gtag('config', 'UA-154374887-1');

Depreciation on Goodwill of a Business or Profession Not Allowed and to be taxed as Capital Gains on transfer: Budget 2021

depreciation-on-goodwill-of-a-business-or-profession-not-allowed-and-to-be-taxed-as-capital-gains-on-transfer-budget-2021

Finance Bill, 2021 has amended the provisions of Income Tax Act, 1961 (“Act”) to disallow depreciation on the goodwill of a business or a profession. Depreciation on self-generated goodwill is not allowed under the Income Tax Act. With this amendment, depreciation on acquired or purchased Goodwill of a business or profession cannot be claimed from 01.02.2021. Goodwill is expressly excluded from the block of ‘Intangible Assets’. Further, a deduction for the amount paid for acquiring Goodwill shall be allowed on sale of Goodwill.


    Introduction


    The Budget 2021 has clarified the government’s position on the allowability of depreciation on Goodwill. It is stated that in order to provide certainty, it is proposed to clarify that no depreciation on Goodwill shall be allowed. However, the deduction for the amount paid for acquiring Goodwill shall be allowed on sale of Goodwill


    It is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill.


    Read Also: Clarification on Depreciation on Goodwill-Budget 2021


    As per section 32, depreciation allowance is available on both tangible assets and intangible assets. Section 32 has defined the expression intangible asset to mean 'know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature'. Since, goodwill is not a tangible asset and is not specifically mentioned in the definition of intangible asset, courts have interpreted the same as intangible assets which falls under the expression ‘any other business or commercial rights’.



    Goodwill is typically generated in the books of accounts when restructuring and acquisition viz., amalgamation, demerger, slump sale etc. takes place. 


    The acquiring company pays a premium over the fair market value of the company's net assets taken over and goodwill is recorded as the balance amount as per Accounting Standards. It is illustrated with the following example-


    Particulars

    Amount (in Rs.)

    Tangible Assets

    200

    Inventory

    300

    Current Assets

    250

    Total Assets

    750

    Loans

    150

    Current Liabilities

    400

    Total Liabilities

    550

    Net Assets

    200

    Consideration

    600

    Goodwill

    400


    In this case, goodwill of Rs. 400 is acquired or purchased goodwill. Suppose, this is a case of merger/acquisition, goodwill is computed as the difference of price paid by the buyer and the net asset taken over. In case, goodwill is actually included in the assets as a separate asset (like in case of slump sale), then the buyer actually pays the price for acquiring the goodwill as an asset rather than arising as a result of the balancing figure.


    The proposed amendments have not made any differentiation and have disallowed the depreciation on goodwill arising from all restructuring transactions.


    Mergers & Acquisitions of business costs to go up after Budget 2021 as it disallowed depreciation on goodwill. This impacts not just internal group restructurings but also business acquisitions. This is going to impact the cost of all business restructurings. The new restriction is not only limited to goodwill arising out of tax neutral mergers and demergers but also to goodwill arising from taxable business acquisitions as depicted above.


    Tax treatment of depreciation on goodwill could be broadly divided into:

    1. Self-generated goodwill; and

    2. Goodwill on business acquisition


    According to prevailing provisions, the cost of acquisition of self-generated goodwill is taken as ‘Nil’ and hence no depreciation is allowed on self generated goodwill.


    On the other hand, there is no express provision in the Income Tax Act to disallow depreciation on purchased or acquired goodwill. Presently, depreciation on acquired or purchased goodwill is allowed on the basis of a Supreme Court’s decision wherein it was held that depreciation could be claimed on goodwill for tax purposes.


    Judicial Decision Overruled to disallow depreciation on goodwill


    This amendment intends to overrule the decision of Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd. [2012] 348 ITR 302 (SC) where it is held that the goodwill acquired on amalgamation (being excess of the consideration paid over the value of net assets acquired) by the amalgamated company would fall under the expression 'any other business or commercial right of a similar nature' and qualify to be treated as an intangible asset eligible for depreciation while computing business income.



