CA Aayush Jain
Introduction
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)
Conclusion
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.
(Author can be contacted for further details on aayush.jain993@gmail.com)
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(Republished with Amendments by Team Taxguru)
