Taxability of Goodwill

Suppose there is a merger of 2 comanies A Ltd and B Ltd . Let us assume that A Ltd is buying B Ltd for Rs 50 crores. Net assets of B Ltd is Rs 30 crores. The amalgamation is duly approved by the court and is regularized . As per accounting principles the combined entity will recognize Rs 20 Crores as "Goodwill". This type of Goodwill is called "Acquired Goodwill" and is a genuine expenditure unlike a fictitious asset being created in the books. This is carried over to the Assets side in B/S and is amortized for a definite period. The situation is

1. The Income Tax officer takes up the amount goodwill allowed in an earlier year and opens the case u/s 147 and contends the allowability of Goodwill and challenges u/s 28 (4) which reads "The value of any benefit or perquisite whether convertible into money or not , arising from business or the exercise of profession". I presume that he is saying goodwill is not covered under Business Income, since Goodwill does not fit in the above deinition. He decides to disallow the entire goodwill of Rs 20 crores in the Balance sheet.

2. I am perplexed on 2 counts ...

First of all I have not amortized the entire amount of goodwill and if at all disallowance to be made it should be on the amount debited to P& L ( say I write off Rs 2 crores over 10 yrs, then I feel the AO can disallow only Rs 2 Cr)

Secondly, suppose the original order for the assessment year is pending before CIT (A), Can AO issue a re-assessment order?

is there any case law to support my views...What is the way to counter AO's stand? Best of all which treatment is correct disallowfully (10cr) /partly disallow(2 cr) / Allow ?

Friends or Experts who have faced a situation like pls answer this

Hi Vikram.. I wanna know as to how the consideration for merger has been apportioned amongst assets by the merged co.

In my view, goodwill is a capital expenditure since it is paid in anticipation of future super profits. There is no provision in the IT Act which allows for amortisation of goodwill except for claiming depreciation u/s 32. So, i wanted to know as to how the purchase consideration been accounted in the books of the merged firm as far as Income Tax Act is concerned.

As far as disallowance is concerned, the AO can add back only that quantum which was considered in ascertainment of income. Hence, the question of adding back entire amount of goodwill does not arise.

As regards issue of notice u/s148 is concerned, i will get back to u after referring some case laws