Vidyadharan Vs. State of Kerala 
INSC 246 (30 November 1960)
CITATION: 1961 AIR 1010 1961 SCR (2) 805
CITATOR INFO :
R 1972 SC2373 (11)
Excess Profits Tax--Assessment--Sale of
theatre and restaurant--Goodwill--Value of--Principle of computation- Excess
Profits Tax Act, 1940 (XV of 1940).
The appellant carried on various businesses
and one such was the running of a Theatre and Restaurant. In October, 1943, a
subsidiary company was formed which was using the premises of the Theatre under
a lease granted to it from April, 1944.
In working out the capital of the two
companies for excess profits tax, a claim of rupees five lakhs for goodwill as
part of the capital of the subsidiary company was not taken into account.
On reference to the High Court it held that
the Tribunal should have allowed the value of the goodwill whatever it thought
was reasonable at the date of transfer. Thereafter the Tribunal took into account
only the value lease-hold of the site to the subsidiary company and came to the
conclusion that no goodwill had been acquired by the business of the Theatre as
such and whatever goodwill there was related to the site of building itself,
and estimated the value of goodwill at rupees two lakhs. Petition under ss.
66(1) and 66(2) read with S. 21 of the Excess Profits Tax Act being rejected by
the Tribunal and the High Court, the appellants came appeal by special leave.
Held, that the goodwill of a business needed
to be considered in a broader way. It depended upon a variety of circumstances
or a combination of them. The nature, the location, the (1) (1959) 36 I.T.R.
102 806 service, the standing of the
business, the honesty of those who run it, and the lack of competition and many
other factors went individually or together to make up the goodwill, though the
locality always played a considerable part. Shift the locality, and the
goodwill may be lost but it was not everything. The power to attract custom
depended on one or more of the other factors as well.
In the instant case a question of law did
arise, whether the goodwill of the Eros Theatre and Restaurant Ltd. was
calculated in accordance with law.
Cruttwell v. Lye, (1810) 17 ves. 335, Trego
v. Hunt, (1896) A. C. 7 (H. L.), Inland Revenue Commissioners v. Muller &
Co.'s Margarin, Ltd., 9101 A. C. 217 (H. L.), Daniell v.
Federal Commissioner of Taxation, (1928) 42
C. L. R. 296 and Federal Commissioner of Taxation v. Williamson, (1943) 67
C.L.R. 561, discussed.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 776 and 777 of 1957.
Appeals by special leave from the judgment
and order dated September 25, 1956, of the Bombay High Court in Income-tax
Application No. 48 of 1956; and from the judgment and order dated March
17,1954, of the Income-tax Appellate Tribunal, Bombay, in E.P.T.A. Nos. 757,
903 and 944 of 1948-49, respectively.
A. V. Viswanatha Sastri and G.
Gopalakrishnan, for the appellants.
A. N. Kripal and D. Gupta. for the
1960. November 30. The Judgment of the Court
was delivered by HIDAYATULLAH, J.-These are two appeals, with special leave,
against an order of the High Court of Bombay rejecting a petition under s.
66(2) of the Indian Income-tax Act and the order of the Income-tax Appellate
Tribunal, Bombay, in respect of which the petition to the High Court was made.
Messrs. S. C. Cambatta & Co. (Private)
Ltd., Bombay, have filed these appeals, and the Commissioner of Excess Profits
Tax, Bombay, is the respondent.
We are concerned in these appeals with three
chargeable accounting periods, each ending respectively on December 31,
beginning with the year, 1943 and ending with the year, 1945.
807 The appellants carry on various
businesses, and one such business was the running of a theatre and restaurant,
called the Eros Theatre and Restaurant. In October, 1943, a subsidiary Company
called the Eros Theatre and Restaurant, Ltd. was formed. The paid up capital of
the subsidiary Company was Rs. 7,91,100 divided into 7,911 shares of Rs.
100 each. 7,901 shares were allotted to the
appellant Company as consideration for assets, goodwill, stock-in- trade and
book debts which were taken over by the subsidiary Company, and the remaining
10 shares were held by the Cam- batta family. The assets which were transferred
were as follows:
Assets transferred.. Rs.1,28,968
Stock-in-trade. Rs.40,000 Book debts..... Rs.100 ------------------ Rs.1,69,068
------------------ They together with the capital reserve of Rs. 6,21,032 made
up the amount of Rs. 7,90,100. In the books of the subsidiary Company, the
share capital account was shown separately as follows:
Rs. 2,50,000 debited to the various assets
Rs. 5,00,000 debited to the goodwill account.
Rs. 40,000 debited to the stock-in-trade
Rs. 100 debited to the book debts account.
It will thus appear that goodwill was not
shown separately in the appellants' account books, but only in the accounts of
the subsidiary Company. In working out the capital of the two Companies for
excess profits tax, a sum of Rs. 5,00,000 was claimed as goodwill as part of
the capital of the subsidiary Company. Both the Department as well as the
Tribunal held that s. 8(3) of the Excess Profits Tax Act applied; and the
goodwill was not taken into account in working out the capital. The Tribunal
declined to state a case, but the High Court directed that a reference be made
on two questions, which were framed as follows:
808 "(1) Whether on the facts of the
case, the Appellate Tribunal was right in applying section 8(3) of the Excess
Profits Tax Act? (2)..Whether in the computation of the capital employed..in
the business of the assessee, the Tribunal erred in....not including the value
of the goodwill or any "portion thereof?" The High Court by its
judgment and order answered the first question in the negative and the second,
in the affirmative.
