First establish the special depreciation population
Section 38(1)(b) of the Income-tax Act, 2025 is not a universal rule for every depreciable asset sale. Section 38(2)(b) requires ownership, business use and depreciation claimed and allowed under section 33(2). That subsection concerns actual-cost depreciation for undertakings generating, or generating and distributing, power. This guide checks the Act as amended by Finance Act, 2026 on 27 October 2026; the examples assume that specific basis is established. 2025 Act: sections 33(2), 38, 66(13) and 75.
Do not substitute the ordinary block calculation
Section 33(3) addresses block depreciation, whereas section 33(2) addresses the stated actual-cost basis. A power business label alone does not establish which basis was actually used for the disposed asset. Retrieve the depreciation history and relevant eligibility or option evidence. If the facts belong to a block calculation, do not force an asset-wise balancing charge into that computation. 2025 Act: sections 33(2), 38, 66(13) and 75.
Identify A, B and C from tax records
Under section 38(1)(b), A is moneys payable together with scrap value, B is actual cost and C is tax written down value. The opening condition is that A exceeds C. Where A is less than B, the charge is A minus C; otherwise it is B minus C. In an ordinary non-negative-WDV case this caps the charge at actual cost less WDV. Book carrying amount is not automatically tax C, and sale consideration must not be counted twice as both moneys payable and scrap. 2025 Act: sections 33(2), 38, 66(13) and 75.
Determine the event and the due year
The provision covers qualifying assets sold, discarded, demolished or destroyed and charges the amount in the tax year in which moneys payable become due. Section 66(13) includes the specified insurance, salvage or compensation amounts in moneys payable for tangible assets and sale price where sold. Preserve the contract, admitted insurance entitlement and scrap evidence; a cash-receipt date alone does not settle when an amount became due. 2025 Act: sections 33(2), 38, 66(13) and 75.
Keep the cap separate from other consequences
Proceeds beyond actual cost are not automatically tax-free merely because this balancing-charge limb stops at B minus C. Section 75 separately addresses cost for capital gains where depreciation was obtained under section 33(2). Equally, A at or below C does not create a negative charge under this limb; any other deduction or loss needs its own applicable conditions. Do not use this article as a complete capital-gains or terminal-depreciation computation. 2025 Act: sections 33(2), 38, 66(13) and 75.
Bridge tax income to the accounts
Reconcile the book gain or loss with the independently established tax charge and any separate tax consequence. If the computation starts from book profit, replace or adjust the book disposal result appropriately rather than adding the entire proceeds again. Section 38(5) preserves application even if the business has ceased. Earlier-law asset histories require their applicable transition analysis; new section numbers should not be mechanically inserted into FY 2025–26 returns. 2025 Act: sections 33(2), 38, 66(13) and 75.
Applicable primary references
2025 Act: sections 33(2), 38, 66(13) and 75
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Recovery between WDV and cost
Amounts in these six illustrations are ₹ lakh. Assume all section 33(2) and section 38 conditions. Cost B is 100, WDV C is 60 and A is 80. Since 60 < 80 < 100, the charge is 80 − 60 = 20.
Illustrative example 2: Proceeds exceed original cost
B is 100, C is 60 and A is 120. The charge under this limb is 100 − 60 = 40, not 60. The excess 20 above cost needs its separate applicable tax analysis.
Illustrative example 3: Exactly WDV
B is 100, C is 60 and A is 60. A does not exceed C, so this balancing-charge trigger produces no charge. Do not use an inclusive comparison for the opening condition.
Illustrative example 4: Below WDV
B is 100, C is 60 and A is 50. The charge under this limb is zero, not negative 10. A possible deduction or loss cannot be established from this subtraction alone.
Illustrative example 5: Separate scrap without duplication
B is 100 and C is 60. Properly established moneys payable are 70 and separate scrap value is 5, so A is 75. The charge is 15. If the 70 already included the same scrap proceeds, adding 5 again would be wrong.
Illustrative example 6: Insurance and scrap with the cap
B is 100 and C is 30. Qualifying insurance moneys payable are 110 and separate scrap is 5, so A is 115. The balancing charge is capped at 70. The 45 difference between A and that charge is not itself a conclusion that 45 is exempt income.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the asset and owner | Asset register and title |
| 2 | Confirm the depreciation basis | Section 33(2) history and supporting evidence |
| 3 | Prove business use and allowance | Tax computation and orders |
| 4 | Establish tax actual cost | Cost and adjustment working |
| 5 | Establish tax WDV | Depreciation reconciliation |
| 6 | Identify the disposal event | Contract, destruction or demolition evidence |
| 7 | Determine moneys payable and due year | Entitlement and settlement records |
| 8 | Reconcile scrap separately | No duplicate proceeds |
| 9 | Apply the correct formula and cap | A, B and C worksheet |
| 10 | Bridge to books and other tax provisions | Disposal computation and review record |
Sixteen practitioner FAQs
1. Does section 38(1)(b) cover every company asset sale?
No. Establish the section 33(2) depreciation and other stated conditions first.
2. Is being a power company sufficient?
No. Verify the actual basis claimed and allowed for the particular asset.
3. Can book depreciation history establish tax WDV by itself?
No. Reconcile the tax depreciation and cost adjustments.
4. What is A?
Moneys payable together with scrap value, established without duplicate counting.
5. What is B?
The applicable tax actual cost of the asset.
6. What is C?
Its applicable tax written down value.
7. What is the opening numerical trigger?
A must exceed C for the charge described in this limb.
8. What if A lies between WDV and cost?
The stated calculation is A minus C.
9. What if A equals or exceeds cost?
The stated calculation is B minus C.
10. Does the balancing-charge cap exempt all remaining proceeds?
No. Separate applicable capital-gains or other tax consequences need analysis.
11. Does A below C create negative balancing income?
Not under this positive-charge formula. Examine any other deduction independently.
12. Can insurance amounts enter moneys payable?
Section 66(13) includes the specified insurance, salvage and compensation amounts for tangible assets.
13. Does the cash-receipt date always determine the tax year?
The provision refers to the year moneys payable become due; establish the entitlement facts.
14. Can the same scrap amount be added twice?
No. Reconcile whether it is already included in the other proceeds.
15. Does business cessation remove the provision?
Section 38(5) preserves its application even if the business no longer exists.
16. Is this a complete disposal-tax calculation?
No. It isolates the balancing-charge issue and identifies separate analyses that may remain.
Conclusion
Calculate balancing charges for qualifying power assets under section 38(1)(b), distinguishing actual-cost depreciation, tax WDV, scrap and separate capital-gain issues.