No more Depreciation on Goodwill !!
As the budget 2021 unveiled, it came up with the proposals to boost the economy and certain important proposed amendments. One of the proposed amendments was ‘No more Depreciation on Goodwill’.
The purpose of this article is to discuss the proposed amendment as the matter has always been debatable before the judiciary. Before that, let’s first understand the controversy behind the issue-
Goodwill of a business or profession has not been specifically provided as an asset either in the definition under clause 11 of section 2 of the act or in section 32 of the act. The question whether goodwill of a business is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under the said section, is an issue which came up before Hon‘ble Supreme Court in the case Smiff Securities Limited [(2012)348 ITR 302 (SC)].
Hon‘ble Supreme Court answered the question in the below manner-
Explanation 3 to section 32(1) states that “assets” shall mean Tangible assets and Intangible assets being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading 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).
Thus, as held by Hon‘ble Supreme Court, Goodwill of a business or profession is a depreciable asset under section 32 of the Act but the matter has been litigated subsequently and the proposed amendment by the Finance Bill 2021 will put the controversy to rest. The rationale has been provided in the Memorandum to Finance Bill, 2021 that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant & machinery.
Amendment proposed by Finance Bill 2021-
(a) amend clause (11) of section 2 of the Act to provide that ‘block of asset‘ shall not include goodwill of a business or profession;
(b) amend clause (ii) of sub-section (1) of section 32 of the Act to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and therefore not eligible for depreciation. Further, it is also proposed to amend Explanation 3 to sub-section (1) of the said section to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section.
(c) amend section 50 of the Act to provide that in a case where goodwill of a business or profession formed part of a block of asset for the assessment year beginning on the 1st April, 2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed.
(d) amend section 55 of the Act by substituting clause (a) of subsection (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,—
(i) in the case of acquisition from a previous owner– cost of acquisition shall be the amount of the purchase price;
(ii) in the case of acquisition as a result of gift, amalgamation etc. and where such asset was acquired by the previous owner by purchase, cost of acquisition shall be the amount of the purchase price for such previous owner; and
(iii) in any other case– shall be taken to be nil
(e) Cost of acquisition of purchased goodwill shall be the purchase price as reduced by the depreciation so claimed by the assessee before assessment year 2021-22.
These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
Disclaimer: The article is for information purposes only.
The author can be reached at capriyajain99@gmail.com
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