Can goodwill arise on an amalgamation? AS-14 pooling vs purchase, Ind AS 103 Appendix C, Smifs, Finance Act 2021 and the Income-tax Act 2025.

Consider a manufacturing company that holds almost all the shares of a smaller company in the same group. The smaller company makes a single product and sells it to nobody but its parent. The group decides the two should become one. A scheme of amalgamation is sanctioned, the subsidiary dissolves, and its factory, its workforce and its licences pass to the parent, which issues its own shares to the subsidiary’s outside shareholders. Not a rupee of cash changes hands.

Somebody must now write this down, and at that point a fork appears. The parent may bring in the incoming assets at exactly the figures at which the subsidiary carried them, in which case nothing new appears anywhere. Or it may treat the transaction as a purchase, value the shares it has issued, and carry the incoming assets at figures allocated on the strength of a valuation report. If the value of the shares issued exceeds the value of the net assets taken in, the difference has to be parked somewhere. It is parked on the asset side of the balance sheet, and it is called goodwill.

That single entry has generated a decade and a half of litigation, because until Assessment Year 2021-22 an intangible asset attracted depreciation at twenty-five per cent, and the Revenue’s standing objection was that a figure conjured out of an accounting difference is not something anybody ever acquired.

Pooling of Interests vs Purchase Method: Accounting under AS-14

Accounting Standard 14, “Accounting for Amalgamations” – notified for companies under the Companies (Accounting Standards) Rules and revised by the Ministry of Corporate Affairs by notification dated 30 March 2016 – divides every amalgamation into one of two species. An amalgamation is “in the nature of merger” if, and only if, it satisfies all five conditions in paragraph 3(e): all the transferor’s assets and liabilities become those of the transferee; shareholders holding not less than ninety per cent of the face value of the transferor’s equity shares become equity shareholders of the transferee; the consideration is discharged wholly by the issue of equity shares, save cash for fractional entitlements; the transferor’s business is intended to be carried on after the amalgamation; and no adjustment is intended to the book values of what is taken over, except to bring accounting policies into line. An amalgamation failing any one of the five is, by paragraph 3(f), “in the nature of purchase”.

The point most often missed in argument is that the method is not a matter of election. Paragraph 31 directs that a merger “should be accounted for under the pooling of interests method”, and paragraph 32 that a purchase “should be accounted for under the purchase method”. The facts drive the characterisation and the characterisation drives the method.

Goodwill under AS-14: Pooling of Interests and Purchase Method

The object of the pooling of interests method, as paragraph 3(i) puts it, is to account for the amalgamation “as if the separate businesses of the amalgamating companies were intended to be continued by the transferee company”. Consistently with that, paragraph 33 requires the transferor’s assets, liabilities and reserves to be recorded “at their existing carrying amounts and in the same form as at the date of the amalgamation”, paragraph 34 permits harmonisation of accounting policies and nothing more, and paragraph 35 directs that the difference between the share capital issued, plus any additional consideration, and the transferor’s share capital “should be adjusted in reserves”. The residue goes to reserves and no asset is created. Under pooling of interests goodwill cannot arise; that is not a matter of practice but the design of the method.

The purchase method proceeds on the opposite premise. Paragraph 36 permits the transferee either to incorporate the incoming assets and liabilities at their existing carrying amounts or to allocate the consideration to individual identifiable assets and liabilities at fair values. Paragraph 37 addresses the residue directly: any excess of the consideration over the value of the net assets acquired “should be recognised in the transferee company’s financial statements as goodwill arising on amalgamation”, any shortfall being credited to Capital Reserve, and paragraph 38 requires such goodwill to be amortised over a period which “should not exceed five years unless a somewhat longer period can be justified”. So the question in the title has, at the level of accounting, a reasonably clear answer. Goodwill can arise on an amalgamation, but only on one accounted for under the purchase method, and therefore only where at least one of the five merger conditions is not satisfied – most often the fifth, the transferee having revalued the incoming intangibles.