It held that sub-s. (5) and not sub-s. (3) of
s. 8 of the Excess Profits Tax Act was applicable. It, therefore, held that
"the Tribunal should have allowed for the value of the goodwill whatever
it thought was reasonable at the date of the transfer." When the matter
went before the Tribunal again, three affidavits and a valuation report by a
firm of architects were filed. The goodwill, according to the report of the
architects, amounted to Rs. 25 lakhs. It may be mentioned here that the
subsidiary Company was using the premises under a lease granted on November 20,
1944, for three years beginning from April 1, 1944, on a rental of Rs. 9,500
per month. The Tribunal came to the conclusion that no goodwill had been
acquired by the business of the Theatre as such, and that whatever goodwill
there was, related to the site and building itself. They then proceeded to
consider what value should be set upon the goodwill on the date of the transfer
of the subsidiary Company as directed by the High Court. They took into account
certain factors in reaching their conclusions. They first considered the
earning capacity of the business, and held that prior to 1942 the business had
not made profits, and that the name of Eros Theatre and Restaurant thus by
itself had no goodwill at all. They, therefore, considered that the only
goodwill which had been acquired attached to the lease, which the trustees had
given to the Eros ;Theatre and Restaurant Ltd., and computing the goodwill as
the value of the lease to the subsidiary Company, they felt that Rs. 2 lakhs
was a liberal estimate of the value of the goodwill in the hands of Eros
Theatre and Restaurant, Ltd. at the material time.
809 Petitions under ss. 66(1) and 66(2) read
with a. 21 of the Excess Profits Tax Act were respectively rejected by the
Tribunal and the High Court; but the appellants obtained special leave from
this Court, and filed these appeals.
In our opinion, a question of law did arise
in the case whether the goodwill of the Eros Theatre and' Restaurant, Ltd., was
calculated in accordance with law. The Tribunal seems to have taken into
account only the value of the leasehold of the site to the subsidiary Company,
and rejected other considerations which go to make up the goodwill of a
business. No doubt, in Cruttwell v. Lye(1), Lord Eldon, L. C. observed that
goodwill was "nothing more than the probability that the old customers
would resort to the old place". The description given by Lord Eldon has
been considered always to be exceedingly narrow. The matter has to be
considered from the nature of the business, because the goodwill of a public
inn and the goodwill of a huge departmental stores cannot be calculated on identical
principles. The matter has been considered in two cases by the House of Lords.
The first case is Trego v. Hunt (2), where all the definitions previously given
were considered, and Lord Macnaghten observed that goodwill is "the whole
advantage, whatever it may be of the reputation and connection of the firm,
which may have been built up by years of honest work or gained by lavish
expenditure of money". In a subsequent case reported in Inland Revenue
Commissioners v. Muller & Co.s.Margarin, Ltd. (3), Lord Macnaghten at pp.
223 and 224 made the following observations:.
"What is goodwill? It is a thing very
easy to describe, very difficult to define. It is the benefit and advantage of
the good-name, reputation, and connection of a business.
It is the attractive force which brings in
custom. It is the one thing which distinguishes an old-established business
from a new business at its first start.................. If there is one
attribute common to all cases of goodwill in it is the attribute (1) (1810) 17
Ves. 335. 346.
(2) (1896) A. C. 7 (H.L.).
(3) (1901) A.C. 217 (H.L.).
810 of locality. For goodwill has no
independent existence. It cannot subsist by itself. 'It must be attached to a
business. Destroy the business, and the goodwill perishes with it, though
elements remain which may perhaps be gathered up and be revived again".
These two cases and others were considered in
two 'Australian cases. The first is Daniell v. Federal Com- missioner of
Taxation (1), where, Knox, C. J. observed:
"My opinion is that while it cannot be
said to be absolutely and necessarily inseparable from the premises or to have
no separate value, prima facie at any rate it may be treated as attached to the
premises and whatever its value may be, should be treated as an enhancement of
the value of the premises".
In the second case reported in Federal
Commissioner of Taxation v. Williamson (2), Rich, J., observed at p. 564 as
"Hence to determine the nature of the
goodwill in any given case, it is necessary to consider the type of business
and the type of customer which such a business is inherently likely to attract
as well as the surrounding circumstances............ The goodwill of a business
is a composite thing referable in part to its locality, in part to the way in
which it is conducted and the personality of those who conduct it, and in part
to the likelihood of competition, many customers being no doubt actuated by
mixed motives in conferring their custom".
In Earl Jowitt's Dictionary of English Law,
1959 Edn., "goodwill" is defined thus:
"The goodwill of a business is the
benefit which arises from its having been carried on for some time in a
particular house, or by a particular person or firm, or from the use of a
particular trade mark or trade name" It will thus be seen that the goodwill
of a business depends upon a variety of circumstances or a combination of them.
The location, the service, the standing of
the business, the honesty of those who run it, and the lack of competition and
many other factors go individually or together to make up the goodwill, (1)
(1928) 42 C.L.R. 296.
(2) (1943) 67 C.L.R. 561.
811 though locality always plays a
considerable part. Shift the locality, and the goodwill may be lost. At the
same time, locality is not everything. The power to attract custom depends on
one or more of the other factors as well. In the case of a theatre or
restaurant, what is catered, how the service is run and what the competition
is, contribute also to the goodwill.
From the above, it is manifest that the
matter of goodwill needs to be considered in a much broader way than what the
Tribunal has done. A question of law did arise in the case, and, in our
opinion, the High Court should have directed the Tribunal to state a case upon
Civil Appeal No. 776 of 1957 is allowed. The
High Court will frame a suitable question, and ask for a statement of the case
from the Tribunal, and decide the question in accordance with law. The costs of
this appeal shall be borne by the respondent; but the costs in the High Court
shall abide the result. There will be no order in Civil Appeal No. 777 of 1957.
C. A. No. 776 of 1957 allowed.