New Rule 8AC for Computing Short Term Capital Gain and Written-Down Value
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 7th 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:
notification_77_2021