    The issue before the Court was “Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on `goodwill' is allowable under the said Section?


    Section 32 of the Income-tax Act, 1961 allows depreciation on both tangible and intangible assets and clause (ii) thereof enumerates intangible assets on which depreciation is allowable. 


    The assets which are included in the definition of ‘intangible assets’ given in clause (ii) are know-how, patents, copyrights, trademarks, licenses, franchises, etc., and any other business or commercial rights of similar nature are also included. 


    Goodwill is a bundle of rights which included, inter alia, patents, trademarks, licenses, franchises, etc. Therefore, all these rights are similar to the rights under goodwill. Applying the principles of Ejusdem Generis the meaning has to be extended to the phrase ‘other business or commercial rights of similar nature’. 


    The Supreme Court interpreted that ‘Goodwill’ falls under the expression any other business or commercial right of a similar nature as defined in Section 32(1)(ii).


    Hence, goodwill is an intangible asset entitled for depreciation. The finding that the difference between cost of asset and amount paid constituted goodwill and that assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which market worth of assessee Company stood increased is affirmed by the Apex Court.


    The Supreme Court’s decision in the case of Smifs Securities Ltd. (supra) is a landmark ruling widely relied upon by many Tribunals and High Courts in deciding the identical issue. Still, the matter has been litigated subsequently since there were no detailed findings by the Supreme Court.


    Amendment in section 32 overturned this decision and the position now is that depreciation on goodwill of a business or profession cannot be claimed from the current AY 2021-22. In other words, the Finance Bill, 2021 has put the above controversy to rest and has proposed a series of amendments on a prospective basis to clarify that no depreciation would be allowable on goodwill.


    Interestingly, in 2017, a question was raised in the Parliament to clarify-


    (a) whether the Government has noticed that several companies are evading taxes through amalgamation and consequent creation of goodwill in its books of account used for tax depreciation leading to lower tax;


    (b) if so, the details thereof;


    (c) whether the Government proposes to restrict such tax evasion by amending Section 32(1) of Income Tax Act, 1961 providing that no depreciation on goodwill as an intangible asset would be allowed to the successor company; and


    (d) if so, the details thereof and the action taken so far in this regard?


    At that time, the Minister of State in the Ministry of Finance, replied as follows-


    (a) & (b): On the legal issue of claim of depreciation on “goodwill”, Supreme Court in CIT v. Smirf Securities Ltd. [(2012) 348 ITR 302 (SC)] has held that “goodwill” is to be treated as an asset under Explanation 3 (b) of Sec. 32(1) of the Income-Tax Act, 1961 and is, therefore, eligible for depreciation. However, its quantification/valuation, being a factual issue, remains a contentious one. Therefore, the said judgement and specific facts and circumstances of a case require consideration to determine if there is any tax avoidance in such transactions.


    However, specific instances on this issue are not maintained in a centralized manner.


    (c)& (d): No proposal to amend the provision is presently under consideration.


    Though there was no proposal to amend the law in 2017, the same is amended in 2021. The rationale to amend the law is stated in the Memorandum Explaining the Provisions in the Finance Bill, 2021. As per the Memorandum, goodwill in general is not a depreciable asset and its value may depend upon how a business runs. Further, the Memorandum has discussed the Supreme Court’s case of Smifs Securities (supra) and clarified that while in this case it was held that goodwill of a business or profession is a depreciable asset, the actual calculation of depreciation on goodwill is dependent upon various provisions and on application of the provisions of the Act the depreciation in some situations would be nil. 


    As per the proposed amendments, depreciation will not be available on goodwill from AY 2021-22. On sale or transfer of Goodwill, Capital gain income will arise and the amount paid for acquiring the goodwill will be allowed as deduction. Further, the WDV as on 01.04.2020 will be the cost of acquisition of the goodwill in case depreciation is claimed thereon by the assessee. Hence, the depreciation already claimed and allowed on goodwill will not be reversed or requires any adjustment.


