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This article is written by Anushka Singhal, a student of Symbiosis Law School, NOIDA. In this article, she discusses whether goodwill is a depreciating asset or not. 


Goodwill is the reputation of the business or the company that basically plays a very important role when one acquires a company. The goodwill of a company is not just the personal value of the company but it represents the commercial value of the same. It consists of the assets, contacts and the good name of the company. Goodwill was previously considered as a depreciating asset i.e. a property that provides an economic benefit for more than one reporting period. Normally, the Income Tax Act,1961 (hereinafter referred to as the IT Act) explains two types of assets – tangible and intangible assets and goodwill was not included in either of them. Goodwill is not explicitly mentioned as a depreciating asset under the IT Act. It was the judiciary that held that goodwill is a depreciating asset. But goodwill was able to find a place as a depreciating asset for a very short period after which the government through the 2021 Budget explicitly mentioned that goodwill is not a depreciating asset. 

Goodwill as a depreciating asset

Goodwill is said to be a thing that is easy to describe but difficult to define. It holds an established business apart from a new business. An excess consideration over and above the net value of an asset taken over in slump sales, mergers and acquisitions is called goodwill. Depreciation of goodwill is not allowed now but it continues to be applicable on other intangible assets like trademark, copyright etc. Depreciation is considered a decrease in an asset’s value. It can occur due to a number of reasons. Section 32 of the Income tax provisions provides rules regarding depreciation. We know that the value of machinery, land etc. can decrease over time and this decrease is known as depreciation. Goodwill was considered as a depreciable asset because it was believed that it falls in the category of intangible assets and depreciates over time similar to other assets. But the Memorandum to the Finance Bill, 2021 states that goodwill is not a depreciable asset as it can be appreciated instead of being depreciated. This phenomenon of depreciation assisted a taxpayer in paying tax but now with the new legislation, a pandora of new judgments will definitely open. 

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Provisions of the IT Act dealing with depreciation

The IT Act lays down the concept and procedure for depreciation through Section 32. Firstly, it categorizes the assets into two types- buildings, machinery, plant or furniture as tangible assets and technical know-how, franchise, licence etc. as intangible assets. It lays down that in the case of tangible objects like machinery, plants or furniture, depreciation can be carried out through a reduction in the value of the assets if it exceeds a particular value. It lays down that deduction cannot be carried out for a car which is used for tourist purposes and also the one which is used outside India. It also lays down that depreciation cannot be allowed for new machinery where there is a certain reduction in price in accordance with the Central Government. The Act explains what new machinery is and the definition of the same is laid down in Section 32-A. Further, it also lists some categories of machinery or plants in which no deduction can be carried out. They are- 

  1. Any machinery which was previously used outside India.
  2. Any machinery which is installed on residential premises. 
  3. Any machinery used in an office or road transport vehicles. 
  4. Any machinery or plant, for which the actual cost has been realised. 

Depreciation of an asset helps a company to recover the cost of an asset when it was purchased i.e if a machine has been used for 10 years and then after somebody acquires the company and uses that machinery, he has the right to cut the cost for the use of those 10 years. Moreover, Section 50 of the IT Act also lays down the provisions for the computation of capital gains in case of depreciable assets. This section has now been amended and the procedure to be followed in cases of goodwill already deducted has been laid down. 

Whether it is a depreciating asset under the IT Act

Goodwill was first declared as a depreciating asset in the case of Commissioner of Income Tax Kolkata v. Smifs securities Ltd.(2010) wherein the Hon’ble Supreme Court held that goodwill falls under the category of intangible assets and thus can be considered as a depreciating asset. Since then, the companies were using goodwill as a depreciating asset and the courts were also dealing with the cases in the same way. The IT Act lays down provisions for amalgamation and acquiring of a company and therein goodwill was being used as a depreciating asset. The inclusion of goodwill as a depreciating asset led to the companies going for a business purchase instead of a share purchase. But after the Finance Bill 2021, it is no longer considered as a depreciating interest and a proviso has been added to Section 32 which explicitly mentions that goodwill is not a depreciating asset. The decision of the government has started a plethora of debates.