The Ind AS Overlay: Common Control and Appendix C

For a company that has moved to Indian Accounting Standards the analysis takes a different shape. Ind AS 103, “Business Combinations”, notified under the Companies (Indian Accounting Standards) Rules 2015, applies the acquisition method to business combinations generally, and goodwill is recognised in the ordinary way. But Appendix C – an Indian addition, since IFRS 3 excludes common-control combinations from its scope – carves out combinations involving entities under common control, defined in paragraph 2 as those in which all the combining entities are ultimately controlled by the same party or parties both before and after the combination, that control not being transitory. Paragraph 8 provides that such combinations “shall be accounted for using the pooling of interests method”; paragraph 9 requires assets and liabilities to be reflected at carrying amounts, with no adjustment to reflect fair values and no new assets or liabilities recognised; and paragraph 12 sends the residual difference to capital reserve.

The consequence is sharper than under AS-14. For a group reorganisation between entities under common control, an Ind AS company has no route to goodwill at all – not because it has chosen the wrong method, but because the standard leaves it no choice. Nor can this be quietly managed in the ledger: the proviso to section 232(3) of the Companies Act 2013 forbids the Tribunal from sanctioning a scheme unless the company’s auditor has certified that the accounting treatment proposed in it conforms to the standards prescribed under section 133, so the treatment goes before the court before the scheme takes effect.

AS-14, by contrast, contains no common-control rule at all: a company still applying it that fails one of the five merger conditions may recognise goodwill even though the amalgamating parties belong to the same group. Much of the litigation surveyed below sits in that gap.

The Tax Treatment of Goodwill Arising on Amalgamation

Before the Finance Act 2021, section 32(1)(ii) of the Income-tax Act 1961 allowed depreciation on “know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998”, and Explanation 3 as it then stood defined “assets” and “block of assets” to include intangible assets of that description. Goodwill was nowhere named.

In CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC), decided on 22 August 2012, the Supreme Court held that goodwill falls within “any other business or commercial rights of a similar nature” in Explanation 3(b) and is therefore an asset eligible for depreciation. It is the foundation of the assessee-side case and also the most frequently over-read decision in the field. Smifs is a short order disposing of the appeal at the stage of granting leave, and it decided the question of legal characterisation and nothing else. The Assessing Officer there had found as a fact that no amount had actually been paid on account of goodwill; the Court declined to disturb the contrary concurrent findings of the Commissioner (Appeals) and the Tribunal, observing that the Revenue had taken only the characterisation question to the High Court and had not carried the finding of fact further. Smifs therefore holds that goodwill is capable of being a depreciable intangible. It does not hold that every figure booked as goodwill on an amalgamation is one. That distinction matters because depreciation attaches to cost, not to a label – the instinct behind CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), where self-generated goodwill was held to have no ascertainable cost of acquisition, so that the computation machinery failed.

The Revenue’s Argument: Explanation 7 to Section 43(1) and Explanation 2 to section 43(6)

Explanation 7 to section 43(1) provides that where, in a scheme of amalgamation, a capital asset is transferred by the amalgamating company to an amalgamated Indian company, the actual cost of that asset to the amalgamated company is what it would have been had the amalgamating company continued to hold it. Explanation 2 to section 43(6) does the corresponding work for a block of assets, fixing the actual cost in the transferee’s hands at the transferor’s written-down value.

The Revenue’s contention, put at its highest, is that these two Explanations are a complete answer. The tax cost of everything crossing over in an amalgamation is frozen at the transferor’s figures, from which it follows that the goodwill the transferee may carry for tax purposes is limited to whatever goodwill stood in the transferor’s own books – usually nothing. The audit objection reproduced verbatim by the Gujarat High Court in Songwon Specialty Chemicals India (P.) Ltd. v. DCIT [2024] 169 taxmann.com 184 (Gujarat) puts the argument in exactly those terms, adding that “the terms of a scheme of amalgamation cannot override the explicit provisions of the Income-tax Act, 1961”.

