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SC Rules Goodwill Is A Depreciable Intangible Asset

The Supreme Court (SC) has recently delivered an important ruling on the depreciability of goodwill arising on amalgamation. The SC has held that the excess amount paid over and above the book value of the assets taken over on amalgamation, being goodwill arising on amalgamation, is eligible for depreciation. Taxand India studies the case of Smifs Securities Limited (SSL) and how the SC came to their decision.

SSL amalgamated with YSN Shares & Securities Private Limited. Within this process goodwill had arisen in the books of SSL due to the excess consideration paid to the Transferor, over and above the book value of the assets taken over.The taxpayer claimed depreciation on goodwill, treating the same to be an intangible asset. The depreciation on goodwill was not allowed by the Revenue Authorities (RA). On appeal, both the Commissioner of Income-tax (CIT) and the Income-tax Appellate Tribunal(Tribunal) ruled in favour of the taxpayer and allowed depreciation on goodwill. On further appeal, the High Court held that no question of law arose in the appeal and dismissed the same.

The SC ruled in favor of the taxpayer by holding that goodwill would fall within the ambit of the words 'any other business or commercial right of similar nature' within the Income Tax Act.

The main contention of the RA was that no amount was paid towards goodwill. The SC observed that the CIT and the Tribunal had made a finding that, as part of the Scheme, assets and liabilities were transferred by the Transferor for a consideration, and that the difference between the cost of the net assets and the amount paid, constituted goodwill being a capital right. This increased the market worth of SSL. The SC did not see any reason to interfere with the factual finding of the CIT(A) and the Tribunal.

Discover more: SC ruling on Smifs Securities Limited

Taxand's Take

The issue of depreciation on goodwill has seen a tremendous amount of litigation in the recent past. While there have been conflicting judgments regarding depreciation on goodwill simpliciter / arising on amalgamation, on the issue of depreciation on goodwill represented by intangible assets, the Courts have by and large held the matter in favour of the taxpayers. Under the Direct Taxes code it is important for multinationals to note that goodwill is specifically included in the definition of business capital assets.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author