Question

What is a capital asset? What factors affect the determination of whether an asset is classified as a capital asset?

Answer 1

Capital assets refer to any kind of assets which is acquired through purchase, construction, and manufacture etc. either for personal purpose or business and which also includes the cost of improvement as well. Further the sale proceeds of which also attract Capital Gain and chargeable to tax at special rates.

Following are the factors that may affect the determination of whether an asset is classified as a capital asset:

1) Useful Life of Assets: The expected useful life of Capital Asset always more than 1 year and if the life of any asset is not more than one year then it will not be treated as capital assets.

2) Capitalization Limit: The acquisition cost of assets also exceeds the capitalization limit prescribe the prescribed tax authority. If the acquisition cost of asset is below the capitalization limit then it will not be classified as capital assets.

3) Not held for normal business operation: Capital Assets are not held by the organisation for normal business operation and not easily convertible in cash. Therefore, if any asset is held by the organisation for sale as part of normal business operation then it will not be classified as capital assets.