The assessee’s answer is that both Explanations presuppose an asset that was transferred. Goodwill of the kind in issue was never held by the amalgamating company at all: it comes into existence for the first time in the transferee’s books, as the arithmetical residue when the consideration exceeds the net assets acquired, and an asset that did not exist before the amalgamation can have no cost in the hands of a previous owner to inherit. That is the reasoning the Commissioner (Appeals) adopted, and which the Tribunal approved, in ACIT v. Intas Pharmaceuticals Ltd. [2026] 183 taxmann.com 697 (Ahmedabad – Trib.). A related point was made in Thermo Fisher Scientific India (P.) Ltd. v. DCIT [2023] 155 taxmann.com 346 (Mumbai – Trib.), where the Tribunal held that Explanation 7 is directed at transactions of amalgamation and does not reach a slump sale at all.

The Revenue’s reading should not be dismissed as merely technical. Sections 47(vi) and (vii) exempt the amalgamation itself from capital gains, and the two Explanations exist to ensure that a transaction so exempted does not simultaneously deliver a step-up in tax cost. If that is their object, permitting a brand-new depreciable intangible to be generated out of the very same transaction can fairly be said to defeat it, whatever the arithmetic of the residue. The argument has force, and it has not yet been tested on the merits by the Supreme Court.

Goodwill Depreciation on Amalgamation: Tribunal Decisions

The permissive line begins with PCIT v. Zydus Wellness Ltd. [2017] 87 taxmann.com 82 (Gujarat), where the proposed question was framed in the sharpest possible way – depreciation “on so called goodwill which was only a book entry created on the event of amalgamation” – and the High Court declined to entertain it, following Smifs. The reasoning is narrower than the headnote suggests. What the Court said was that the Assessing Officer had referred to no material to hold the claim fictitious, and that his real objection was that an intangible of this kind does not qualify at all, which was contrary to Smifs. The case where the Assessing Officer does record material was left open. The same line continues through Urmin Marketing (P.) Ltd. v. DCIT [2020] 122 taxmann.com 40 (Ahmedabad – Trib.) and ACIT v. Mcfills Enterprises (P.) Ltd. [2025] 176 taxmann.com 288 / 213 ITD 573 (Ahmedabad – Trib.), which puts it at its most direct: where the consideration exceeds the net assets acquired, the difference is goodwill and depreciation is available on it.

In ACIT v. Intas Pharmaceuticals Ltd. the Revenue argued the accounting question head-on, contending that the assessee had used the purchase method “instead of merger method” by revaluing intangibles, and that paragraph 8 of Appendix C to Ind AS 103 made pooling mandatory between commonly controlled entities. The Tribunal held for the assessee on three features of the record: the scheme had been sanctioned after the Department was invited to object and did not; the valuation rested on a registered valuer’s report which the Assessing Officer neither displaced nor referred to the Departmental Valuation Officer; and the allotment of shares is “payment” in kind (CIT v. Mira Exim Ltd. (2013) 359 ITR 70 (Delhi)).

The restrictive line is best represented by Aptara Technologies (P.) Ltd. v. DCIT [2026] 183 taxmann.com 571 (Pune – Trib.), decided on 17 February 2026. Two subsidiaries of a common overseas holding company merged under a sanctioned scheme, the consideration was discharged wholly by a share swap, and the excess over net assets was booked as goodwill with depreciation claimed at twenty-five per cent. The Tribunal disallowed it, holding the goodwill an artificial creation lacking commercial substance – the parties were not unrelated, no banking transaction occurred, the transferor’s business was discontinued after the merger and no new business was added – and treated the arrangement as a colourable device. From a different direction, Gera Developments (P.) Ltd. v. PCIT [2025] 181 taxmann.com 469 (Pune – Trib.) upheld revision under section 263 where the Assessing Officer had allowed depreciation on goodwill without any enquiry at all, the goodwill having in fact been fully impaired and standing at nil in the books.

