Depreciation on Goodwill in Amalgamations: From Smifs Securities to the Finance Act, 2021

How Indian tax law treats goodwill depreciation in amalgamations, from Smifs Securities to the Finance Act 2021, for practitioners and non-specialists.

Suppose a company pays one hundred crore rupees to take over a business whose assets, once its debts are set off, are worth seventy crore. What has it bought with the extra thirty crore? In both accounting and tax law that premium has a name — goodwill — and it stands for something quite real if intangible: the reputation of the business, the loyalty of its customers, the pull of its brand, and the reasonable expectation that those customers will keep returning. For the better part of a decade, Indian companies were permitted to claim depreciation on goodwill on amalgamation, treating the acquired goodwill as a wasting asset and writing down a quarter of its value every year against their taxable profits. The Finance Act, 2021 brought that practice to an end for the future, even as it left a decade of past claims to be contested in the tribunals and courts. This article traces how the law arrived at its present position, sets out the competing arguments with equal care, and explains what it all means today — for a business weighing a merger, for the adviser who must caution it, and for the general reader trying to follow a subject that sits exactly where accounting meets tax.

What Goodwill Is and Why Depreciation on Amalgamation Mattered

Goodwill is best understood as the part of a purchase price that cannot be pinned to any identifiable asset. When a buyer pays more than the fair value of the tangible assets and identifiable intangibles it acquires, the excess is recorded as goodwill. It is, in a sense, the accountant’s way of capturing the difference between a business as a going concern and the sum of its separable parts.

Depreciation is the mechanism by which the law lets a taxpayer spread the cost of an asset over the years it is used, deducting a slice of that cost from profits each year. For intangible assets the rate was twenty-five per cent on the written-down value. It is easy to see why a large goodwill figure was attractive: capitalised at that rate, it could shelter substantial profits from tax over several years without any cash ever leaving the company again. That very attractiveness is what turned a technical question — is goodwill the kind of asset on which depreciation may be claimed? — into one of the most heavily litigated issues in Indian corporate tax.

The Turning Point: Smifs Securities

The question of depreciation on goodwill on amalgamation reached the Supreme Court in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302. Section 32 allows depreciation on intangible assets, which Explanation 3(b) to section 32(1) describes as know-how, patents, copyrights, trade marks, licences, franchises “or any other business or commercial rights of similar nature.” The Court held that goodwill falls within that closing phrase. Applying the interpretive principle of ejusdem generis — by which general words that follow a list of specific things take their colour from that list — it reasoned that goodwill is a commercial right of the same broad character as the trade marks and licences that precede it, and is therefore a depreciable intangible.

Two features of the decision are often forgotten, and both matter a great deal to the disputes that continue today. First, the Court proceeded on a concurrent finding of fact that a genuine excess consideration had been paid and that the assessee had, through the amalgamation, acquired a real capital right whose market worth had increased. Second, the Revenue had not challenged that finding before the High Court. Smifs, in other words, decides a question of law — that goodwill can be a depreciable asset — but it does not certify that every figure a company chooses to label “goodwill” is genuine or beyond scrutiny. Much of what has happened since is an argument about that distinction.

How Goodwill “Arises” on a Merger: Two Accounting Roads

Whether goodwill can come into existence at all depends on how the merger is accounted for, a question that directly affects claims for depreciation on goodwill arising from amalgamation. Here, the law borrows directly from accounting standards. Under the purchase method, the acquiring company records what it takes over at fair value, and any excess of the consideration over the net assets becomes goodwill. Under the pooling of interests method — historically prescribed by Accounting Standard 14 for certain amalgamations, particularly of entities already under common ownership — the assets and liabilities are simply carried over at their existing book values, and any difference between the consideration and those book values is adjusted against reserves. Crucially, under pooling, goodwill is not supposed to arise at all.

This is the fault line beneath a large part of the litigation. Where a scheme of amalgamation adopts the pooling method but a clause nonetheless directs the resulting difference to be debited to a “Goodwill” account, the tax authorities contend that the goodwill is a manufactured balancing figure rather than the price of anything acquired. The move from AS-14 to Ind AS 103, which applies an acquisition model and treats common-control combinations on yet another footing, has only sharpened these questions for combinations governed by the newer standards.

The Debate, Fairly Stated

The case for allowing depreciation. Taxpayers, and a good many tribunals and High Courts, rest on solid ground. Smifs is a decision of the Supreme Court holding squarely that goodwill arising on amalgamation is a depreciable intangible, and coordinate benches are bound to follow it; the Gujarat High Court did so in PCIT v. Zydus Wellness Ltd. [2017] 87 taxmann.com 82. A scheme of amalgamation sanctioned by the High Court or the National Company Law Tribunal carries statutory force, and where the sanctioned scheme itself directs the accounting treatment, that treatment is said to be legitimate rather than contrived. And once the existence of the goodwill and the payment of consideration are accepted, its precise valuation and the statutory apportionment become questions of computation, not grounds for refusing the deduction outright. Section 32, it is pointed out, contains no general fiction reducing the cost of acquired goodwill to nil, unlike the specific rule the legislature enacted for capital gains.

