CA Aayush Jain

CA Aayush JainIntroduction

The concept of merger and acquisition was not popular until the year 1988 in India. However, in the last five years merger and acquisition has emerged as a very important tool for growth of Indian corporates. Today, many companies are merging with each other in order to generate more revenues that the companies could have earned individually or to improve the financial performance by reducing redundancies, resulting in significant cost reduction. An important aspect in a merger and acquisition transaction is goodwill. Goodwill arises in case of such transactions when the price paid by the amalgamated company to an amalgamating company is more than the value of net assets. Many issues are being faced by the people in the industry before taking the decision of merger and acquisition amongst them one of such issues is described below.

Eligibility of Depreciation on Goodwill

A major problem that many people in the industry are facing today is that whether the goodwill arising out of amalgamation is eligible for depreciation under section 32(1)(ii) of the Income Tax Act, 1961 or not.

Answer to the above problem

The answer to the question that whether goodwill is eligible for depreciation under section 32(1)(ii) of the Income Tax Act has been given by the Supreme Court of India in the case of Smifs Securities Ltd. v. CIT, which can be read as under:

Pursuant to an amalgamation of another company with the assessee, the difference between the consideration paid by the assessee and the net value of assets of the amalgamating company was treated by the assessee as goodwill and depreciation of Rs. 54 lakhs was claimed thereon u/s 32(1)(ii). The AO rejected the claim on the ground that (i) goodwill was not an intangible asset as defined in Explanation 3 to s. 32(1) and (ii) the assessee had not paid anything for the same. The Tribunal and High Court upheld the assessee’s claim. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

Explanation 3 to s. 32 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. The words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, Goodwill is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not paid anything for the goodwill, this cannot be accepted because (a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted goodwill and (b) this aspect was not challenged by the department before the High Court.

To the same effect are the following decisions, wherein it has been held that the goodwill arising out of merger and acquisitions is eligible for depreciation:

1. Areva T & D India Ltd. v. DCIT ( Delhi High Court)

2. CIT v. Techno Shares & Stocks (Bombay High Court)

3. CIT v. Hindustan Coca Cola Beverages Pvt. Ltd.( Delhi High Court)

4. ACIT v. GE Plastics India Ltd.( ITAT Ahmedabad)


In conclusion, from the above judgments it can be safely concluded that goodwill arising on amalgamation or any merger or acquisition is eligible for depreciation under section 32(1) (ii) of the Income Tax Act, 1961.


The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization or authority. Although the author has made every effort to ensure that the information in this article was correct, the author does not assume and hereby disclaim any liability to any party for any loss, damage or disruption caused by errors and omissions, whether such errors or omissions result from negligence, accident or any other cause. The information in this document is proprietary, strictly private, personal and confidential to its recipient and should not be disclosed to any other person. It should not be displayed, distributed or reproduced in whole, or in part, nor may any information contained therein be disclosed without the prior consent of the author. Any form of reproduction, dissemination, copying, disclosure, modification, distribution and/or publication of this material is strictly prohibited and shall lead to legal consequences except where the permission of the author is explicitly taken.

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