These two lines are not, on analysis, a conflict of law. Both accept Smifs. What separates them is a finding of fact about whether anything was really acquired, and whether the Assessing Officer did the work of establishing that it was not. To that extent the field is governed less by Smifs than by the older and more durable principle in Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), that entitlement to a deduction depends on the provisions of law relating to it and not on the entries the assessee has made in his books.

One caution on citation is worth recording. Songwon Specialty Chemicals is sometimes cited as High Court approval of goodwill arising on amalgamation. It is nothing of the kind. It was a writ petition against a notice under section 148A(b) and an order under section 148A(d), quashed for non-application of mind because the Assessing Officer had reproduced an audit objection without engaging with the assessee’s reply and had accepted the identical claim in two earlier years. The merits were not decided. The Department’s special leave petition was dismissed ([2025] 181 taxmann.com 843 (SC), 16 December 2025), which leaves the reassessment quashed and the substantive question untouched.

The Position by Period

Finance Act 2021, and the Re-Enactment in the Income-tax Act 2025

The Finance Act 2021 closed the question prospectively, amending section 2(11), section 32(1)(ii) and Explanation 3, section 50 and section 55(2)(a) so that goodwill of a business or profession ceased to be a depreciable asset with effect from Assessment Year 2021-22. Rule 8AC of the Income-tax Rules 1962, inserted by the Income-tax (19th Amendment) Rules 2021, prescribes how the written-down value of the intangible block is recomputed, and the short-term capital gain determined, where depreciation on goodwill was previously obtained.

The Income-tax Act 2025, in force from 1 April 2026, carries the exclusion forward without softening it, and the rest of the architecture is renumbered rather than rewritten. “Amalgamation” is now defined in section 2(6); the apportionment rule formerly in the sixth proviso to section 32(1) is section 33(5); Explanation 7 to section 43(1) and Explanation 2 to section 43(6) correspond to sections 39 and 41; sections 47(vi) and (vii) to sections 70(1)(e) and (f); section 49 to section 73; section 50 to section 74; and section 55 to section 90. A citation to the old numbering in a matter governed by the new Act is now an error, and a common one.

For current years, then, this has ceased to be a depreciation question at all. What survives is an accounting question – which method the scheme must adopt, and what the auditor may certify under the proviso to section 232(3) – together with a capital-gains question about the cost of acquisition of goodwill on a later transfer, now governed by section 90. The pre-2021 question is nonetheless far from academic: appeals for years up to Assessment Year 2020-21 remain live in large numbers, and the Tribunals have generally held that the exclusion operates prospectively. So far as we could verify, that proposition has not been ruled on by a High Court or the Supreme Court, and should be treated as a Tribunal-level trend rather than settled law.

What Actually Decides these Cases

Stripped of citation, the litigation turns on three things. The characterisation is not elective: a transferee wanting the purchase method must identify the merger condition its transaction fails, and an Ind AS company reorganising within a group is foreclosed by Appendix C. The record must show an acquisition and not merely a subtraction – a sanctioned scheme, a valuation that survives scrutiny, a business that continues, some commercial purpose beyond the depreciation. And, cutting the other way, an Assessing Officer who wishes to displace the entry must do the work: Zydus Wellness failed for the Revenue because no material was produced, Aptara succeeded because the findings were made.

