Amendments relating to Slump Sale & Goodwill | Finance Act 2022

Table of Contents

1. Curative amendment to the definition of ‘Slump Sale’ [Section 2(42C)]
2. Curative amendment to section 50 in relation to goodwill [Section 50]

1. Curative amendment to the definition of ‘Slump Sale’ [Section 2(42C)]

The term’ slump sale’ has been defined under section 2(42C) of the Income Tax Act, as follows:

“slump sale” means the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

The definition of ‘slump sale’ was amended by the Finance Act, 2021, and its scope was expanded to cover all forms of transfer within the scope of slump sale. However, inadvertently, the reference to the term “sales” in the last line of the definition was not replaced with the term “transfer”.

Accordingly, the Finance Act, 2022 has done the curative amendment by amending the provisions of section 2(42C) to substitute the word “sales” with the word “transfer”. Now the amended definition of slump sale is:

“slump sale” means the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.

This amendment will take effect retrospectively from the Assessment Year 2021-22.

2. Curative amendment to section 50 in relation to goodwill [Section 50]

2.1 Introduction

The Finance Act, 2021 had prohibited depreciation allowance on goodwill, and accordingly, amendments were made to various sections of the Act with effect from Assessment Year 2021-22:

(a) Goodwill of a business or profession is not considered as a depreciable asset, and no depreciation is allowable on it under any situation;

(b) In a case where goodwill is purchased, the purchase price of the goodwill will be considered as the cost of acquisition for computing capital gains;

(c) If depreciation was obtained on goodwill before assessment year 2021-22, the depreciation so obtained shall be reduced from the amount of the purchase price of the goodwill. The CBDT has notified Rule 8AC to compute short-term capital gains and written down value under Section 50 where depreciation on goodwill has been obtained.

2.2 Amendment by the Finance Act, 2022

The Finance Act, 2022 has inserted an Explanation after the proviso to Section 50 to clarify that the reduction of the amount of goodwill of a business or profession from the block of an asset in accordance with Section 43(6)(c)(ii)(B) shall be deemed to be a transfer.

Purpose of the amendment – Section 43(6) prescribes the method of computation of the written down value of a block of asset. Sub-clause (ii) of clause (c) of Section 43(6) was amended by the Finance Act, 2021 to provide that the WDV of the block of intangible assets shall be reduced by the actual cost of goodwill falling within such block of assets.

Section 50 of the Act contains provisions for computation of capital gain in case of transfer of depreciable assets. The Finance Act, 2021 had also amended section 50 to insert a new proviso to section 50(2). Said proviso provides that the CBDT may prescribe a manner to determine the WDV of the block of asset and short-term capital gain if goodwill is forming part of that block and depreciation has been claimed thereon. The CBDT has notified Rule 8AC prescribing manner for computation of capital gain on such block. However, this proviso is applicable only if a block of intangible assets contains goodwill and ceases to exist.

Rule 8AC(3) computes deemed capital gains if reduction as per clause (c) of Section 43(6) exceeds the aggregate of the following amount:

(a) the WDV of the block of assets at the beginning of the previous year relevant to the assessment year commencing on 01-04-2021 without giving effect to reduction under Section 43(6)(c); and

(b) the actual cost of any asset falling within the block of intangible assets, other than goodwill, acquired during the previous year relevant to the assessment year commencing on 01-04-2021.

The Finance Act, 2021 had not amended Section 50 for computation of deemed capital gains in a case the amount of goodwill is reduced from the block of intangible assets. However, Rule 8AC(3) squarely covers this situation and computes the deemed capital gains.

To fill this gap, the Finance Act, 2022 has brought a consequential amendment under section 50 to provide that a reduction of the amount of goodwill of a business or profession, from the block of asset shall be deemed to be a transfer.

This amendment is applicable with retrospective effect from Assessment Year 2021-22.

2.3 Example

XYZ Limited is engaged in a manufacturing business. On 10-4-2018, it acquired the following intangible assets:

(a) Goodwill: Rs. 100 crores;

(b) Trademarks: Rs. 50 crores; and

(c) Licenses and franchise agreement: Rs. 50 crores.

Compute the WDV of the block of intangible assets of XYZ Ltd. as on 31-03-2021 in the following two situations:

Situation 1 – In April 2019, XYZ Ltd. sold the trademarks for Rs. 40 crores.

Situation 2 – In April 2019, XYZ Ltd. sold the trademarks for Rs. 80 crores, and in April 2020, it acquired patents for Rs. 2 crores.

Computation of WDV as on 31-3-2021 (In Crores)