Goodwill - Challenges Ahead!

What is the Tax Controversy about?

The Finance Act, 2021 (FA 2021) brought in relevant amendments in the Income Tax Act, 1961 (ITA) to establish that ‘goodwill’ will no longer be considered as an “intangible asset” and further that depreciation would not be available on ‘goodwill’ from 1st April 2020. The said amendments also warranted that goodwill would have to be removed from the block of asset (Intangibles) as on 1st April 2020, to the extent that value of that block will be reduced by the cost of goodwill, net of depreciation claimed till date.

Section 55 of the ITA, which typically explains the meaning of “adjustment”, “cost of improvement” and “cost of acquisition” for the purpose of computing capital gains was also suitably amended to inter alia insert a Proviso that seeks to reduce the “purchase price” of acquired ‘Goodwill” to the extent of total depreciation claimed from the purchase price up to 1st April 2020.

However, this was not the end of the matter. Vide the FA 2021, a suitable amendment was also introduced in the ITA to hold that where the value of net goodwill removed from the block is in excess of the opening Written Down…