Can i depreciate goodwill

The Government considers that it is impractical to change the treatment of self-generated intangible assets including goodwill , the costs associated with which will remain largely immediately deductible.

In addition, there is not a strong case to change the treatment of acquired goodwill and intangible assets that are not subject to statutory lives — as this would involve a substantial cost to revenue and it is not clear that it would have a significant impact on investment and innovation. While start-up enterprises will generally claim the expenses in building intellectual property as revenue employee expenses rather than depreciating them, faster depreciation will decrease the cost of investment in these asses for larger companies that can better exploit and commercialise the assets.

This in turn will enable smaller innovative companies to better market their intellectual property and similar intangible assets. Intangible assets that currently has a statutory effective life will be able to be reassessed, these are:.

A business will self-assess the effective life for an intangible asset with a statutory effective life the same way it would for a tangible asset. That is, it would use the provisions of ITAA s which states that you:. Intangible asset depreciation. Though goodwill is not a term defined in the Indian tax laws, common dictionaries describe it as the established reputation of a business regarded as a quantifiable asset. Lord Macnagthen described it as the benefit or advantage of the good name, reputation and connection of a business.

He also noted that goodwill has no independent existence and it must be attached to the business. Therefore, whenever a business is acquired, the buyer also by default acquires the goodwill associated with such business. Usually, goodwill which is self-generated over a period of time is not recorded as an asset in the books of accounts of the seller. However, while valuing the business and negotiating the consideration, the parties not only take into account the market value of the tangible and intangible assets already recorded in the books of the seller, but also that of the goodwill associated with the said business.

Thus, any premium paid by the buyer to seller over and above the recorded net worth of the business, i. Indian Income Tax Law provides for depreciation on various tangible and intangible assets, which are owned and used by the taxpayer for the purposes of business see section 32 of the Indian Income Tax Act, Earlier, the scope of intangible assets was wide enough to cover any know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Also, the manner in which the other assets and liabilities of the business were valued had a direct bearing on the quantum of goodwill and was often disputed by the tax department. The opinion of the courts has been divided on treatment of goodwill in case of internal reorganisation of business within a group of companies, where in essence there is no transfer of ownership to a third party.

The issue has been even more contentious in case of transfer of business under a tax neutral amalgamation or demerger, as some provisions require the transferee company to record the assets at the same value as they were appearing in the books of the transferor and also bar claim of depreciation by the transferee in excess of what could have been claimed by the transferor.

The memorandum issued by the tax department to explain the said amendment expressly states that though the Supreme Court had held goodwill to be a depreciable asset, it may not be justified to treat goodwill as a depreciable asset as depending on how a business is run, goodwill may actually see appreciation in its value. In this background, by excluding goodwill from the scope of intangible assets eligible for depreciation, the tax department has sought to put many controversies to rest in one stroke.

Amendment to Section 32 1. Clause ii to section 32 1 has been proposed to be amended to provide that 'goodwill of a business or profession' shall not be eligible for depreciation. Further, an amendment has been proposed to Explanation 3 to Section 32 1 which defines the expression 'assets'. It has been proposed that 'goodwill of a business or profession' shall not be treated as an 'intangible asset' for Section 32 1.

Amendment to Section Section 50 is a special provision for computation of capital gains in case of depreciable assets. A new proviso has been proposed to be inserted to Section 50 2 that the CBDT may prescribe a manner to determine the written down value of the block of asset and short-term capital gain if any if goodwill is forming part of the block of asset and depreciation has been claimed on it. Section 55 provides the meaning of various terms including 'cost of acquisition' for computation of capital gains.

It provides that 'cost of acquisition' of a capital asset being goodwill shall be the purchase price if goodwill has been acquired by purchase. In other cases, it will be nil except in cases covered by sub-clauses i to iv of section 49 1 i [assets acquired through will, gift, succession, etc. The Finance Bill proposes to amend section 55 to provide that the 'Cost of Acquisition' of capital asset being goodwill shall be as follows:.

A Proviso is proposed to be inserted to Section 55 2 a that if the assessee has claimed depreciation on goodwill before the Assessment Year , then the cost of purchase of such goodwill shall be reduced by such amount of depreciation.

The amendments proposed to exclude 'goodwill' from 'intangible assets' will have a deep impact on assessees engaged in business or profession. The proposed amendment along with their challenges have been discussed below. Why only goodwill has specifically been excluded from 'intangible asset'? The term 'intangible asset' has been defined in Section 2 11 and Explanation 3 to section After the proposed amendments, the 'intangible assets' will be intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature not being goodwill of a business or profession.

The Memorandum explaining the Finance Bill, provides the following reasons for doing this. The actual calculation of depreciation on goodwill is required to be carried out in accordance with various other provisions of the Act, which include Section 43 6 C , Explanation 2 of Section 43 6 c , Section 43 1 , etc.

There are various components and a variety of elements under an umbrella that together accounts for and gives rise to the goodwill. It includes copyrights, trade-marks, franchises, etc. This view is also confirmed by the Kerala High Court in the case of B. Raveendran Pillai v. CIT [] Taxman Kerala. The High Court held that when the goodwill is paid for ensuring retention and continued business, it is certainly for acquiring a business and commercial rights and it is certainly comparable with trademark, franchise, copyright etc.

If goodwill is not eligible for depreciation on account of provisions contained in Section 43 6 C , Explanation 2 of Section 43 6 c , Section 43 1 , etc.

Dispute on the classification of an intangible asset. Intangible assets, after the proposed amendment, would means know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature not being goodwill of a business or profession.

The term 'any other business or commercial rights of similar nature' is wide enough to cover ample of things and thus may be subject to litigations in future. The Supreme Court held that goodwill falls under the expression 'any other business or commercial right of a similar nature '.

As goodwill is specifically excluded from the meaning of intangible assets, it will be prudent for the buyer to identify the real nature of the new intangible asset acquired from the seller. The Delhi High Court in the case of Triune Energy 1 held that if a purchaser acquires a business on a going concern basis by paying more than the fair market value of the net tangible asset, the difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser.

Whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. Thus, the specified intangible assets acquired under slump sale agreement are in the nature of 'business or commercial rights of similar nature'. After identifying the real nature of such business or commercial rights, the next step is to get its actual cost for recognition in the books of accounts of the buyer.

All other assets and liabilities should be recognized in the books of the new entity at the book value. As per Para 15 of ICDS-V Tangible Fixed Assets where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis.