Treatment of goodwill:
♣ Accounting Standard 14 (Accounting for Amalgamation) allows amortization of goodwill, acquired in a business acquisition, over a period not exceeding 5 years unless a longer period can be justified.
♣ Ind AS 103 (Business Combinations) requires amortization of goodwill over its useful life if the same is finite. But if the useful life of the goodwill is determined as indefinite, then there shall not be any amortization.
♣ Section 32 of the Income-tax Act allows depreciation on tangible and intangible assets which is deductible from the income computed under the head profits and gains from business or profession.
As per Explanation 3 to Section 32(1), ‘intangible assets’ eligible for depreciation are know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. The term ‘goodwill’ of a business or a profession has not been included specifically in the definition of an ‘intangible asset’. Further, it is also not included in the definition of ‘Block of Assets’ as defined in section 2(11).
Supreme Court in case of PCIT v Zydus Wellness Ltd.  – The Apex court upheld depreciation would be allowed on the goodwill recognized in a business combination.
Budget 2021 – The Finance Ministry is of the view 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. The Budget 2021-22 proposes that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation.
The following amendments have been proposed by Budget 2021-22:
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) in the case falling under sub-clause (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and
(iii) in any other case, shall be taken to be nil