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Is Goodwill an Intangible Asset Eligible for Tax Depreciation? First of all what is an intangible asset?

Intangible assets are those which do not have any physical f orm i.e. they cannot be touched and seen but they create significant values for an organisation. Goodwill An intangible asset valued according to the advantage or reputation a business h as acquired (over and above its tangible assets). Now according to the article Some of the intangible assets are not capable of recognition in books o f accounts in accordance with Accounting Standard-26. In spite of this, intangib les constitute a larger part of acquisition price in present era of mergers and acquisitions. Therefore, while structuring M&A deals, the prospective buyer, apa rt from considering other legal and commercial considerations, also considers ta x cost and benefits involved in the deal. Thus, the acquirer is always intereste d to factor-in the tax incidence in the form of tax depreciation that would be e ligible to him on intangible assets which are acquired and embedded within goodw ill. Keeping this view in mind, the article explains accounting principles for r ecognition of goodwill in financial statements as per prevailing Accounting Stan dards. The article says that the term Goodwill has not been defined in the Income-tax Ac t though in Section 55(2) (a) it has been recognised as a capital asset for purpos es of computing capital gains. The cost of acquisition in case of purchased good will is to be taken as the amount of purchase price and the cost is taken to be Nil when it is self-generated goodwill. The article also states that for accounting purposes, goodwill recognised in fin ancial statements is amortised over its systematic life (preferably five years) as per Indian Accounting Standards; whereas Goodwill as such is not included in the list of intangible assets eligible for depreciation under Section 32(ii) of Income-tax Act, 1961. Therefore, it can be said that provisions of said section do not appreciate the fact that consequent to existing accounting norms, such pu rchased goodwill recognised in books of accounts may have intangibles embedded w ithin it which are eligible for depreciation. Main Cause of Concern: Thus Due to non-alignment between provisions of Income-tax Act, 1961 and the acc ounting methods followed by assesses in respect of goodwill recognition and its subsequent amortisation and/or depreciation, allowance of depreciation on Goodwi ll (embedded with other intangible assets) has always been a subject matter of c onsiderable uncertainty and litigation. And goodwill whether self-generated or acquired will be classified as a business capital asset under DTC regime and any income arising from transfer, demolition , destruction or discardment of a business capital asset will be classified as i ncome from business for the transferor of such asset. As per Depreciation allowance on intangible assets under DTC, Depreciation would be nil in case of those assets which are not specified in Fifteenth Schedule. Thu s as regards to the above mentioned goodwill, as such, is not included in the li st of intangible assets eligible for depreciation under proposed DTC regime also . Therefore, uncertainty and litigation on eligibility of depreciation on intang ible assets embedded within goodwill is expected to continue due to lack of clar ity on the subject and contrary views held by the judicial authorities. Thus from above discussion, it is clear that Goodwill is a kind of intangible as set that is made up of many components. The true nature to establish it as depre ciable or amortisable can only be ascertain from actual nature of transaction.

Since, Goodwill transactions are nil, it become difficult to assess the true val ue. However, some methodology must be followed so that true value of Goodwill ca n be ascertained in every case. Profit of an organization must be calculated an d then compared with the last 2 years so that the actual increase in customers a nd profits can be valued. This increase is majorly through the good branding and name that accounts for goodwill can be formed. This goodwill that is earned ca n be depreciated over the years if no change is brought into the company. So, it is necessary to apply the financial accounting on the goodwill so that the true value of the benefits taken can be ascertained. But above all, as described in the article, Uncertainty on depreciation of Goodw ill is expected to continue due to lack of clarity on the subject.