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Goodwill Witten off

Monika Bachhawat (Chartered Accountant) (211 Points)

25 May 2010

I have purchased business for 6 crore, this payment has been made as 4 crore for assets & Rs 2 crore as goodwill. I would like to know in how many years will this Goodwill be written off both frm accounting & Income Tax point of view. Also kindly let me know under which Section .

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15 Replies

Shudhanshu Agrawal (Business) (2570 Points)
Replied 25 May 2010

In accounts goodwill can be written off in 5 years where as in Income Tax it is considered under the head Capital Gain.

Monika Bachhawat (Chartered Accountant) (211 Points)
Replied 25 May 2010

In Income Tax it will be considered Under Capital Gains only for the Seller but I am asking treatment for Buyer.

Shudhanshu Agrawal (Business) (2570 Points)
Replied 25 May 2010

Originally posted by : Monika Bachhawat
	In Income Tax it will be considered Under Capital Gains only for the Seller but I am asking treatment for Buyer.

For buyer it will be considered when he will sell it. Till the time buyer sells its goodwill there will be no deduction available.

(Guest)

dear monica

goodwill is to be write off in 5 years as accounting point of view and as per income tax there is no proviso of w/off the goodwill but u can claim it as a cost of acquisition when u sell these business to some other person and this is applicable for goodwill of business only not for profession.

regards

tarun rustagi

Monika Bachhawat (Chartered Accountant) (211 Points)
Replied 25 May 2010

Originally posted by : tarun rustagi
	dear monica goodwill is to be write off in 5 years as accounting point of view and as per income tax there is no proviso of w/off the goodwill but u can claim it as a cost of acquisition when u sell these business to some other person and this is applicable for goodwill of business only not for profession. regards tarun rustagi

Thus it means there will be no tax treatment until I sell out my business .

(Guest)

yes u are right there is no tax treatment until u sell the goodwill and whatever the amount of write off u can claim deduction in computing PGBP.

i mean there is no proviso regarding time of write off .

Monika Bachhawat (Chartered Accountant) (211 Points)
Replied 25 May 2010

Originally posted by : tarun rustagi
	dear monica goodwill is to be write off in 5 years as accounting point of view and as per income tax there is no proviso of w/off the goodwill but u can claim it as a cost of acquisition when u sell these business to some other person and this is applicable for goodwill of business only not for profession. regards tarun rustagi

Tarun I do not agree with You !!!!!!!!!

(Guest)

on which point can u plz specify.i will try definately try to solve it

harish sharma (student) (58 Points)
Replied 26 May 2010

monika u can take benifit of goodwill w\off only when u are a co. on which tax is payble as per section 115JB.since in sec 115JB there no provision for adding back such debits.

alternatively since it is purchesed goodwill u can claim depriciation @ 25% as applicable to intengiable assets

harish sharma (student) (58 Points)
Replied 26 May 2010

if u have any other treatment in ur mind or u have any other doubt feel free to contect

Shudhanshu Agrawal (Business) (2570 Points)
Replied 26 May 2010

Originally posted by : harish sharma
	monika u can take benifit of goodwill w\off only when u are a co. on which tax is payble as per section 115JB.since in sec 115JB there no provision for adding back such debits. alternatively since it is purchesed goodwill u can claim depriciation @ 25% as applicable to intengiable assets

Goodwill purchased in not considered as intangible asset for tax purpose.

Monika Bachhawat (Chartered Accountant) (211 Points)
Replied 26 May 2010

Every 1 go through the following case law :-

SUMMARY OF CASE LAW

Goodwill is a `business or commercial right of similar nature’; once it is held that the goodwill is also an intangible asset of the similar nature referred to in clause (ii) of section 32(1) of the Income-tax Act, 1961 the depreciation is consequently allowable on the same.

CASE LAW DETAILS

Decided by: ITAT, MUMBAI BENCH `F’, MUMBAI, In The case of: Kotak Forex brokerage Ltd. v ACIT , Appeal No.: ITA NO. 2692/Mum/2007, Decided on: August 2009

RELEVENT PARAGRAPH

7. Section 32 of the Income Tax Act allows depreciation on both tangible and intangible assets and clause [ii] thereof enumerates the intangible assets on which depreciation is allowable. The assets which are included in the definition of `intangible assets’ given in clause [ii] are know-how, patents, copy rights, trademarks, licenses, franchises etc., and any other business or commercial rights of similar nature are also included. The AO has agreed that goodwill is a bundle of rights which include, inter alia, patents, trademarks, licenses, franchises etc. Therefore, all these rights are similar to the rights under goodwill. Applying the principles of ejusdem genesis, the meaning has to be extended to the phase `other business or commercial rights of similar nature’. What is the meaning of business or commercial rights of similar nature?

8. Business or commercial rights are rights obtained for effectively carrying on the business or commerce. Commerce is a wider term, which encompasses business in its fold. Therefore, any right which is obtained for carrying on the business effectively and profitably, has to fall within the meaning of intangible asset. The definition further provides that the business or commercial rights should be of similar nature as know-how, patents, copy rights, trademarks, licenses, franchises etc. all these are the assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They assume importance in the commercial world as they represent a particular benefit or advantage or reputation built over a period of time and customers associate with such assets. Similarly, goodwill is nothing but positive reputation built by a person/company/ business- house over a period of time. Thus, goodwill is a `business or commercial right of similar nature’. As seen from the agreement of sale between Shri Uday S. Kotak and the assessee company formerly known as Komaz Financial Services Ltd., we find that the name `Kotak’ has tremendous importance as the assessee company was to be benefited by the usage of the said name and it has gone as far as amending its name by including Kotak in its name. Therefore, it is of commercial value for which the assessee has paid the amount of Rs. 1.88 crores as goodwill.

9. Once it is held that goodwill is also an intangible asset of the similar nature referred to in clause [ii] of section 32(1) of the Act, the depreciation is consequently allowable on the same. The same is fortified by the decisions relied upon by the Id. Counsel for the assessee are also to this effect. The decision of the Ahmedabad Bench in the case of Bharatbhai J. Vyas vs. ITO reported in 97 ITD 2248 [Ahd] relied upon by the Id. CIT [A] is misplaced. Accordingly, we allow the appeal of the assessee.

There fore depreciation allowable u/s 32.

harish sharma (student) (58 Points)
Replied 26 May 2010

Originally posted by : Shudhanshu Agrawal
	Originally posted by : harish sharma monika u can take benifit of goodwill w\off only when u are a co. on which tax is payble as per section 115JB.since in sec 115JB there no provision for adding back such debits. alternatively since it is purchesed goodwill u can claim depriciation @ 25% as applicable to intengiable assets Goodwill purchased in not considered as intangible asset for tax purpose.

dear can u tell me where in the income tax (in sec 32 ) it is coded that goodwill is not an intengiable asset

harish sharma (student) (58 Points)
Replied 26 May 2010

Originally posted by : Shudhanshu Agrawal
	Originally posted by : harish sharma monika u can take benifit of goodwill w\off only when u are a co. on which tax is payble as per section 115JB.since in sec 115JB there no provision for adding back such debits. alternatively since it is purchesed goodwill u can claim depriciation @ 25% as applicable to intengiable assets Goodwill purchased in not considered as intangible asset for tax purpose.