Rule 8AC of Income Tax Rules

Neethi V. Kannanth | Last updated: 20 July 2021

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Quick Summary

Rule 8AC, introduced on 7th July 2021, clarifies the calculation of short-term capital gains and written down value for goodwill under Section 50 of the Income Tax Act, 1961. It applies when goodwill is the sole or primary asset in an 'intangible' block of assets and depreciation was claimed for the assessment year beginning 1st April 2020. The rule outlines specific conditions under which capital gains or losses are calculated, and also specifies scenarios where no capital gain or loss will arise.

CBDT, through Notification no. 77/2021 dated 7th July 2021, inserted a new rule, 'Rule 8AC' in the Income Tax Rules, 1962. Rule 8AC deals with the computation of short term capital gains and written down value under section 50 of the Income Tax Act, 1961, where depreciation on Goodwill has been obtained.

Before understanding what Rule 8AC is let us first discuss Section 50 of the Income Tax Act, 1961.

Section 50 of the Income Tax Act, 1961

Section 50 of the Income Tax Act, 1961 states that, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed , the provisions of sections 48 and 49 shall be subject to the following modifications:

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts-

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess amount shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) where any block of assets ceases to exist, as a result of all the assets in that block being transferred during the previous year, then the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

Now let us understand what Rule 8AC says.

Rule 8AC: Capital Gains and Goodwill Explained

Rule 8AC of Income Tax Rules, 1962

1) For the purposes of proviso to section 50, the written down value of the block of the asset and short term capital gains, if any, for the previous year relevant to the assessment year commencing on the 1st day of April, 2021 shall be determined in accordance with this rule.

(2) Applicability

Rule 8AC is applicable if the following criteria are met-

The goodwill of the business or profession was the only asset or one of the assets in the block of assets "intangible".
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.

(3) Calculation of Capital Gain-

Where the reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, for the previous year relevant to the assessment year commencing on the 1st day of April, 2021, exceeds the aggregate of the following amounts, namely:-

(i)

the written down value of the block of assets at the beginning of the previous year relevant to the assessment year commencing on the 1st day of April, 2021 without giving effect to reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43; and

(ii)

the actual cost of any asset falling within the block of assets "intangible", other than goodwill, acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(4) No Capital Gain or Loss in certain cases

Without prejudice to the provisions of sub-rule (3) and section 55, no capital gain shall arise if the following conditions are satisfied-

Where the goodwill of the business or profession was the only asset 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, and
The block of asset ceases to exist on account of there being no further asset acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021 in that block.

(5) 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].

FAQ :

Rule 8AC is a new rule inserted into the Income Tax Rules, 1962, by the CBDT on 7th July 2021, which deals with the computation of short-term capital gains and written down value under Section 50 of the Income Tax Act, 1961, specifically where depreciation on Goodwill has been obtained.

Rule 8AC is applicable if the goodwill of the business was the only asset or one of the assets in the 'intangible' block of assets, and depreciation was claimed by the assessee in the assessment year beginning on 1st April 2020.

Capital gains are calculated under Rule 8AC when the reduction under a specific section exceeds the written down value at the beginning of the previous year plus the actual cost of any other 'intangible' asset (excluding goodwill) acquired during that year. The excess is deemed short-term capital gains.

Yes, no capital gain shall arise if goodwill was the only asset in the 'intangible' block for which depreciation was obtained, and the block ceases to exist because no further asset was acquired in the relevant previous year.

Section 50 of the Income Tax Act, 1961, modifies Sections 48 and 49 for capital assets that are part of a block of assets where depreciation has been allowed. It defines how capital gains are computed in such cases, particularly when the asset is transferred.

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