GOODWILL NO LONGER AN ASSET ELIGIBLE FOR DEPRECIATION

The Finance Bill, 2021 (“Bill”) has proposed to disallow the depreciation on goodwill. The Bill proposes to make amendments by inserting the words “not being goodwill of a business or profession” in Section 2 (11) (b), Section 32 (1) (a) and Explanation 3(b) to Section 32(1) of the Income Tax Act, 1961 (“the IT Act”). Post the amendment, goodwill of a business or profession shall not be considered as an asset eligible for depreciation.

The proposed amendment would be contrary to the many judicial pronouncement including the decision of Hon’ble Supreme Court in the Commissioner of Income Tax, Kolkata v. Smifs Securities Ltd. [2012]348 ITR 302 (SC).

In the aforementioned case the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to Smifs Securities Ltd (“Assessee” ) for a consideration and the difference between the cost of an asset and the amount paid constituted goodwill and that the Assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the Assessee stood increased.

The Supreme Court while deciding whether goodwill is an asset within the meaning of Section 32 of the IT Act, and whether depreciation on goodwill is allowable under the said Section, held that Explanation 3 to the Section states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. By applying the principle of ejusdem generis while interpreting the expression “any other business or commercial rights of similar nature” the court held that Explanation 3 (b) indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature”. Hence, “Goodwill” is an asset under Explanation 3(b) to Section 32(1) of the Act.

1. Proposed Amendment
   

   Section 2 (11) of the IT Act defined “block of assets” to mean a group of assets falling within a class of assets comprising -

   1. tangible assets, being buildings, machinery, plant or furniture;
   2. intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature,

   in respect of which the same percentage of depreciation is prescribed;

   The Bill proposes to make amendment to the definition through the insertion of the words “not being goodwill of a business or profession,” in Section 2 (11) (b).

   Section 32 (1) of the Act provides for depreciation in respect of;

   1. buildings, machinery, plant or furniture, being tangible assets;
   2. know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998.

   The Bill proposes to make amendment to the Section through the insertion of the words “not being goodwill of a business or profession,” in Section 32 (1) (a) and Explanation 3 to the

   Section. Hence, goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and, hence, will not be eligible for depreciation.