    Amendments are proposed in the following provisions of the Income Tax Act, 1961 by the Finance Bill, 2021 to disallow depreciation on the goodwill and charging income from transfer of goodwill under capital gains


    Definition of Block of Assets [Section 2(11)] is proposed to be amended to exclude goodwill of a business or profession.


    Section 2(11) which defines ‘block of assets’ has been amended to clarify it does not include goodwill of a business or profession. The definition of the 'block of assets', is proposed to be amended to specifically exclude goodwill of a business or profession. Excluding such goodwill from the definition of ‘block of assets’ makes the same ineligible for claiming tax depreciation.


    Similar amendment to exclude goodwill is proposed in Section 32.


    Section 32 has been amended to clarify that goodwill of a business or profession shall not be considered as an intangible asset for the purpose of the section 32(1)(ii) and therefore not eligible for depreciation. 


    Section 50 proposed to be amended to prescribe the manner of Computing the capital gains on transfer of goodwill


    Section 50 is proposed to be amended to provide for a prescribed manner of calculating WDV of block of assets as on 01.04.2020 in case of goodwill of a business or profession where depreciation is claimed for computing short term capital gains on transfer of such goodwill.

    Section 50 which provides for computation of capital gains in case of depreciable assets has been amended to provide that where goodwill of a business or profession forms part of block of assets for assessment year 2020-21 and depreciation has been claimed, the written down value of the block of assets and short term capital gains would be determined in the prescribed manner. The rules prescribing the computation mechanism will be notified in due course.


    The proposed amendment in Section 55 provides that the cost of acquisition of goodwill of a business or profession shall be the price paid by the assessee for acquiring such goodwill. In case it is acquired as a result of gift, amalgamation etc. and goodwill was acquired by previous owner, then the cost of acquisition of such goodwill shall be the cost to the previous owner.


    It has also been clarified that where depreciation has been claimed on the goodwill of a business or profession prior to assessment year 2021-22, the same would be reduced from the actual cost of acquisition.


    It should be noted that Once legislated, the aforementioned proposals shall be effective from 1st April 2020.


    Other Issues for Consideration


    Impact on WDV of Block of Assets of Intangible Assets with Goodwill and includes Other Intangibles


    The proviso to substituted section 55 provided for reducing the cost of acquisition of goodwill with the amount of depreciation already allowed for goodwill. But there is no express provision to reduce or adjust the WDV of the block of assets in which the goodwill belongs.


    In case the block consists of only goodwill, there is no complexity in not claiming the goodwill on such block of assets.


    In case the block consists of goodwill as well as other intangibles, in such a case there is no express provision to adjust the block with the amount of goodwill. In this case, whether the depreciation would be required to be computed on the WDV of the block of assets without any adjustment for goodwill or depreciation can be claimed on the entire block of assets. A corresponding adjustment for reducing the WDV of the block of assets consisting of intangible assets including goodwill as on 01st April 2020 with the standalone WDV amount attributable to the goodwill is missing.


    This needs to be clarified by the CBDT as to how the depreciation on this block of intangibles will be computed for the AY 2021-22. Alternatively,  a suitable amendment is required for downward adjustment of block of assets of intangible assets.


    Impact on Unabsorbed Depreciation related to depreciation on goodwill


    As stated in the succeeding paragraphs,  the amendment to disallow the depreciation on goodwill is prospective in nature. The depreciation already allowed will not be reversed or requires any adjustment. Hence, there will be no impact on the amount of unabsorbed depreciation amount which relates to depreciation on goodwill. The same entire amount of unabsorbed depreciation as available prior to AY 2021-22 will be eligible to set-off after the said assessment year.


    Impact on other intangible assets which are not expressly included in section 32


    The proposed amendment only excludes goodwill from the list of eligible intangibles from allowing depreciation. Other intangible assets if found eligible for depreciation, the same will be allowed.


