Rules for computation of short-term capital gain and written down value u/s 50 where depreciation on goodwill has been obtained
Introduction:
The Government has amended the provisions relating to the depreciation on goodwill by Finance Act, 2021 which states that no depreciation will be allowed on goodwill under section 32 with effect from A.Y. 2021-22 and onwards. Thus, no depreciation shall be allowed for A.Y. 2021-22 and subsequent years. Further, the 'Goodwill' has been excluded from the 'Block of asset' relating to 'Intangible Assets'. The above amendments are intended to overrule the decision of Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Limited [2012] 348 ITR 302 (SC) where it is held that goodwill would qualify as intangible asset eligible for depreciation. Consequential amendments are also made by the Finance Act, 2021 in the Chapter of "Capital Gain" for calculation of capital gain on goodwill.
In lines of the amendments made by Finance Act, 2021, the CBDT vide Notification No. 77/2021 dated 7th July, 2021 notified Rule 8AC which prescribes the manner for computing the short-term capital gain and written down value under section 50 if the depreciation has been obtained by the assessee.
Rule-8AC: Computation of short-term capital gains and written down value under section 50 where depreciation on goodwill has been obtained:
(1) For the purposes of proviso to section 50, the written down value of the block of the asset and short-term capital gains, if any, for the previous year 2020-21 (AY 2021-22) shall be determined in accordance with this rule.
(2) Where the goodwill of the business or profession was the only asset or one of the assets in the block of assets “intangible” for which depreciation was obtained by the assessee in the previous year 2019-20 (A.Y. 2020-21), the written down value of this block of asset for the previous year 2020-21 (A.Y. 2021-22) shall be determined in accordance with the provisions of section 43(6)(c)(ii).
(3) Where the reduction under sub-item (B) of section 43(6)(c)(ii) for the previous year 2020-21 (A.Y. 2021-22), exceeds the aggregate of the following amounts, namely:
(i) Written down value of the block of assets at the beginning of the previous year 2020-21 (AY 2021-22) i.e. 01-4-2020 without giving effect to reduction under sub-item (B) of section 43(6)(c)(ii) and
(ii) The actual cost of any asset falling within the block of assets “intangible”, other than goodwill, acquired during the previous year 2020-21 (AY 2021-22)
such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(4) Without prejudice to provisions of sub-rule (3) above & section 55, where the goodwill of the business or profession was the only asset on the block of asset “intangible” for which depreciation was obtained by the assessee in the A.Y. 2020-21, and the block of asset ceases to exist on account of there being no further asset acquired during the previous year 2020-21 (AY 2021-22) in that block, there will not be any capital gains or loss on account of the block of asset having ceased to exist.
(5) The capital gains or loss on transfer of goodwill, during the previous years 2020-21 (AY 2021-22) or subsequent years, shall be determined in accordance with the provisions of section 48, section 49 and section 55(2)(a).
Read Notification: Notification No. 77/2021 dated 07th July 2021
