In this document we have discussed the amendment relating to Goodwill, Slump Sale, ULIP and Taxability on Reconstitution/Dissolution of Firm/AOP/BOI.  We believe that you will find the same useful.

> Depreciation on Goodwill of Business or Profession:

Section Covered – 2(11), 32(1)(ii), 32(1) Explanation 3 (b), 43(6)(c)(ii)

  • Definition of “block of asset” u/s 2(11) is being amended to exclude “goodwill of business or profession” from intangible asset.
  • Further under section 32, “goodwill of business or profession” is also being removed from the meaning of term ‘asset’ (Refer Explanation 3 to clause b)
  • For such cases where the Goodwill is already forming part of Block of Assets, the Finance Act introduced a change in section 43(6)(c)(ii) which defines the block of assets. Under such section, the written down value of Goodwill is required to be reduced from the Opening WDV.
  • Accordingly, now onwards, no depreciation will get allowed on the Goodwill even if it was forming part of opening block of assets.
  • These amendments will be effective from Assessment Year 2021-22. Accordingly, impact must be given in the depreciation working for FY 2020-21

Also Read – Finance Act 2021 Analysis of Certain Provisions [Part 2]

> Amount received under Unit Link Insurance Plan:

Section Covered – 2(14)(c), 10(10D), 45(1B), 112A Explanation and Proviso

  • Unit Link Insurance Policy (ULIP) is an insurance Policy having the security on the life of insurer with the benefit of investment. The part amount of premium is invested in the securities.
  • Taxability of old policies:
    • At present ULIP polices enjoy the tax exemption u/s 10(10D) subject to premium for any of the year does not exceed 10% of the sum assured for Policy issued after 1.4.2012 or 20% for Policy issued after 1.4.2003. There is no change in this threshold of 10% in Finance Act, 2021.
  • Taxability for the Policies issued on or after February 1, 2021 wherein the premium does not exceed 10% of the sum assured:
    • Section 10(10D):

Benefit of section 10(10D) is not available for certain ULIP issued after 01.02.2021.  For ease of reference, such ULIP are referred as T-ULIP (Taxable ULIPs).

As per Fourth proviso, the T-ULIP would mean any ULIP issued on or after 1st February 2021 and premium payable for any previous year exceeds INR 250,000 during the term of policy. Further, as per fifth proviso, if the person has more than one ULIP then the exemption u/s 10(10D) will be available only for such policy where aggregate amount does not exceed Rs 250,000.

Accordingly, if the ULIP are not T-ULIP it will continue to enjoy the benefit of section 10(10D)

Amount received under T-ULIP at the time of death of person will get the benefit of exemption u/s 10(10D).

  • Taxability under Capital Gain:

– Definition of “Capital Asset” u/s 2(14) is amended to include – “any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof” (i.e. T-ULIP)

– Charging section 45 of Capital Gain is being amended to include any amount received on such T-ULIP as taxable under the head Capital Gain in the year of receipt of amount. [Section 45(1B)]

– U/s 112A of taxability of long-term capital gains, the definition of “Equity Oriented Fund” is amended to include such T-ULIP. Accordingly, such T-ULIP is taxable u/s 112A as long-term capital gains.

– Further, if there is a Short-Term Capital Gain then, such transaction will get covered u/s 111A as, section 111A imports the definition of ‘equity oriented fund’ from section 112A.

– Accordingly, the Long-Term or Short-Term gain on T-ULIPs will get taxable u/s 112A or 111A respectively.

– In case of Individual and HUF, such income will also enjoy the benefit of threshold limit of maximum amount of income not chargeable to tax [as per section 111A and 112A]

    • Please note that irrespective of taxability of T-ULIP, the deduction u/s 80C is available as per the usual provisions.
  • The taxability of maturity or surrender value received by person on a similar product issued by foreign insurance or investment companies is another point which needs to be given due attention while filing tax return in India. It has been a matter of litigation and debate as to whether such income is exempt or taxable. If taxable then, whether taxable under the head Capital Gain or Other Sources etc.  The difference is the tax rate leaves the scope of arbitrage.  Since the ULIPs are included in the capital gain by Finance Act, 2021, position could be taken to consider such income accordingly.

> Slump Sale:

Section Covered – 2(42C), 50B

  • u/s 2(42C), Slump Sale is defined to include the transfer of one or more undertaking as a result of sale. However, as per amendment in Finance Act 2021, the transfer of one or more undertaking by any means is covered in the definition of ‘slump sale’ and it’s not just limited to a Sale. Accordingly, all the possibilities of transfer as covered under section 2(47) will get attracted to slump sale.