    Impact on pending assessment or appeals for assessment years prior to AY 2021-22


    Since the amendment is prospective in nature, it appears that the legislation intends to  apply the provision only from AY 2021-22 and not from the preceding years. Hence, in case any assessee has claimed depreciation on goodwill earlier, it appears that the same would be allowed for those earlier assessment years if otherwise eligible as per the Supreme Court decision.


    Impact on goodwill purchased on or after 01.04.2020


    The proposed amendment states that no depreciation will be allowed on goodwill of a business or profession from AY 2021-22. However, the position of the assessee with respect to claim of depreciation on the goodwill prior to AY 2021-22 is not disturbed. But it is provided that such goodwill will be taxed to capital gains under section 50 of the Act. Thus, the WDV of the goodwill as on 1st April 2020 will be deemed to be the cost of acquisition and no indexation benefit will be available on transfer of such goodwill for consideration.


    The computation mechanism for capital assets being goodwill acquired on or after 01.04.2020 will be computed in the normal manner in which capital gains on transfer of a capital asset is computed since no depreciation will be allowed in this case and such goodwill fails to qualify as a depreciable asset. In case the capital asset so transferred is a long term capital asset, the indexed cost will be allowed and the gain will be chargeable to tax as a long term capital gain. In case goodwill is acquired for less than 36 months, the same will become short term capital gains. 


    The Amendment - Whether prospective or retrospective


    The amendment will take effect from AY 2021-22 which is yet to commence. From this angle, the amendment is prospective. But this amendment is proposed on 1st February, 2021 and covers not only transactions which will take place after 1st feb., 2021 but also covers which already took place prior to 01.02.2021 since the commencement of the FY from 01.04.2020. The price of restructured business might have factored in the depreciation on goodwill on the basis of the prevailing law at the time of concluding the business transactions prior to 1st February. It does not apply on goodwill created on or after 01.04.2020. Ideally it should have been made applicable from 01.04.2021 to maintain equilibrium, but it did not happen.


    A company that has acquired a business as a slump-sale or through a merger would have factored in tax savings on account of depreciation on goodwill in determining the transaction price. A retrospective blanket denial of depreciation on goodwill will impact the completed transactions prior to February 1, 2021. Further, those business deals which are nearing completion, the price may require re-adjustment for foregoing the benefit of tax savings on depreciation on goodwill.


    Hence, since the amendment also impacts prior transactions, the amendment is retrospective in nature though in a limited sense.


    All the proposed amendments related to the Provisions for Depreciation on Goodwill of a business or profession explained


    Depreciation on Goodwill


    Section 2 of the Act provides the definitions for the purposes of the Act. Clause (11) of the said section defines “block of assets” to mean a group of assets falling within a class of assets comprising, tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. 


    Section 32 of the Act relates to depreciation. Sub-section (1) of the said section provides for deduction on account of depreciation on tangible assets (Building, machinery, plant and furniture) and intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature) acquired on or after the 1st day of April, 1998 which are owned, wholly or partly by the assessee which are used wholly and exclusively for the purpose of business and profession while computing the income under the head “Profits and gains of business or profession”.


    Further, Explanation 3 to sub-section (1) provides that for the purposes of this sub-section, the expression "assets" shall mean to be tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.


    Section 50 of the Act provides for conditions for the applicability of provisions of section 48 and 49 for computation of capital gains in case of depreciable assets where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under this Act.


    Section 55 of the Act provides the meaning of terms "adjusted", "cost of improvement" and "cost of acquisition" for the purposes of sections 48 and 49 of the Act. In relation to a capital asset, being goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy rights, stage carriage permits or loom hours, it is defined to mean the purchase price if it is acquired by purchase. In other cases, it is nil except when it is covered by sub-clauses (i) to (iv) of sub-section (1) of section 49.

