Depreciation on goodwill

Dear ravi,

first of all, goodwill is an intangible assets and therefore no depreciation is allowed thereon. however, one can claim the amortisation of goodwill.

goodwill can generate only under two accounting standards, namely, AS-14 & AS-26.

goodwill under AS-14 arises as a result of amalgamation of two enterprises. this is also called as resulting goodwill. SUCH GOODWILL SHALL BE WRITTEN OF OVER A PERIOD OF 5 YEARS. (MAX 5 YEARS)

goodwill under AS-26, is a deliberate purchased goodwill, means the person has valued his goodwill of the business and charged the money accordingly. SUCH GOODWILL SHALL BE WRITTEN OF OVER A PERIOD OF 10 YEARS. (MAX 10 YEARS)

in your case, if it the goodwill under AS-26, then goodwill can be written off upto 2013.

Thanks

What about taxation, what tax recipent of goodwill pay.

to shashi sir,

the recipient of goodwill will not pay any tax on the amount of goodwill as such. he shall record the goodwill in his book at a price paid for such goodwill.

In the hands of transferor, where self generated goodwill is transfered, the cost of the goodwill will be taken as NIL while computing the capital gain Tax.   Sec. 55

Thank u.

The Mumbai bench of the Income-tax Appellate Tribunal in the case of Kotak Forex Brokerage Ltd.1 held that the ‘Goodwill’ will fall under the category of `business or commercial right of similar nature' under the definition of intangible asset. Accordingly, the taxpayer was entitled for the depreciation on the ‘Goodwill’ under section 32 of the Income-tax Act, 1961 (the Act).

The Tribunal observed that ‘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 Tribunal also observed that ‘Goodwill’ is nothing but positive reputation built by a person/company/business-house over a period of time which are not manufactured or produced overnight but are brought into existence by experience and reputation. Since in the current case, the taxpayer formerly known as Kohanmaz Financial Services Ltd. acquired the business of Mr. Uday S. Kotak and was going to use the name `Kotak' in its name, the taxpayer was to be benefited by the usage of the said name. Accordingly, it is to be considered as `business or commercial right of similar nature' under the definition of intangible asset.

Section32 of the Income tax provides for grant of depreciatin allowance. Section 2(11) defines block of assets . This includes intbgibe assets, being know-how, patents,copyrights,trademarks,licences, franchise or any other business or commerical rights of similar nature.The  two important conditons for claiming the depreciation is that 

1)The asset should be owned by the assesee

2) it must have been used for the purpose of business.

 A reading of your statement shows that  the company in which you are working as executive was taken over by one of its directors on a payment of Rs.30 lakhs being good will for continue to use Logo etc.  The reading indicates your company sold the good will of these assets being trade marks. In short you have sold your Logo and trade marks as it appears from the reading. If this understanding is clear since you dont own the assets any more and partuclary during the financial year, you wont be able to calim depreciation.

it is the different question whether the other company who took over your company will be able to claim this or not and has to be decided on the type of commrcial rights and usage etc on a different footings. However they are entitled for the calim of depreciation subject to fullfillment of conditions. The rate applicable is stipulated in the rules providing for rate of depreciation on various  block of assts.

The question is if your company has sold the Logo Brand name commercial interest (Trademark) for 30 lakhs and you are the receipient of the amount then the question of chargebility to taxation under captial gain is to be examined with referent to to the provison of section 45. If the take over are the nature mentioned in section47 they may be exempted for charge of captial gain. The cost of aquistio has to be determined with reference to section 49 of incometax Act.

so in nut shall the answer to your query is

If your company has sold the Logo,Brand name to the Director then the other company alone is entitlled to get the depreciation and not you.

The receipt of Rs.30lakhs received by you will be subject to capital gain tax subject to the determination of section 47 and 49.

From the reading of the statement it is not clear whether you are the receipient or the seller hence the above reply on two postions.

A.R.Sathyan

BA(hons.)lLB

advocate

retired income tax officer.

09822252492

Do agree with Mr Vishal and Mr Sathyan.

In your case it is not clear whether the goodwill is self generated or created due to revaluation of assets as part of taking over exercise of the same company. If the goodwill, logo, trademark etc have not changed hands for a price in this transaction, no depreciation is admissible as it is mere restatement of value which is not recognised by IT Act for "Actual Cost".