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CBDT Notifies Rule 8AC for Computing STCG and WDV when Depreciation on Goodwill is Claimed

cbdt-notifies-rule-8ac-for-computing-stcg-wdv-us-50-when-depreciation-on-goodwill-claimed

CBDT vide Notification no. 77/2021 in G.S.R. 472(E) dated 7th July 2021 through Income tax Amendment (19th Amendment), Rules, 2021 has inserted a new Rule 8AC in the Income-tax Rules, 1962 to prescribe the Rules for Computation of short term capital gains and written down value under section 50 where depreciation on goodwill has been obtained.


Finance Act, 2021 has amended the provisions of Income Tax Act, 1961 (“Act”) to disallow depreciation on the goodwill of a business or a profession. Depreciation of self-generated goodwill is not allowed under the Income Tax Act. With this amendment, depreciation on acquired or purchased Goodwill of a business or profession cannot be claimed from 01.02.2021. Goodwill is expressly excluded from the block of ‘Intangible Assets’. Further, a deduction for the amount paid for acquiring Goodwill shall be allowed on sale of Goodwill.



Read More on Budget 2021 proposals to disallow depreciation on Goodwill

Income Tax announcements in Budget Speech:Union Budget 2021

Clarification on Depreciation on Goodwill: Budget 2021

Depreciation on Goodwill of a Business or Profession Not Allowed and to be taxed as Capital Gains on transfer: Budget 2021

CBDT Notifies Rules for Computing STCG and WDV u/s 50 When Depreciation on Goodwill is Claimed


As per the amendments, depreciation will not be available on goodwill from AY 2021-22. On sale or transfer of Goodwill, Capital gain income will arise and the amount paid for acquiring the goodwill will be allowed as deduction. Further, the WDV as on 01.04.2020 will be the cost of acquisition of the goodwill in case depreciation is claimed thereon by the assessee. Hence, the depreciation already claimed and allowed on goodwill will not be reversed or requires any adjustment.


Thus no depreciation on Goodwill shall be allowed. However, the deduction for the amount paid for acquiring Goodwill shall be allowed on sale of Goodwill.


Section 50 is amended to provide for a prescribed manner of calculating WDV of block of assets as on 01.04.2020 in case of goodwill of a business or profession where depreciation is claimed for computing short term capital gains on transfer of such goodwill.


Section 50 which provides for computation of capital gains in case of depreciable assets has been amended to provide that where goodwill of a business or profession forms part of block of assets for assessment year 2020-21 and depreciation has been claimed, the written down value of the block of assets and short term capital gains would be determined in the prescribed manner. The rules prescribing the computation mechanism are now notified in Notification No. 77/2021 dated 7-7-2021.


Read the full text of Notification No. 77/2021 dated 7-7-2021 on Rules for Computing STCG and WDV u/s 50 when Depreciation on Goodwill is claimed


MINISTRY OF FINANCE 

(Department of Revenue) 


(CENTRAL BOARD OF DIRECT TAXES) 


NOTIFICATION 


New Delhi, the 7th July, 2021 


INCOME-TAX


G.S.R. 472(E).— In exercise of the powers conferred by proviso to section 50 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct taxes hereby makes the following rules further to amend the Income-tax Rules,1962, namely:─


1. Short title: - These rules may be called the Income tax Amendment (19th Amendment), Rules, 2021. 


2. In the Income-tax Rules, 1962, after rule 8AB, the following rules shall be inserted, namely:—


“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 relevant to the assessment year commencing on the 1st day of April, 2021 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 asset “intangible” for which depreciation was obtained by the assessee in the assessment year beginning on the 1st day of April, 2020, the written down value of this block of asset for the previous year relevant to the assessment year commencing on the 1st day of April, 2021 shall be determined in accordance with the provisions of item (ii) of sub-clause (c) of clause (6) of section 43.


(3) Where the reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, for the previous year relevant to the assessment year commencing on the 1st day of April, 2021, exceeds the aggregate of the following amounts, namely:-


(i) the written down value of the block of assets at the beginning of the previous year relevant to the assessment year commencing on the 1st day of April, 2021 without giving effect to reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43; and


(ii) the actual cost of any asset falling within the block of assets “intangible”, other than goodwill, acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021,


such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.


(4) Without prejudice to the provisions of sub-rule (3) and section 55, where the goodwill of the business or profession was the only asset in the block of asset “intangible” for which depreciation was obtained by the assessee in the assessment year beginning on the 1st day of April, 2020, and the block of asset ceases to exist on account of there being no further asset acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021 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 relevant to the assessment year 2021-22 or subsequent assessment years, shall be determined in accordance with the provisions of section 48, section 49 and clause (a) of sub-section (2) of section 55.”


[Notification No. 77/2021/ F. No. 370142/23/2021-TPL] 

ANKIT JAIN, Under Secy. (Tax Policy and Legislation Division)


Note. –The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-section (ii) vide notification number S.O. 969 (E), dated the 26th March, 1962 and was last amended vide notification number G.S.R. 470 (E) dated the 2nd July, 2021. 


Download Copy of CBDT Notification No. 77/2021 dated 7-7-2021 on Rules for Computing STCG and WDV u/s 50 When Depreciation on Goodwill is Claimed in pdf format

 



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