Finance Bill 2021 - 1. No Depreciation on Goodwill of Business or Profession from 1 April 2021 - Proposed Amendment

No Depreciation on Goodwill of Business or Profession?

Source: The Finance Bill 2021 and the memorandum to the Finance Bill.

Introduction

Dear Readers,

In case you would recollect the famous judgement of Smifs Securities (Supreme Court); wherein it was held that depreciation is to be allowed on Goodwill acquired in case of amalgamation / merger, etc.

Recently the Finance Bill 2021 has proposed various amendments to Section 2(11); Section 32(1)(ii); Section 50, Section 55 of the Income Tax Act, 1961 ('the Act') in order to exclude / not allow the depreciation on goodwill on business and profession.

Before going in the detailed proposed amendments; it is relevant to understand certain existing provision of the Act dealing with depreciation of Goodwill.

Existing relevant Income Tax Provisions

Currently as per the Act, 'Goodwill' is not specifically included / excluded in the definition of Intangible Assets. Be it section 2(11) or Section 32(1)(ii). Resulting which the issue arose in the case of Smifs Securities, as mentioned above. 

However for the computation of depreciation, in case of succession / amalgamation / demerger; it is clearly mentioned that depreciation has to be calculated as if there is no succession / amalgamation / demerger has been taken place (Section 32, sixth proviso). Further the depreciation as computed is to be apportioned on the basis of number of days of assets used between the predecessor entity and the successor entity.

Further for the purpose of computing depreciation as above, can Goodwill be added as an Asset as it is acquired by the successor entity?

This answer can be referred to from section 43, wherein it states that the opening Written Down Value ('WDV') is to be increased by 'Actual Cost' of asset acquired. Further it clarifies that Actual Cost refers to actual cost to the Assesse. Further by way of explanation, it clearly mentions that in case of amalgamation; the cost of transferred captial asset to the successor entity is to be considered as if the predecessor entity continues to hold the Asset, for its own business.

Hence it becomes amply clear that in case the depreciation is to be computed, Goodwill is not to be considered as any asset acquired by the Successor entity.

Conclusion of Analysis

Therefore, as per the provision of the Act, Goodwill ideally should not be considered for depreciation computation. The judgement as mentioned in the case above, arose only due to the fact that goodwill is not specifically covered / excluded in any of the definition of 'Intangible Asset'. 

Further as per the memorandum to the Finance bill, it tries to justify this position by stating that Goodwill need not necessarily depreciate. Goodwill can see appreciation on the basis of how the business is operated.

Further for the purpose of computation of Capital Gains; the Memorandum to the Finance bill provides that Goodwill shall form part of the cost of capital asset; however any depreciation claimed (till AY 2020-21), shall be reduced from the said purchase price of the Goodwill.

Amendments proposed in the Finance Bill, 2021.

Accordingly, the following sections are undergoing amendments;

• Section 2(11) - wherein it will specifically not include (exclude) goodwill of business or profession from Block of Asset for Intangible Asset.
• Section 32(1)(ii) - wherein goodwill of business or profession shall not be considered as an asset for the purpose of depreciation.
• Section 50 - wherein the cost of block of Asset for Intangible Asset where Goodwill is included is to be computed the WDV of such block and the resultant short term capital gains is to be computed.
• Section 55 - to include the cost of goodwill for determining cost of acquisition.

The above proposed amendments are to be made applicable from 1 April 2021 onwards and will apply to AY 2021-22

Do let me know your views for the same. I think this is a very relevant change which needs to be considered.