The Revenue’s answer. The Department replies that Smifs settled only the abstract character of goodwill and left standing a deliberate architecture of anti-abuse provisions designed to prevent a merger from manufacturing a tax deduction out of nothing. The sixth proviso to section 32(1) limits the depreciation for the year of amalgamation to what would have been allowable had the amalgamation not occurred, so that a transaction cannot enlarge the pool of depreciation. Explanation 7 to section 43(1) and Explanation 2 to section 43(6) carry the written-down value of a transferred asset across at the figure it stood at in the amalgamating company’s hands — so that if the predecessor held no goodwill, the successor inherits none. Beyond these specific provisions lies a settled principle that book entries do not determine tax: entitlement to a deduction depends on the law and not on the ledger (Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363), and accountancy cannot override the Act (Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172). Company-law sanction, the Department adds, is not a grant of tax immunity; Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809 fixes the effective date of an amalgamation but does not bar the assessing officer from testing its substance. And where a transaction has been arranged with no commercial purpose beyond the tax advantage, the substance-over-form principle running from McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 through Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 — now reinforced by the General Anti-Avoidance Rules — permits it to be disregarded.

The Intra-Group Flashpoint

The sharpest of the surviving disputes concerns the merger of two companies under common control, where no cash changes hands, only shares are issued, and the “goodwill” is simply the gap between an earlier investment figure and book value. In Aptara Technologies (P.) Ltd. v. DCIT [2026] 183 taxmann.com 571, the Pune Tribunal held that goodwill generated in exactly this way — an intra-group merger under the pooling method, with no genuine acquisition of a business, customers or commercial rights — was an artificial creation and a colourable device; and that, the asset itself being artificial, no depreciation could follow. The Tribunal was willing to look past the scheme-compliant book entry to the reality beneath it.

Fairness requires the contrary view to be stated with equal clarity, for it remains strong. Several benches have declined to brand amalgamation goodwill a colourable device, particularly where the Department raised no objection when the scheme was sanctioned, where an independent valuation supported the consideration, or where a genuine operating business with real customers was actually absorbed. On that view, once the transaction is accepted as authentic, Smifs governs and the depreciation follows as a matter of course. The dividing line, in practice, is not the presence or absence of the word “goodwill” but the genuineness and commercial substance of what lies behind it — a question of fact that turns on the evidence in each case.

The Watershed: The Finance Act, 2021

Parliament ultimately resolved the question of depreciation on goodwill on amalgamation for the future in the plainest possible terms. With effect from assessment year 2021-22, the Finance Act, 2021 amended section 2(11), section 32 and Explanation 3 to section 32(1) so that goodwill of a business or profession is no longer a depreciable asset at all — irrespective of how it was acquired, whether by outright purchase or on an amalgamation or succession. The long argument about the character of goodwill was, prospectively, brought to a close by legislation rather than by the courts.

The change did more than switch off future claims. Under section 50 read with Rule 8AC of the Income-tax Rules, notified in July 2021, where depreciation had already been obtained on goodwill up to assessment year 2020-21, the goodwill is removed from the relevant block of assets and its written-down value is adjusted; in defined circumstances the excess depreciation claimed in the past is treated as a short-term capital gain and taxed accordingly. A claim that looked entirely benign when made can therefore surface, years later, as a present tax cost — a point easily missed and worth checking carefully.

Where the Law Stands Today

The legal position on depreciation on goodwill on amalgamation is best understood period by period.

What it Means in Practice

For any merger or acquisition being structured now, the practical lesson is simple: goodwill depreciation is no longer available, and financial models should not assume it. Attention shifts instead to whether the transaction genuinely brings in identifiable intangibles — know-how, patents, licences, trade marks — which remain depreciable in their own right and must be identified and valued as such rather than swept into an undifferentiated goodwill figure. For the assessment years still open, a company defending a past claim should be ready to demonstrate that its goodwill was real: an independent valuation, evidence of a genuine transfer of business and customers, and consistency between the accounting clause in its scheme and the standard actually applied will matter far more than the label. Past positions also deserve a second look for the transitional consequences, since the interaction of section 50 and Rule 8AC can convert a historic depreciation claim into a taxable gain. And in group reorganisations in particular, the commercial rationale should be documented as it happens, because the colourable-device and sixth-proviso arguments are now made as a matter of routine, and a contemporaneous record is the best answer to them.

Frequently Asked Questions

Sources & Citations

• CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 / 24 taxmann.com 222 (SC).
• PCIT v. Zydus Wellness Ltd. [2017] 87 taxmann.com 82 (Gujarat).
• Aptara Technologies (P.) Ltd. v. DCIT [2026] 183 taxmann.com 571 (Pune – Trib.).
• Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC).
• Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC).
• Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809 (SC).
• McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC); Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC).
• Income-tax Act, 1961 — sections 32(1)(ii) and Explanation 3, sixth proviso to section 32(1), 2(11), Explanation 7 to section 43(1), Explanation 2 to section 43(6), and 50.
• Finance Act, 2021; Income-tax (19th Amendment) Rules, 2021 — Rule 8AC (CBDT notification, 7 July 2021).

Related Reading

• Is Goodwill an “Asset” for Depreciation? Smifs Securities and Explanation 3(b)
• Pooling of Interests vs Purchase Method: Can Goodwill Arise on Amalgamation?
• The Cost-Step-Up Cap on Amalgamation: The Sixth Proviso to Section 32(1) and Explanation 7 to Section 43(1)
• Goodwill Removed from Depreciable Assets: The Finance Act 2021, Its Transition and Its Fallout
• Bogus Purchases and Accommodation Entries: Burden of Proof and Commission-Rate Additions

Disclaimer: This article is for general information and does not constitute legal advice. The law is stated as understood in 2026 and continues to evolve; readers should take advice on their specific facts. © Bhatt & Joshi Associates.