The Hon’ble Finance Minister presented the Union Budget 2021 on 01 February 2021 wherein announced “No depreciation to be allowable on Goodwill from 01 April 2021” (assessment year 2021-22 onwards).
The tax authorities always argued that the depreciation on goodwill in business restructuring like Merger and Acquisition should be disallowed. The rationale beside that no allocable cost is actually incurred for the creating the goodwill and the goodwill is not specifically included in section 32 (Depreciation allowed on Tangible and Intangible Assets) of the Act. The matter has been argued at many judicial forums including the Supreme Court.
In 2012, Supreme Court settled this controversy in the case of Smifs Securities Limited. In this case, depreciation on goodwill arising in the course of amalgamation, the Supreme Court held that the goodwill arising out of excess consideration paid on and over the fair value of assets on business acquisition would qualify as Intangible assets as “any other business or commercial rights of similar nature” applying the principle of ‘ejusdem generis’ to the words used in the meaning of intangible assets
Finance Bill, 2021, above controversy settled by amendments on prospective basis to clarify that no depreciation would be allowable on goodwill from 01 April 2021 (assessment year 2021-22 onwards).
The proposed amendments by Finance Bill, 2021 are as below:
1. Section 2(11) – Block of asset has been amended to clarify it does not include goodwill of a business or profession.
2. Section 32 has been amended that intangible depreciation is not allowable on goodwill of a business or profession. Further, definition of asset has been amended to exclude goodwill of a business or profession as an asset for the purpose of section 32.
3. Section 50 – Computation of capital gains in case of depreciable assets has been amended to provide that where goodwill forms part of block of asset for assessment year 2020-21 and depreciation has been claimed, the written down value of the block would be determined in the prescribed manner. The rules prescribing the computation mechanism will be notified in due course.
4. Section 55 – Cost of acquisition has been amended in relation to goodwill of a business or profession if:
(i) Goodwill acquired from a previous owner, the cost would be the purchase price of the owner
(ii) Goodwill acquired as a result of gift, amalgamation, and merger. Goodwill was acquired by previous owner; cost will be the cost to the previous owner
(iii) In all other cases- cost will be nil.
It is also been clarified that where depreciation has been claimed on the goodwill preceding to assessment year 2021-22, the same would be reduced from written down value of the block of intangible assets.