Computation of Capital Gain:

  • u/s 50B, we are aware that the “Net worth” of such unit or undertaking is considered as a Cost of Acquisition/Cost of improvement.
  • The full value of consideration used to be the amount received. In the Finance Act, 2021, has introduced the concept of FMV of capital assets transferred to be considered as Full Value of Consideration.
  • FMV is to be computed for the Capital Assets involved under the transfer. It will be very interesting to know how the intangible capital assets are being considered and how the tax department identifies various intangibles involved in the transfer.
  • The Rules to be prescribed will give more clarity on the manner of computing FMV.
  • Accordingly, the two scenarios will arise –
    • FMV is less than actual amount received
    • FMV is more than the actual amount received
  • It will be very interesting to analyse the impact, if any in the hands of Buyer where the FMV is lesser / higher than the actual amount paid by the buyer.

> Tax on transfer of money or asset by Firm/AOP/BOI to its Partners/Members

Section Covered – 9B, 45(4), 48(iii)

(for the purpose of simplicity, we are referring Firm and Partners commonly for AOP/BOI and Members)

  • Let’s try to analyse the taxability of certain related transaction in detail
    • Asset introduced by Partner to a Firm [Section 45(3)- no change]
    • Transfer of Capital Assets/Stock in Trade by Firm to Partner (in case of dissolution or reconstitution) [New Section 9B]
    • Receipt of capital asset by Partner from Firm (in case of dissolution or otherwise) [Old Section 45(4) which is substituted]
    • Receipt of money or capital asset by Partner from Firm (in case of reconstitution) [New Section 45(4)]
  • Asset introduced by Partner to a Firm [Section 45(3):
    • When a Partner introduces capital asset in the Firm, it is regarded as a taxable transaction in the hands of Partner in the year of such transfer. The amount recorded in the books of accounts of the Firm is considered as Full value of consideration.
    • This does not deal with any specific situation of ‘Reconstitution’ or otherwise under which the asset is introduced by a Partner.
  • Section 9B, Section 45(4) are simplified in the below table:
Situation Taxable in hands of Computation
In case of Reconstitution
Receipt of Money or Capital Asset by Partner from Firm

[New Section 45(4)]

Firm

(Though the income arises to a partner but it is deemed as income of the firm)

Value of Money

+ FMV of Capital Asset

Less:

Balance in Capital account at the time of reconstitution

= Capital Gain

(if gain is negative then it will be considered as NIL)

Stock in Trade transferred by Firm to Partner
Section – 9B(money is not covered)
Firm FMV of Stock is taxable under the head Business or Profession
Capital Asset transferred by Firm to Partner
Section – 9B(money is not covered)
Firm FMV of asset is considered as Full Value of Consideration under the head Capital Gain, and

while calculating Capital gain, amount taxable u/s 45(4) will be reduced proportionately [Ref Section 48(iii)- furthermore clarification is awaited]

In case of Dissolution
Capital asset / stock in trade transferred by Firm to Partner Section – 9B

(money is not covered)

Firm FMV of stock/asset is taxable under the head Business / Capital Gain
  • Analyses
    • Balance in Capital account of partner to be calculated without considering the increase due to revaluation of assets or due to self-generated goodwill/assets. Please note that reduction if any in the capital account due to revaluation is not to be add back. [Section 45(4)]
    • Section 9B covers both situation of ‘reconstitution’ and ‘dissolution’. However, section 45(4) covers only ‘reconstitution’.
    • ‘Reconstitution’ means:

– One or more of its partners or members ceases to be partners or members;

– One or more new partners or members are admitted. However, at least one existing partner or member should continue to be partner or member of the specified entity after admission of the new partner(s) or member(s); or

– All the partners or members continue with change in their respective share or in share of some of them.

  • Erstwhile section 45(4) was covering situation of transfer of capital asset during Dissolution or Otherwise. However, in the new section 45(4), its applicable only in case of reconstitution. Further., term ‘otherwise’ is being deleted. Accordingly, new provision will not cover any other situation where the capital asset is being transferred by Firm to a Partner. It will be interesting to analyse the implication of section 56 on such situations if any.
  • Fair Market Value is being used for the purpose of taxability. Accordingly, if the Net Realisable Value is really very less as compared to Fair Value, then it will result in higher taxability. We are awaiting the guidelines about the calculation of FMV. On a safer side, if the NRV is lesser than, its beneficial to first liquidate the asset and then transfer the amount to a partner.

 Source: Finance Act, 2021 (No. 13 of 2021) received the assent of the President on the 28th March, 2021 

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Disclaimer: The information contained herein is of a general nature and does not contain any expert view or opinion. Please refer source documents for detailed information. Although we try to provide accurate information, there can be no guarantee that such information is accurate as of the time it is received or in the future.  We request readers to seek professional advice before arriving at any decision / conclusion after reading of this document. We are not responsible for any loss arising to anyone after referring and relying on this document.

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