New Rule 8AC for Computing Short Term Capital Gain and Written-Down Value

The Central Board of Direct Taxes (CBDT) vides a Notification No. 77/2021 dated 7

th July 2021 notified Rule 8AC for businesses that obtained depreciation on goodwill in FY2020-2021. The excess of such depreciation will be considered a short-term capital gain and invite tax liability. The new rule 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.

Synopsis of Rule 8AC

The Central Board of Direct Taxes issued Income-tax Amendment (19th Amendment), Rules, 2021 to introduce New Rule 8AC of Income Tax Rules, 1962. The new Rule 8AC lays out the computation methods of Short-term capital asset (STCG) and written down value (WDV) applicable for that business that has obtained depreciation on goodwill in the assessment year beginning on April 1, 2020, since depreciation can no longer be deducted on goodwill, as provided by the Finance Act 2021.

Reason for Introducing New Rule 8AC

The Government has amended the various provisions of the Income Tax Acts relating to the depreciation on goodwill by Finance Act, 2021 which states that no depreciation will be allowed on goodwill under section 32 of Income Tax Act with effect from AY 2021-2022 and onwards. Thus, no depreciation shall be allowed for AY 2021-2022 and subsequent years. The Goodwill has been excluded from the Block of assets relating to Intangible Assets. Consequential amendments are also made by the Finance Act, 2021 in the Chapter of Capital Gain for the calculation of capital gain on goodwill.

Section 2(11) of the Income Tax Act defines the term “block of assets” was amended to exclude goodwill of a business or profession from the purview of “block of asset”
Section 32(1(ii)) of the Income Tax Act was amended to remove the goodwill of a business or profession from the definition of tangible assets to make them ineligible for depreciation.

In line with these amendments made by Finance Act, 2021, the CBDT now 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 - Implications for businesses

This rule enforces the amended Section 50 of the Income Tax Act, which provides a method for computation of STCG and WDV in cases where the goodwill of a business or profession formed part of a block of assets for the assessment year beginning on April 1, 2020, and depreciation has been obtained by the assessee under the Income Tax Act. If the value of net goodwill removed from the block is more than the opening WDV value as of April 1, 2020, such excess will now taxable as STCG. But in cases where goodwill was the only asset in the block, there will be no impact as per Section 55(2(a)) of the Income Tax Act. Companies/Businesses will now be required to calculate the tax on these short-term capital gains and pay it before filing the income tax return (ITR) for the financial year 2021 (FY21). Note: The deadline for filing the returns has been extended for businesses, from October 31, 2021, to November 30, 2021, due to the pandemic.

Procedure to Determine the Written Down Value (WDV)

The Procedure to Determine the Written Down Value (WDV) relevant to the assessment year (AY) 2021-2022 is as follows:

The business needs to determine the opening WDV of a block of assets as of April 1, 2020.
Add the actual cost of the asset (other than goodwill) acquired during the previous year
Deduct the amount payable concerning any asset that is sold, destroyed, discarded, or demolished during the previous year. The scrap value, if any, must also be deducted.
Deduct the WDV of the assets, transferred under ‘slump sale’ falling under that block.

Deduct the actual cost of goodwill after reducing depreciation allowed, falling within the block.

Note: Slump sale means the transfer of one or more undertakings, for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales Rule 8AC provides that if the actual cost of goodwill after reducing depreciation (exceeds the aggregate of opening WDV and the actual cost of asset acquired during the year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets. The official Notification About Income-tax Amendment (19th Amendment), Rules, and Rule 8AC are as follows:

Back to Learn

Frequently Asked Questions

Common questions about Rule 8AC for Short Term Capital Gain & Written Down Value.

Rule 8AC is a new rule introduced by the Central Board of Direct Taxes (CBDT) through the Income-tax Amendment (19th Amendment), Rules, 2021. It provides the method for computing short-term capital gains (STCG) and written down value (WDV) for businesses that had obtained depreciation on goodwill in the assessment year 2020-2021.

Rule 8AC was introduced as a consequence of the amendments made by the Finance Act, 2021, which disallowed depreciation on goodwill from the assessment year 2021-2022 onwards. The rule aims to address the tax implications arising from the non-allowance of depreciation on goodwill, particularly for businesses that had claimed depreciation on goodwill in the previous year.

Under Rule 8AC, if the value of goodwill removed from the block of assets is higher than the opening WDV as of April 1, 2020, the excess amount will be taxable as short-term capital gains. This means businesses that had claimed depreciation on goodwill in the previous year may face additional tax liabilities on the excess amount.

The procedure to determine the WDV relevant to the assessment year 2021-2022 involves determining the opening WDV as of April 1, 2020, adding the cost of assets acquired during the previous year, deducting the value of assets sold or transferred, and deducting the actual cost of goodwill after reducing the depreciation allowed.

If goodwill was the only asset in the block, there will be no impact under Rule 8AC, as per Section 55(2(a)) of the Income Tax Act. This provision ensures that businesses with goodwill as the sole asset in the block are not adversely affected.

Businesses will be required to calculate the tax on the short-term capital gains arising from Rule 8AC and pay it before filing their income tax returns (ITRs) for the financial year 2021 (FY21). The deadline for filing ITRs for businesses has been extended to November 30, 2021, due to the pandemic.

The term "slump sale" refers to the transfer of one or more undertakings for a lump sum consideration without values being assigned to individual assets and liabilities. Under Rule 8AC, the WDV of assets transferred under a slump sale falling within a particular block must be deducted while determining the WDV.

Rule 8AC specifically addresses the tax implications for businesses that had obtained depreciation on goodwill in the assessment year 2020-2021. It provides a method to calculate the short-term capital gains and written down value for such businesses, ensuring that the excess depreciation claimed on goodwill is appropriately taxed.

The Finance Act, 2021, disallowed depreciation on goodwill to align with the principle that goodwill, being an intangible asset with an indefinite lifespan, should not be subject to depreciation. This change aims to bring the Indian tax laws in line with international accounting standards and practices.

No, Rule 8AC is specifically applicable to businesses that had obtained depreciation on goodwill in the assessment year 2020-2021. For businesses that did not claim depreciation on goodwill in that year, the provisions of Rule 8AC may not be relevant or applicable.