Corporate Tax News Issue 59 - July 2021

Certain goodwill no longer eligible for depreciation

With a view to overturning a decision of India’s Supreme Court and to counter taxpayer claims for the depreciation of goodwill acquired in a business reorganization, India’s Finance Act, 2021 makes various changes to the Income-Tax Act, 1961 (ITA). These changes are likely to have a negative impact on past and future M&A transactions and other reorganizations.


The terms “depreciation” and “amortisation” are used to connote the reduction in the value of tangible and intangible assets, respectively, over a period of time due to use (it should be noted that India typically refers to the depreciation of goodwill, rather than the amortisation of goodwill). While accounting standards permit charging such a reduction to the profit and loss account, the deductibility of goodwill when computing tax liability is governed by the tax law.

India’s ITA permits the depreciation of intangible assets, although for a period of time it was unclear whether acquired goodwill could be depreciated since goodwill was not included in the list of intangible assets in the ITA, nor was the term defined. This lack of clarity gave rise to disputes between the Indian tax authorities and taxpayers, with the issue ultimately going before India’s Supreme Court in 2012 and the court concluding that goodwill arising out of an amalgamation may be depreciated. Now the Finance Act, 2021 has explicitly eliminated the ability to depreciate acquired goodwill. This abrupt change in the rules potentially could give rise to a spate of litigation.

This article provides some background on the depreciation of goodwill in India and the issues arising from the changes made by the Finance Act, 2021.

Indian tax law

Indian tax law uses the concept of a “block of assets,” under which assets are categorised into blocks depending on whether they are tangible or intangible assets. Tangible assets include buildings, machinery, plant and furniture, and intangible assets include know-how, patents, copyrights, trademarks, licences, franchises and any other business or commercial rights of a similar nature. Goodwill is not included in either definition.

Court decisions

The lack of clarity as to whether goodwill is depreciable gave rise to the question whether it could be regarded as “any other business or commercial rights of a similar nature” and thus qualify as an intangible asset. In the early 1980s, India’s Supreme Court described the term goodwill as follows:

Goodwill denotes the benefit arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition.

The court did not address whether goodwill could be depreciated, which generated more disputes, and this was exacerbated by conflicting decisions issued by various Indian courts and tribunals. Finally, in a decision issued on 22 August 2012, the Supreme Court settled the issue by ruling that goodwill arising in a scheme of amalgamation falls within the scope of the phrase “any other business or commercial rights of a similar nature” and, thus, is an intangible asset eligible for depreciation as per Explanation 3(b) to section 32(1) of the ITA.

The Supreme Court decision provided clarity—particularly, in the context of acquisitions and/or restructuring transactions—where acquiring taxpayers were able to depreciate the goodwill over a period of years, thus reducing their taxable income and tax liability. For nearly 10 years following the Supreme Court’s decision, taxpayers have been claiming depreciation of goodwill arising out of business acquisitions and other business reorganizations.

Finance Act, 2021

Finance Act, 2021 contains provisions that overturn the Supreme Court’s position in its 2012 decision. Effective 1 April 2021, the goodwill of a business or profession is not considered a depreciable asset and is specifically excluded from the definition of an asset for depreciation purposes.

To address situations where taxpayers are currently claiming depreciation on goodwill, the Finance Act provides that:

  • The written down value of a block of assets may not be increased by the cost to acquire the goodwill of a business or profession.
  • The written down value of a block of assets is to be reduced by the written down value of the goodwill falling within the block.
  • Where a taxpayer has claimed depreciation of goodwill, the written down value (WDV) of that block of assets is to be reduced by the WDV of the goodwill, with any excess following the adjustment treated as short-term capital gain. 
  • The cost of acquisition goodwill is the actual price paid and where goodwill arises from a restructuring, etc., it is the price paid by the previous owner. In all other cases, the cost of acquisition will be nil.

Issues for consideration

In a typical restructuring (e.g., M&A, demerger, slump sale, etc.), the buyer pays for tangible assets that are taken over, as well as intangible assets, including historical goodwill generated by the target company, customer databases (especially in case of service industry), etc. The changes made by Finance Act, 2021 will affect all restructuring and acquisition transactions, and as the new rules are effective from 1 April 2021, taxpayers that were previously claiming depreciation can no longer claim it, giving rise to immediate higher tax costs.

Some relevant issues that should be noted include the following:

  • It has been almost a decade since the Supreme Court issued its decision on the depreciation of goodwill. The amendments made by Finance Act, 2021 will override the Supreme Court decision. The abrupt change in the legislation—no deduction for goodwill—will lead to an immediate higher cash tax outflow for affected taxpayers and such taxpayers may have to pay more in tax, with possible interest charges.
  • Under the block of assets concept, individual assets lose their identity once they are included in the block. Thus, once goodwill formed part of an intangible assets block, it would have lost its identity. The new rules require an adjustment to be made with respect to the amount attributable to goodwill in the block, so it may be difficult to trace the actual goodwill in the block of assets.
  • With goodwill and other intangible assets forming part of the same block of assets and therefore subject to the same depreciation rate, many taxpayers would not have further classified the consideration among the intangible assets (i.e., between intellectual property rights, customer databases, copyrights, trademarks, etc.). Taxpayers may have to explore whether or not such reclassifications can be made, and when making such an assessment, should take into account the fact that previously all of the consideration would have been classified as goodwill; hence, the possibility of the tax authorities denying a taxpayer’s claim cannot be ruled out.
  • Going forward, the sale of a business in which goodwill is recorded in the books of account will attract capital gains tax. While it provides that the WDV of goodwill as on 31 March 2021 will be considered the cost of acquisition, whether the taxpayer can index such WDV will need to be evaluated.


The amendments to the goodwill depreciation rules will have a far-reaching impact on M&A transactions. Deals could be negatively affected, with sellers wishing to monetise the goodwill created/generated by it over the years and purchasers disallowed a deduction of this amount. India’s tax authorities have opined that goodwill cannot reduce in value, but it appears that the authorities may have lost sight of the fact that due to various factors, goodwill so acquired could be wiped out rather than appreciate in value. Also, the costs incurred to purchase goodwill involve actual outflows, not mere book entries and disallowing depreciation claims on acquired goodwill could lead to unrecoverable costs. This may have the unintended consequence that buyers may start making itemised bifurcations of assets acquired.

Aakash Uppal

Jagat Mehta