Direct Tax Alert

Methodology prescribed for determination of Short Term Capital Gain and Written Down Value for the Intangible Asset comprising Goodwill

July 26, 2021


The Finance Act, 2021 has made amendment in the definition of “Intangible Asset” to exclude goodwill of business or profession resulting in ineligibility of depreciation on goodwill from Financial Year (FY) 2020-21 onwards. This amendment has impacted existing goodwill already forming part of block of “Intangible Asset” as on 31 March 2020 and new goodwill newly acquired on or after 1 April 2020.

The definition of “Written Down Value” (WDV) has also been amended to provide for reduction of WDV of goodwill from the WDV of “Intangible Asset” block of asset as on 31 March 2020.

In order to give effect to the above-mentioned amendments, the Central Board of Direct Taxes (CBDT) has issued a Notification No. 77/2021 dated 7 July 2021 to introduce “Rule 8AC” of Income Tax Rules, 1962 (Rules) which provides for the methodology to reduce the WDV of goodwill from WDV of block of “Intangible Asset” and mechanism to compute Short Term Capital Gains (STCG) for block of “Intangible Asset” comprising goodwill on which depreciation has been claimed up to 31 March 2020.


  • Block of “Intangible Asset” only comprises of Goodwill: In case goodwill is the only asset in block of “Intangible Asset” and depreciation is claimed up to 31 March 2020, WDV of such block of “Intangible Asset” shall be reduced by the quantum of actual cost of goodwill less depreciation allowable on such goodwill which will result in WDV of such block of “Intangible Asset” as Nil.
  • Block of “Intangible Asset” comprises Goodwill with other Intangible Assets: In case the block of “Intangible Asset” comprises goodwill with other intangible assets, the WDV of block of “Intangible Asset” as on 1 April 2020 needs to be reduced by WDV of goodwill computed as difference between actual cost of goodwill and depreciation allowable on such goodwill up to 31 March 2020. Further, in case the WDV of goodwill is higher than opening WDV of block of “Intangible Asset” and actual cost of any intangible asset other than goodwill acquired in FY 2020-21, the excess shall be considered as Capital Gain for FY 2020-21 on the transfer of Short-Term Capital Asset.

This Rule clarifies that there will not be any capital gains or loss in case the goodwill was the only asset forming part of block of “Intangible Asset” as on 31 March 2020 and such block of “Intangible Asset” ceases to exist due to reduction of WDV of goodwill. Going forward from FY 2020-21, the capital gains or loss on transfer of goodwill shall be determined in the manner as if the transfer is of non-depreciable capital asset, as goodwill would cease to be part of block of “Intangible Assets” and no depreciation would be allowable from FY 2020-21.

Article contributed by:

Himanshu Suryan

Manager - Taxation

MBG Corporate Services

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