Taxability of depreciation effect of goodwill has been a debatable issue and matter of litigation between the IT department and the taxpayers for a long time. There is no specific exclusion in the definition of ‘Block of Assets’ as regards goodwill. Taking advantage of this, the corporates have been claiming depreciation on the goodwill element, and the same was questioned by the taxman. In many Judgements including in the case of Smiff Securities Limited [(2012) 348 ITR 302 (SC)], the Courts have allowed the claim of depreciation on goodwill. In this Finance Bill, 2021, the Government has put a rest to such controversies and litigations arising in the tax treatment of goodwill. We will discuss the amendment proposed in the Finance Bill 2021 with the perspective of goodwill in this article.
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Existing Provision |
Amendment proposed and its effect |
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Section-2(11)(b) defines “Block of Assets” to include intangible assets which consist of know-how, patent, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. |
Earlier, the companies used to claim ‘Goodwill’ to be part of ‘Block of Assets’ as any other business or commercial rights of similar nature and hence, eligible for depreciation.
Now, this definition has been amended to include the words “not being goodwill of a business or profession” after the words “any other business or commercial rights of similar nature”.
It means that Goodwill will not be a part of ‘Block of Assets’ now and thus depreciation is not eligible thereon w.e.f. 1st April 2021 i.e. for A.Y. 2021-22 and onwards.
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Section 32(1)(ii) states that depreciation shall be allowed as a deduction in respect of intangible assets acquired on or after 1st April, 1998 which includes know-how, patent, copyrights, trademarks, licenses, franchises and any other business or commercial rights of similar nature
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Herein clause (ii) of section 32(1), the words “not being goodwill of a business or profession” are inserted.
Thus, goodwill will be no longer eligible for claim of depreciation u/s 32 of the Income Tax Act |
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Explanation-3 to Section 32(1) provides that for the purpose of this subsection, the expression “assets” shall mean to include “intangible assets” being know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature |
Herein this explanation, the words “not being goodwill of a business or profession” has been inserted. Thus, excluding the goodwill out of the definition of depreciable assets as per section-32 |
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Section 50 provides for the manner of calculation of capital gains in case of a depreciable asset forming part of the block of assets for which depreciation has been allowed under the Act.
It should be noted that where depreciation on goodwill was claimed in earlier years, any profit on transfer of such goodwill is treated as short term capital gains. |
A proviso has been inserted in section 50(2) as below: - “Provided that in a case where the goodwill of a business or profession forms part of a block of an asset for the A.Y. beginning on 1st April 2020 and depreciation thereon has been obtained by the assessee under the Act, the written down value of that block of asset and short- term capital gain, if any, shall be determined in such manner as may be prescribed”
As regards this amendment, we will have to wait for the rules which the Government might prescribe for the manner of calculation of short-term capital gains on goodwill which was already existing as part of a block of assets in the books of the assessee.
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Section-55 provides for the meaning of “Cost of Improvement” and “Cost of Acquisition”.
Section-55(2) (a) of the Act defines “Cost of Acquisition” in respect of capital assets including “Goodwill”. It states that where goodwill has been acquired by the assessee by way of purchase: - Purchase Cost shall be taken as cost of acquisition. In any other case (self-generated), the cost of acquisition shall be taken to be ‘Nil’.
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Clause (a) of Section-55(2) has been substituted by a new clause and further to provide that: - Where deduction towards depreciation under section 32(1) in respect of goodwill has been obtained by the assessee up to the financial year 2019-20 (AY 2020-21) then: -
Cost of acquisition= Purchase Price – Depreciation is already taken till F.Y. 2019-20 |
In view of the above amendments proposed by Finance Bill, 2021, it is clear that the goodwill of a business or profession will not be considered as a depreciable asset. Hence, no business entity could claim depreciation on goodwill in any circumstances w.e.f. A.Y. 2021-22. If a business entity has acquired goodwill for consideration, it will be shown as an asset in the books of accounts of the entity and capital gain will also be liable on the transfer of such goodwill. It is to be noted that if the goodwill is already existing in the books of the assessee and the assessee has already been claiming depreciation on such goodwill, the cost of acquisition of such goodwill will be the purchase cost as reduced by the depreciation claimed till 31st March 2020.
