Depreciation on Goodwill,Short Term Capital Gains

With the Finance Bill 2021 Amendment a much debated provision between Tax Authorities  and Assessee on charging depreciation on Goodwill has come to an end.

With this amendment reference to Judgement Smiff Securities Limited wherein the Supreme Court of India held that goodwill of a business is a depreciable asset stands reversed.

No Depreciation on Goodwill from the assessment year beginning 01st Day of April 2021

(i.e.F.Y. 2020-2021)

Definition of Block of assets Sec 2 (11) (b) Section Depreciation of Assets Section 32 (1) (ii) amended “not being goodwill of a business or profession”

Section 50 – Capital Gain on Transfer of Depreciable Assets Amended – Goodwill shall be transferred from block of assets and the short term capital gain , if any, shall be determined in such manner as may be prescribed.

Section 55 Cost of Acquisition of Capital Assets Amended – Cost of Acquisition of the goodwill which has been purchased and depreciation has been claimed if any on the same upto year ending 31.03.2020, shall be Purchase Price Less accumulated depreciation on the same upto 31.03.2020.

Why Did Goodwill arise in the Books of Account’s ?

In Case of Mergers/ Slump Sale Arrangements where companies would end up buying companies more than what the “Book Value” of the Company – termed as negative Net Worth. This Negative Net Worth was a cost of goodwill to the buyer company. Most companies claimed depreciation on the goodwill and lowered their taxation by treating the same as intangible assets.

So after these amendment :-

How to Compute Depreciation on Intangible Assets ?

How to calculate Short Term Capital Gain ?

Reference :- Rule 8AC has been inserted vide Income Tax Amendment (19th Amendment), Rules 2021 vide notification no. 77/2021 dated 07th July, 2021

Rule 8 AC Guidance with regards to Computation of Short Term Capital Gains and Written Down Value under section 50 where depreciation on Goodwill has been obtained :-

In Simple words :-

(A) Only Asset in Block of Assets – Intangible Assets Category is Goodwill – Then Opening WDV as on 01.04.2020 of Goodwill to be reduced from Block of Assets – No Capital Gains

(B) Block of Intangible Assets includes Goodwill and other Intangible Assets –Then Opening WDV as on 01.04.2020 of Goodwill to be reduced from Block of Assets – Take depreciation on remaining value of Block of Assets – No Capital Gains

(C) Block of Assets Intangible Assets includes Goodwill and other Intangible Assets – Where Value of Goodwill is already reduced due to Sell of other Intangible Assets in Block of Assets in amount higher then closing WDV– Then Calculate Depreciaiton on Goodwill WDV Separately and Adjustment for Opening WDV as on 01.04.2020 of Goodwill to be reduced from Block of Assets- Difference will be Short Term Capital Gains.