Income Tax 30 Jan,2020
Depreciation of goodwill in the process of Merger/ Amalgamation – An unending Saga
Sridhar RPartner – Grant Thornton India LLP

Background :

We are in a business era, where inorganic growth, in the form of Mergers and Acquisitions are a preferred mode of expansion. The "Grow Fast or Die Slow" attitude of most corporates has pushed them towards an acquisition spree for inorganic and fast growth. Our recent studies reported 124 transactions aggregating USD 4.5 Billion in November 2019, besting comparable figures for the previous year. This is despite domestic and global slowdown and is clearly indicative of the inorganic growth trend.

From a tax perspective, while most of the amalgamations are tax neutral from a capital gains perspective, one of the most debatable matters is the consequent creation of goodwill and its related tax depreciation claim.

Generally, matters which are covered by the Hon'ble Apex Court become settled matters. However, claim of depreciation on goodwill created pursuant to amalgamation has become an exception to the rule where a Supreme Court judgement has resulted in increase in the number of litigation surrounding this matter.

In a hope to bring clarity on the litigation surrounding this issue, it is expected the government would make certain much needed amendments within the Income-tax Act, 1961 (Act).

Accounting Treatment:

Since most of the tax positions follow accounting positions, it is important to understand the way in which Mergers and Amalgamations are required to be accounted as per applicable accounting standards.

Under Indian GAAP, two different methods of Accounting are provided for mergers viz the Purchase method and the Pooling of Interest, based on prescribed conditions.

Under Ind AS, pooling of interest method is required to be followed where it is a common control business combination (i.e., intra-group amalgamation). In other cases, purchase method is required to be followed.

In both the cases, creation of goodwill in books is possible only under the Purchase method of Accounting. The difference between the consideration pursuant to amalgamations and the net assets transferred would usually result in Goodwill/Capital Reserve.

This led to the following questions in the minds of the tax experts:

 1.  Whether goodwill recognized in the course of amalgamation is a depreciable asset as per the provisions of the Act?

 2.  If yes, whether depreciation can be claimed on such goodwill?

The first issue has been discussed and settled by the Apex Court in the case of Smifs Securities Ltd, which held that the principle of Ejusdem generis (of the same Kind) would strictly apply and goodwill should be considered as 'any other business or commercial right of similar nature'. Therefore, goodwill recognized in amalgamation is a depreciable asset as per the provisions of the Act.

The second issue has not been examined by the Apex Court and is still a matter of debate amongst the tax fraternity. In order to understand the debate, there are three sections which require emphasis: 5th Proviso to Section 32(1), Explanation 7 to Section 43(1) and Explanation 2 to Section 43(6)

The aforesaid provisions of the Act seek to restrict the claim of depreciation/cost of asset to the amalgamated company to the extend of depreciation/cost that would have been applicable had the amalgamation not taken place. These provisions are however unclear on whether they apply only to existing assets in the books of accounts of amalgamating company or also to new asset such as goodwill created pursuant to amalgamation.

In this case, there are two views. Firstly, if the goodwill does not previously exist in the books of the amalgamating Company, consequently there can be no cost and depreciation claimed by the amalgamating company and therefore no depreciation is allowable in the amalgamated company in light of the aforesaid provisions. Second, the said provisions apply only in the case of existing assets, and the provisions do not apply to goodwill that arises only on account of the merger.

This issue gained significance post the Bangalore Tribunal ruling in the case of United Breweries Ltd1, which upheld the first view stated above. This case is also important since it differentiates the Apex Court's ruling in the case of Smifs Securities, by holding that the said judgement deals with only whether goodwill is an intangible asset per Section 32 and does not over-ride 5th proviso to Section 32(1).

However, this ruling was recently distinguished by the Hyderabad Tribunal in the case of Mylan Laboratories Ltd2, wherein the assessee successfully argued the second view discussed above. The assessee contended that the Memorandum to Finance Bill, 1996, which introduced the said proviso, was introduced only to cover existing assets and to curb the practice of double claim of depreciation by amalgamating and amalgamated companies. This case also holds significance since it differentiates the United Breweries case and the current case on the basis that the United Breweries case was within the group and did not involve an acquisition, whereas in this case there was a prior acquisition involved.

A very recent case law in this regard is the Ahmedabad ITAT bench ruling in the case of Bodal Chemicals Ltd3. The ruling was in favor of the assessee not on account of the merits of the case, but on account of the principal of consistency, since depreciation was allowed in the previous year. The said ruling brings out the difference between tax planning and tax neutrality, holding that various provisions of the Act are tax neutral for an amalgamation, and that amalgamation should not be used as a tax planning tool for obtaining depreciation benefit.

Over the years, it has been seen that many companies undertake restructuring within the group to artificially create goodwill in order to lower their tax liability. The tax authorities have been scrutinizing such cases and have threatened to impose anti abuse General Anti-Avoidance Rules (GAAR) provisions on such transactions.

Therefore, the Companies undertaking amalgamations, especially within the group, may be required to explain the business rationale and establish the commercial substance of the transactions undertaken.


Mergers in the form of acquisitions and genuine merger within the group that follow a third party acquisition deserve to claim depreciation on goodwill. Goodwill is a very important aspect of various Companies, especially the "Futuristic Companies" who operate with very few assets and are based on intangible assets, of which goodwill plays an important rule.

The expectation of clarity on this matter is longstanding and we hope that the upcoming budget provides much needed clarity in form of amendments in the relevant provisions of the Act.

Sridhar R, Partner - Grant Thornton India LLP with inputs from CA Subham Kumar and CA Pranaav Murali


 1.  United Breweries vs ACIT [2016] 76 103 (Bangalore - Trib)

 2.  Mylan Laboratories Ltd vs DCIT [2020] 113 6 (Hyderabad - Trib.)

 3.  Bodal Chemicals Ltd vs. AdCIT (2019) 112 217 (Ahmedabad Trib.)