Section 50 of the Income-tax Act, 1961 (‘Act’) provides for special provisions for the computation of short term capital gains on the transfer of depreciable assets. In the case of goodwill, it is now proposed to clarify that any reduction of the value of goodwill from the written down value (WDV) of the block of assets in accordance with the provisions of section 43(6) shall be deemed to be ‘transfer’ with retrospective effect from AY 2021-22.
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.
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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 require 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 the goodwill of a business or profession forms part of the block of assets for the 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.
For this purpose, Rule 8AC(3) was notified by the CBDT vide Notification No. 77/2021 dated 7-7-2021.
As any reduction is not treated as ‘transfer’ so it is clarified that for the purpose of computation of short term capital gains as per section 50 of the Act for which Rule 8AC(3) was notified shall be deemed to be ‘transfer’ so as to trigger the computation of capital gains under section 50 if the reduction of goodwill exceeds the WDV as on 1.4.2020 and any additions thereto in FY 2020-21.
For this purpose, Clause 15 of the Finance Bill, 2022 inserts an Explanation in section 50 as follows-
Amendment of section 50.
15. In section 50 of the Income-tax Act, after the proviso, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2021, namely:––
“Explanation.––For the purposes of this section, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with subitem (B) of item (ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer.”.
Explaining the amended provisions of section 50
Clause 15 seeks to amend section 50 of the Act relating to special provision for computation of capital gains in case of depreciable assets.
The said section provides for certain modification in the applicability of the provisions of sections 48 and 49 for computation of capital gains in case of depreciable assets where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under this Act.
Proviso to the said section provides that in a case where goodwill of a business or profession forms part of a block of assets for the assessment year beginning of the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Incometax Act, the written down value of that block of asset and short term capital gain if any, shall be determined in such manner as may be provided by rules.
It is proposed to amend section 50 to insert an Explanation to clarify that for the purposes of the said section 50, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer.
This amendment will take effect retrospectively from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
Rationale of the amendment as stated in the Explanatory Memorandum
From the assessment year 2021-2022, goodwill of a business or profession is not considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill.
When the amendment was carried out through the Finance Act 2021, consequential amendment was carried out in section 50 of the Act by insertion of a proviso to clause (2) of that section. A further consequential amendment required is being proposed now.
Accordingly, it is proposed to clarify that for the purposes of section 50 of the Act, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, shall be deemed to be transfer
Since the amendment to the effect that goodwill of a business or profession is not a depreciable asset has been made applicable from assessment year 2021-2022 the above amendment will take effect retrospectively from 1st April 2021 and will accordingly apply in relation to the assessment year 2021-22 and subsequent assessment years.
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