART - II (For CA Mod F and ICMAP Students)NON ARMS’ LENGTH TRANSACTIONS AND NON RECOGNITION RULES- Non-arm's length transactions [U/s 78]
Where an asset is disposed of in a non-arm's length transaction –
(a) the person disposing of the asset shall be treated as having received consideration equal to
the FMV of the asset determined at the time the asset is disposed; and
(b) the person acquiring the asset shall be treated as having a cost equal to the amount
determined under (a) above.Example: Mr. Jamshed sold his factory building to his relative Mr. Amir for Rs. 500,000 i.e.
transaction was non-arm’s length transaction. However, the fair value of building was Rs. 1,200,000.
Compute gain / loss on disposal if WDV of building is Rs. 600,000.Solution:
Rs.
Consideration received equal to FMV of building both for buyer and seller
irrespective of sale proceeds) 1,200,000
Less: WDV 600,000
Gain on disposal 600,000
- Non - recognition rules for gain or loss on disposal [U/s 79]
No gain or loss shall be taken to arise on the disposal of an asset –
(a) between spouses under an agreement to live apart;
(b) by reason of the transmission of the asset to an executor or beneficiary on the death of a
person;
(c) by reason of a gift of the asset to a relative, as defined in sub-section (5) of section 85;
(d) by reason of the compulsory acquisition of the asset under any law where the consideration
received for the disposal is reinvested by the recipient in an asset of a like kind within one
year of the disposal;
(e) by a company to its shareholders on liquidation of the company; or
(f) by an AOP to its members on dissolution of the association where the assets are distributed to
members in accordance with their interests in the capital of the association-
Provided the above provisions shall not apply where the person acquiring the asset is a non-
resident person at the time of the acquisition in respect of disposal of an asset as mentioned in
clauses (d), (e) and (f) of sub-section (1).
In the above all the cases the person acquiring the asset shall be treated as –
(a) acquiring an asset of the same character as the person disposing of the asset; and
(b) acquiring the asset for a cost equal to the cost of the asset for the person disposing of the asset
at the time of the disposal.
Cost of replacement assets under compulsory acquisition:
The person’s cost of a replacement asset referred to in clause (d) above shall be the cost of the
asset disposed of plus the amount by which any consideration given by the person for the
replacement asset exceeds the consideration received by the person for the asset disposed of.
The formula for the above is as under:
Cost of asset disposed
Plus consideration given Less consideration received on disposed of asset