      

    It is seen that Goodwill of a business or a profession has not been specifically provided as an asset either in the definition under clause (11) of section 2 of the Act or in section 32 of the Act. The question whether goodwill of a business is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under the said section, is an issue which came up before Hon‘ble Supreme Court in the case  Smiff  Securities  Limited  [(2012)348  ITR  302  (SC)].  Hon‘ble Supreme Court answered the question in affirmative. Thus, as held by Hon‘ble Supreme Court, Goodwill of a business or profession is a depreciable asset under section 32 of the Act. 


    However, there are other sections of the Act which are relevant for calculation of depreciation under section 32 of Act. These are as under:


    Sixth proviso the section 32 of the Act mandates that in a case of succession/amalgamation/demerger during the previous year, depreciation is to be calculated as if the succession or amalgamation or demerger has not taken place during the previous year and apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.


    Explanation 2 of sub-section (1) of section 32 of the Act provides that the term “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43 of the Act.


    Clause (c) of sub-section (6) of section 43 of the Act, with respect to block of assets, inter-alia, provides that the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year is to be increased by the actual cost of any asset falling within that block, acquired during the previous year.


    Sub-section (1) of section 43 of the Act which defines “Actual cost” as actual cost of the assets to the assessee. 


    Explanation 7 to this section covers a situation where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company. It clarifies that in this situation, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.


    Explanation 2 of clause (c) of sub-section (6) of section 43 of the Act also covers a situation where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company. It also clarifies that in this situation, the actual cost of the block of asset in the hand of the amalgamated company would be written down value of that block in the immediate preceding previous year in the case of amalgamating company as reduced by depreciation actually allowed in that preceding previous year.


    Thus, while Hon‘ble Supreme Court has held that the Goodwill of a business or profession is a depreciable asset, the actual calculation of depreciation on goodwill is required to be carried out in accordance with various other provisions of the Act, including the ones listed above. Once we apply these provisions, in some situations (like that of business reorganization) there could be no depreciation on account of actual cost being zero and the written down value of that assets in the hand of predecessor/amalgamating company being zero. 


    However, in some other cases (like that of acquisition of goodwill by purchase) there could be valid claim of depreciation on goodwill in accordance with the decision of Hon‘ble Supreme Court holding goodwill of a business or profession as a depreciable asset. 


    It is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant & machinery. Hence there appears to be little justification or depreciation on goodwill even in the category of cases referred to in the immediately preceding paragraph. 


    In view of above discussion, it has been decided to propose that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In a case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill. 


    Therefore, to give effect to the above decision, it has been proposed to,


    (a) amend clause (11) of section 2 of the Act to provide that “block of asset” shall not include goodwill of a business or profession;


    (b) amend clause (ii) of sub-section (1) of section 32 of the Act to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and therefore not eligible for depreciation. Further, it is also proposed to amend Explanation 3 to sub-section (1) of the said section to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section. 


    (c) amend section 50 of the Act to provide that in a case where the goodwill of a business or profession formed part of a block of asset for the assessment year beginning on the 1st April, 2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed.


    (d) amend section 55 of the Act by substituting clause (a) of sub-section (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trademark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,-


    (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and


    (ii) in the case falling under sub-clause (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and 


    (iii) in any other case, shall be taken to be nil


    (e) provide that in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous owner (either directly or through modes specified under sub-clause (i) to (iv) of sub-section (1) of section 49) and any deduction on account of depreciation under section 32 of the Act has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st April, 2021, then the cost of acquisition will be the purchase price as reduced by the depreciation so obtained by the assessee before the previous year relevant to the assessment year commencing on 1st April, 2021.


    These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years. 


    Amendment of section 2. 


    3. In section 2 of the Income-tax Act,–– 


    (i) in clause (11), in sub-clause (b), after the words “or commercial rights of similar nature,”, the words “not being goodwill of a business or profession,” shall be inserted; 


    Amendment of section 32.


