Can you depreciate goodwill

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All material subject to strictly enforced copyright laws. For help please see our FAQ. This content is from: Sponsored. June 30 June 29 April 30 March 31 The latest amendment will have far-reaching consequences Recording of goodwill in the books of accounts pursuant to acquisition or reorganisation of business and claim of depreciation on it has been a long-debated issue under the Indian Income Tax Law.

What is goodwill? Earlier law on depreciation 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, Inline Feedbacks.

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The revenue department, on the other hand, supported the view that it is not covered in the list of intangibles eligible for depreciation. The court, in this case, had come to the conclusion that the goodwill arising on account of excess consideration paid over value of assets acquired on amalgamation is an intangible asset. Resultantly, this judgement led to the several other judicial decisions which allowed depreciation on goodwill both in case of tax-neutral restructuring e.

It is important to note that in case of slump sale, the seller is required to pay tax on the capital gains made on sale of the business undertaking and there is no specific value ascribed to the goodwill which, in any case, forms part of this business.

Capital gains in this case is computed as the excess of sales consideration over the net worth of the business undertaking. In the past, buyers used to claim deprecation on this excess amount. Post these amendments in the Income tax laws, the provisions now do not differentiate between goodwill recognized during tax-neutral transactions such as amalgamation, demerger and non-tax neutral transactions such as slump sale.

While the seller will continue to be liable to pay capital gains tax, the buyer will not be eligible to claim depreciation. This aspect will have to be carefully evaluated so as to provide clear explanation to the tax authorities, if any such need arises, especially in case of those items which are not specifically mentioned in the list of intangibles such as the goodwill — even though it is now outside the purview of claiming depreciation on it.

Thus, now, it is apparent that the stakeholders would need to factor in these changes while formalizing any mergers and acquisition transactions or structuring any future deals.