Frequently Asked Questions

Sources & Citations

• Income-tax Act 1961 (as amended by the Finance Act 2021): ss.2(1B), 2(11), 32(1)(ii) and Explanation 3, sixth proviso to s.32(1), Explanation 7 to s.43(1), Explanation 2 to s.43(6), ss.47(vi) and (vii), 49, 50, 55(2)(a).
• Income-tax Rules 1962, Rule 8AC (inserted by the Income-tax (19th Amendment) Rules, 2021).
• Income-tax Act 2025 (in force 1 April 2026): ss.2(6), 33(1)(b), 33(5), 33(12)(a)(ii)(G), 39, 41, 70(1)(e) and (f), 73, 74, 90.
• Companies Act 2013, ss.230-232, in particular the proviso to s.232(3) read with s.133.
• Accounting Standard (AS) 14 (revised 2016), “Accounting for Amalgamations”: paras 3(e), 3(f), 3(g), 3(i), 8, 9, 31, 32, 33, 34, 35, 36, 37, 38, 39.
• Ind AS 103, “Business Combinations”, Appendix C (business combinations of entities under common control): paras 2, 8, 9, 12.
• CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 (SC) / 24 taxmann.com 222, decided 22 August 2012.
• CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC).
• Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC).
• PCIT v. Zydus Wellness Ltd. [2017] 87 taxmann.com 82 (Gujarat), Tax Appeal No. 779 of 2017, decided 3 October 2017.
• Songwon Specialty Chemicals India (P.) Ltd. v. DCIT [2024] 169 taxmann.com 184 (Gujarat), decided 15 October 2024; SLP dismissed, [2025] 181 taxmann.com 843 (SC), 16 December 2025.
• ACIT v. Intas Pharmaceuticals Ltd. [2026] 183 taxmann.com 697 (Ahmedabad – Trib.), decided 24 February 2026, following [2025] 174 taxmann.com 867 (Ahmedabad – Trib.).
• Aptara Technologies (P.) Ltd. v. DCIT [2026] 183 taxmann.com 571 (Pune – Trib.), decided 17 February 2026.
• Gera Developments (P.) Ltd. v. PCIT [2025] 181 taxmann.com 469 (Pune – Trib.), decided 9 December 2025.
• ACIT v. Mcfills Enterprises (P.) Ltd. [2025] 176 taxmann.com 288 / 213 ITD 573 (Ahmedabad – Trib.), decided 4 July 2025.
• Urmin Marketing (P.) Ltd. v. DCIT [2020] 122 taxmann.com 40 (Ahmedabad – Trib.), decided 21 October 2020.
• Thermo Fisher Scientific India (P.) Ltd. v. DCIT [2023] 155 taxmann.com 346 (Mumbai – Trib.), decided 31 July 2023.
• CIT v. Mira Exim Ltd. (2013) 359 ITR 70 (Delhi).
• Areva T&D India Ltd. v. DCIT [2012] 20 taxmann.com 29 / 345 ITR 421 (Delhi), decided 30 March 2012.
• Triune Energy Services (P.) Ltd. v. DCIT [2016] 65 taxmann.com 288 / 237 Taxman 230 (Delhi), decided 19 November 2015.

A Note on Verification

The statutory text of section 32(1)(ii) and Explanation 3 as they now stand, and the corresponding provisions of the Income-tax Act 2025 cited above, were checked against the Income Tax Department’s own published comparison of the 1961 and 2025 Acts. The case law was verified on Taxmann. The paragraph numbers of AS-14 are taken from the ICAI text of the standard as revised in 2016. Three matters should be treated as carrying a lower level of assurance and were flagged in the course of preparing this article. First, the paragraph numbering of Appendix C to Ind AS 103 could not be checked against the notified text on the Ministry of Corporate Affairs website, which was not reachable; paragraphs 8, 9 and 12 are stated on the strength of professional commentary and of the Revenue’s own pleading recorded in Intas Pharmaceuticals, which cites paragraph 8 of Appendix C in terms. Secondly, the dismissal of the Department’s special leave petition in Zydus Wellness is recorded in the Tribunal’s order in Intas Pharmaceuticals but the order of dismissal was not separately traced, and it is not relied upon here. Thirdly, the prospectivity of the Finance Act 2021 goodwill amendment rests at present on Tribunal decisions only; no binding High Court or Supreme Court authority on the point was located. Copyright Bhatt & Joshi Associates. This article is published for general information and academic discussion only. It is not legal advice and should not be acted upon without professional advice on the facts of a particular case.

Related Reading

• Depreciation on Goodwill in Amalgamations: From Smifs Securities to the Finance Act, 2021
• Is Goodwill an “Asset” for Depreciation? Smifs Securities and Explanation 3(b)
• Book Entries Do Not Decide Tax: Kedarnath Jute, Tuticorin Alkali and Court-Sanctioned Schemes
• 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

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