Finance Act, 2021, has brought up an amendments by making consequential changes in the provisions of the Act to prevent depreciation on goodwill with effect from Assessment year 2021-2022, U/s 2(11), 32(1)(ii),43(6),50 amendments have been made to prohibit deduction on depreciation to be allowed to assessee from previous year 2020-2021 relevant to assessment year 2021-2022, but these modus operandi provisions does not laid down the manner of determination of written down value and capital gain, CBDT Vide Notification No.77/2021, dated 07-07-2021, has brought up the manner for determination of written down value and capital gain, if depreciation was obtained by assessee earlier prior to previous year 2020-2021.
Section 2(11): This Section defines “block of assets”, which got amended to provide that “block of assets” shall not include goodwill of business and profession.
Section 32(1) (ii): This Section got amended to provide that, goodwill of business and profession is not eligible for depreciation, and accordingly Explanation 3 to Section 32(1) got modified to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section.
Section 43(6): This Section got amended to provide that, if value of a “block of assets” on 01.04.2020, includes goodwill of a business and profession, on which depreciation was obtained earlier, then the depreciated value of goodwill shall be deducted from the value of the block of assets on 01.04.2020. This Section after amendments provide that depreciated value of goodwill shall be calculated as if goodwill was the only asset in the relevant block of assets.
Section 50: This Section got amended to provide that in case where goodwill of a business and profession formed part of a block of asset for the previous year 2020-2021, and depreciation has been obtained by the assessee under section 32, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed.
The above consequential amendments had abrogated the judgments[i] made by the Supreme Court in CIT vs. Smiff Securities Ltd. (2012) 210 Taxman 428, Where it is held that goodwill acquired on amalgamation was a capital right which would fall under the expression “any other business or commercial right of am similar nature” and hence, eligible for depreciation while computing business income.
This rule provides the computation mechanism for determination of short term capital gain and written down value u/s 50, if depreciation was obtained earlier. Under this rule sub-rule 2provides that “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”.
The manner of determination of written down value of asset is prescribed by sub-rule 2 read with sub-rule 3 aforesaid above which laid down the mechanism as under:
Opening written down value of block of “Intangible Assets” (A) xxx
(+) actual cost of any asset falling within the block of assets “intangible”, other than goodwill, acquired during the previous year (B) xxx
(-) money payable in respect of any asset, sold, destroyed, discarded, or demolished during the previous year plus additional any scrap value, if any © xxx
(-) WDV of assets transferred under slump sale (D) xxx
(-) actual cost of goodwill after reducing deprecation falling under that block (E) xxx
Written down value _______
Further, under this rule sub rule 3, amount calculated under step (E) exceeds the amount calculated under step (A) and (B), without giving effect to step (C) and (D), the excess shall be deemed to be the capital gain arising from the transfer of short term capital gain.
Furthermore, under this rule sub rule 4, it also provides that if goodwill of the business or profession was the only asset in the block of asset “Intangibles” for which assessee had obtained depreciation earlier i.e. in the assessment year 2020-21, and the block of asset ceases to exist on account of there being no further asset acquired during the previous year 2020-2021 relevant to assessment year 2021-22 in that block “Intangibles”, there will not be any capital gains or loss on account of the block of asset having ceased to exist.
Furthermore, Under this rule sub rule 5,it states that, “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”
Analysis of sub-rule 3 and sub-rule 4 by illustration:
Illustration: Sahni Pvt Ltd is engaged in the business of manufacturing professional books, during the previous year 2019-2020, it acquired goodwill of T.R. Publications Ltd, for an agreed consideration of Rs.500000 on 01.04.2019, and also acquired copyrights of S.M. Publications for Rs.300000 on 01.05.2019. Its opening balance in block of intangible assets is Rs.200000 other than goodwill. During the previous year 2020-2021, on 01.06.2020 it sold the copyrights acquired on 01.05.2019 for Rs. 320000.
Solution: Computation of written down value/short term capital gain as per Rule 8AC:-
| Intangible Asset block @ 25% | Amount |
| Opening WDV on 01.04.2019 | 200000 |
| Add: copyright and goodwill acquired | 800000 |
| Less: Depreciation @ 25% (1000000*0.25) | 250000 |
| Closing WDV on 31.03.2020/opening WDV on 01.04.2020 | 750000 |
| Less: Money realized on sale of copyrights | 320000 |
| Less: Actual cost of goodwill (5Lac-1.25Lac) | 375000 |
| WDV as per rule 8AC | 55000 |
Now, changing the above scenario, let’s say the above copyright is sold on 15.06.2019 for Rs.600000, instead of Rs.320000 on 01.06.2020, and in addition to that one copyright forming part of block of intangible assets had opening balance of Rs.50000, also disposed off for a sum of Rs.100000 on 01.05.2020.
Solution: Computation of written down value/short term capital gain as per Rule 8AC:-
| Intangible Asset block @ 25% | Amount |
| Opening WDV of 01.04.2019 | 200000 |
| Add: copyright and goodwill acquired | 800000 |
| Less: Money realized on sale of copyrights | 600000 |
| Less: Depreciation @ 25% (400000*0.25) | 100000 |
| Closing WDV on 31.03.2020/opening WDV on 01.04.2020 | 300000 |
| Less: Actual cost of goodwill (5 Lac-1.25Lac) | 375000 |
| Short term capital gain as per rule 8AC | 75000 |
Now in this scenario, prior to deduction of money realized on sale of copyright of Rs.100000 on 01.05.2020, Actual cost of goodwill exceeds the amount of opening WDV on 01.04.2020 by Rs.75000, thus it is construed as short term capital gain as per Rule 8AC.
Analysis of sub-rule 4:
If an assessee had opening block of Intangible assets under which only one intangible asset i.e. goodwill is there on 01.04.2020, and no further assets are acquired during the previous year then there will not be any short term capital gain or loss on account of block ceased to exist.
Analysis of sub-rule 5:
This sub-rule states that, any transfer of goodwill in the assessment year 2021-2022 and in subsequent assessment years apart from the above scenarios, the mechanism for determination of capital gain or loss on goodwill shall be computed in accordance with the provisions of section 48, 49 and clause (a) of sub section (2) of section 55.In other words, it should not be computed under section 50 onwards as neither there is any separate block of assets goodwill nor it forms part of block of Intangible assets with effect from 01.04.2020 as per amended section 2(11), section 32(1)(ii), section 43(6), section 50.
Conclusion: Insertion of new rule 8AC by CBDT vide Notification dated 07-07-2021, sorted out the issues of the assessee, as there is ambiguity in the manner of determination of written down value and short term capital gain, if goodwill was there in the block of intangible assets and depreciation claimed in the earlier previous years, and in addition to that also provide the mechanism in determination of capital gain of this assessment year and subsequent assessment years.
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