    7. In section 32 of the Income-tax Act, in sub-section (1),– 


    (a) in clause (ii), after the words, figures and letters, “after the 1st day of April, 1998,”, the words “not being goodwill of a business or profession,” shall be inserted; 


    (b) in Explanation 3, in clause (b), after the words “or commercial rights of similar nature”, the words “, not being goodwill of a business or profession” shall be inserted. 


    Amendment of section 50.


    18. In section 50 of the Income-tax Act, in clause (2), the following proviso shall be inserted, namely:–– 


    “Provided that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in such manner as may be prescribed.”


    Amendment of section 55.


    20. In section 55 of the Income-tax Act, in sub-section (2), for clause (a), the following clause shall be substituted, namely:––


    “(a) in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,— 


    (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and 


    (ii) in the case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and 


    (iii) in any other case, shall be taken to be nil: 


    Provided that where the capital asset, being goodwill of a business or profession, in respect of which a deduction on account of depreciation under sub-section (1) of section 32 has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st day of April, 2021, the provisions of sub-clauses (i) and (ii) shall apply with the modification that the total amount of depreciation obtained by the assessee under sub-section (1) of section 32 before the assessment year commencing on the 1st day of April, 2021 shall be reduced from the amount of purchase price;”. 


    Amended Provisions disallowing depreciation on goodwill explained


    Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions. 


    Clause (11) of the said section, inter alia, defines “block of assets” to  mean a group of assets falling within a class of assets comprising tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.  


    It is proposed to amend the said clause so as to exclude goodwill of a business or profession from the purview of “block of asset”. 


    Clause 7 of the Bill seeks to amend section 32 of the Income-tax Act relating to depreciation. 


    Sub-section (1) of the said section provides for deduction on account of depreciation on tangible assets (building, machinery, plant and furniture) and intangible assets (know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature) acquired on or after the 1st day of April, 1998, and are owned, wholly or partly by the assessee and are used wholly and exclusively for the purpose of business and profession while computing the income under the head ‘Profits and gains of business or profession’. 


    It is proposed to amend clause (ii) of the said sub-section (1) so as to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and, hence, not eligible for depreciation. 


    Explanation 3 to the said sub-section defines the expression “assets” to mean tangible assets, being buildings, machinery, plant or furniture; and intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. 


    It is proposed to amend the said Explanation 3 so as to provide that goodwill of a business or profession shall not be considered as an asset for that purposes of the said sub-section. 


    These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. 


    Clause 18 of the Bill seeks to amend section 50 of the Income–tax Act relating to special provision for computation of capital gains in case of depreciable assets. 


    The said section, inter alia, provides for certain conditions for the applicability of provisions of sections 48 and 49 for computation of capital gains in case of depreciable assets, where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under the said Act. 


    It is proposed to insert a proviso in the said section so as to provide that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in such manner as may be prescribed. 


    This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. 


    Clause 20 of the Bill seeks to amend section 55 of the Income-tax Act relating to the meaning of “adjusted”, “cost of improvement” and “cost of acquisition”. 


    Clause (a) of sub-section (2) of the said section provides that for the purposes of sections 48 and 49, "cost of acquisition" in relation to a capital asset, being goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy rights, stage carriage permits or loom hours,— 


    (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and 


    (ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil ; 


    It is proposed to substitute the said clause so as to provide that in relation to a capital asset, being goodwill of a business or profession, or a trademark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,— 


    (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and 


    (ii) in the case falling under sub-clause (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and 


    (iii) in any other case, shall be taken to be nil.


    It is also proposed to provide therein that in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous owner (either directly or through modes specified under sub-clause (i) to (iv) of sub-section (1) of section 49) and any deduction on account of depreciation under section 32 of the said Act has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st day of April, 2021, then the cost of acquisition will be the purchase price as reduced by the depreciation so obtained by the assessee before the previous year relevant to the assessment year commencing on the 1st day of April, 2021. 


    These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.



    Get all latest content delivered straight to your inbox
    Socialize with Us

    Post a comment

    0 Comments