Many of the experts say that such exclusion of goodwill was not needed as it deprived the buyer of getting adequate benefits. The depreciation of goodwill was not leading to any tax evasion and thus it was not needed. The reasons for discontinuing the use of goodwill in the depreciating assets were given by the government in the memorandum. It says that there is no concrete proof that the goodwill would depreciate over time, it can appreciate or it can even remain neutral and thus it would not be a logical decision to keep it under the header of intangible assets that can be depreciated. The amendment has not made a distinction between the provisions to be followed in a case of slump sale as well as in the case of amalgamation. This distinction was needed as in both these cases goodwill is calculated differently. 

An analysis of the recent amendments in the IT Act regarding goodwill

The decision of removing goodwill from depreciating assets has received a mixed reaction from the people of the tax industry. Here are some of the apprehensions (or we can say the negative side) of the amendment-

  1. It will increase the tax costs. All the recent deals would have to be reconsidered because the taxes would be altered now as depreciation is not allowed anymore. 
  2. The memorandum to the Finance Bill says that goodwill cannot be depreciated but it is not true. The goodwill can be depreciated in case a merger or acquisition goes wrong. There are certainly other instances too wherein the goodwill can depreciate.
  3. This proposal does not differentiate between depreciation in a lump sale vis-a-vis depreciation in a merger and acquisition deal as goodwill has a different definition in both cases. 
  4. The proposal will lead to double taxation wherein neither the buyer would benefit nor the seller. 
  5. Depreciation on goodwill is always an essential element in calculating the post-tax return of an acquisition proposal and would severely impact pay-back calculations of every M&A deal and the corresponding negotiations in the bid or offer price for an asset.

Case laws

CIT v. Smifs Securities Ltd.

Here an amalgamation occurred between YSN shares and Smifs Securities Ltd. where a bad debt was incurred by the company. The other company was asking for the depreciation of assets and thus a deduction of Rs. 54,85,430 due to the depreciation of goodwill. The other company was denied depreciation on such bad debt. It approached the Court seeking depreciation. The Hon’ble Court allowed the petitioner to deduct the value. The Court held that goodwill is an intangible asset and thus can be depreciated. It applied the principle of ‘ejusdem generis i.e. of the same kind and took goodwill to be the same as any other business or commercial right of similar nature. 

Triune Energy services P. Ltd. v. DCIT

Here the assessing officer denied the deduction in goodwill. The assessee said that since the opposite party had goodwill, thus it should be deducted. In this case, the Delhi High Court observed that goodwill is an intangible asset providing a competitive advantage to an entity and provides a company with innumerable benefits that are acquired when a person acquires a business. 

Bremko Brake India v. DCIT

In this case, the income tax tribunal held that as the buyer acquired the machinery and other things on acquiring the business, similarly he acquired the list of customers, know-how and thus, in short, has acquired the intangible assets, goodwill being one of them. 

United breweries v. ACIT

This case was different in the sense that it did not directly allow for considering goodwill as a depreciating asset unlike the decision in the above cases. It was held that an amalgamating company would not be entitled to the depreciation of goodwill if the amalgamating company is not claiming the same. 

Pitney Bowes India (P) Ltd. v. DCIT

Herein the company was denied the deduction of goodwill costs as it had not pleaded the same before the High Court and Supreme Court previously. The Court held that an alternative plea of allocating the value of Government Authorisations/Approvals (GAs) towards goodwill also cannot be accepted as the taxpayer is bound to accept the value assigned to the Government Authorisations/Approvals (GAs) by an independent valuer.


The goodwill that was erstwhile a depreciating asset is no more the same. This new decision by the government may lead to several cases being filed in court. The decision has not been received happily by many and the chances are high that it would be challenged. Goodwill, if considered as a depreciable asset, would have a positive effect on the transactions and it is wrong to exclude it from the depreciable assets. It would be interesting to see what will be the next step of the major players of the industry. 


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