Depreciation on goodwill as per income tax act

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CA Nimesh Maheshwari (Querist)
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10 May 2013 A partnership firm got itself converted into a public company under part IX of Companies Act, 1956. During the course of conversion the company paid the consideration (by way of issue of equity share capital at par value) in excess of the capital employed by the partners as on the date of conversion. This has lead to creation of goodwill in the books of accounts of the newly incorporated company. Now the query is relating to depreciation on goodwill created. In light of recent judgement by Honorable Supreme Court of India in the case of Smifs Securities Ltd., Goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961. In the light of the above judgement can the company claim depreciation on goodwill? Please consider that in the above mentioned case law the goodwill did came into existence as a result of amalgamation of two companies and in the company in the question above, goodwill has arisen as a result of conversion under Part IX of the Companies Act, 1956.

TKKKKKK

TKKKKKK (Expert)
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10 May 2013 claim depreciation at 25%. It is intangible asset.

CA Nimesh Maheshwari

CA Nimesh Maheshwari (Querist)
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10 May 2013 Dear Tarannam,

Thanks for the reply.

But another view is that since this goodwill has been generated not as a result of merger or acquisition, the A.O. can very well question the very essence of goodwill. That is to say, he can very well say that the value of assets was Rs. 10 crores but the consideration paid has been manipulated and given as 11 crores. Thus 1 crore is extra payment and will not be elligible for depreciation.

Can you please refer some case law and quote something in language of law that is more appealing.

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TKKKKKK

TKKKKKK (Expert)
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10 May 2013 nimesh ji...

read this link

http://thefirm.moneycontrol.com/story_page.php?autono=519086

CA Nimesh Maheshwari

CA Nimesh Maheshwari (Querist)
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14 May 2013 Dear Tarannum,

Thanks for the reply. It has helped me in some of doubts.

On the basis of my reading of the article; I can make out that the goodwill generated during acquisition of busines can be depreciated. But would the same apply when it is the case of CONVERSION? that is to say, change in form of business.

TKKKKKK

TKKKKKK (Expert)
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14 May 2013 If you paid for the goodwill, you can treat it as asset. I m searching the case or data about that kind of case. I ll post u when i get the information. this link is also supportive . In which one line is
since one of the basic condition for finding the value of asset is “What’s the consideration paid for that asset”, read this
http://www.taxfaq.in/depreciation-on-goodwill-and-goodwill-is-treated-as-asset.html
https://www.caclubindia.com/articles/valuation-of-goodwill-11681.asp

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CA Nimesh Maheshwari

CA Nimesh Maheshwari (Querist)
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20 May 2013 Dear Tarannum,

I have gone through the article and it says about the goodwill in accounting terms. As per AS 26 isuued by the ICAI and notified by NACAS, I have no doubt as to the amortisation of goodwill while preparing books for the year in compliance with Companies Act 1956.

However, the complexity arises when we talk about depreciation on goodwill as per Income Tax Act 1961.

I am waiting for the case laws if you could find out any.

TKKKKKK

TKKKKKK (Expert)
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20 May 2013 http://taxguru.in/income-tax-case-laws/depreciation-on-goodwill-is-allowable-under-the-income-tax-act-1961.html

http://taxguru.in/income-tax-case-laws/depreciation-on-goodwill-is-allowable-under-the-income-tax-act-1961.html

I didn't read that but u read may be it will be helpful.

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