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.

(Author can be contacted for further details on [email protected])


Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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April 2021