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.

Headnote:
EXCESS PROFITS TAX ACT - SECTION 8(3) AND 8(5) - GOODWILL - CALCULATION OF GOODWILL - FACTORS TO BE CONSIDERED.
Fact of the Case:

The assessee company transferred its theatre and restaurant business to a subsidiary company. The subsidiary company claimed goodwill as part of its capital for the purpose of calculating excess profits tax. The Income-tax Appellate Tribunal held that Section 8(3) of the Excess Profits Tax Act applied and disallowed the claim for goodwill. The High Court held that Section 8(5) applied and allowed the claim for goodwill.
Finding of the Court:

The Supreme Court held that the Tribunal erred in applying Section 8(3) of the Excess Profits Tax Act and that Section 8(5) was applicable. The Court held that the Tribunal should have considered all the factors that contribute to goodwill, including the location, the service, the standing of the business, the honesty of those who run it, and the lack of competition.
Issues: Whether Section 8(3) or Section 8(5) of the Excess Profits Tax Act applied to the calculation of goodwill.
Ratio Decidendi: The Court held that Section 8(5) of the Excess Profits Tax Act applied to the calculation of goodwill. The Court held that goodwill 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.
Final Decision: The Court allowed the appeal and directed the High Court to frame a suitable question and ask for a statement of the case from the Tribunal.

Judgment

HIDAYATULLAH, J. : These are two appeals, with special leave, against an order of the High Court of Bombay rejecting a petition under section 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 and Co. (Private) Ltd., Bombay, have filed these appeals and the Commissioner of Excess Profits Tax, Bombay, is the respondent.

2. 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.

3. 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. 7,90,100 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 cambatta family. The assets which were transferred were as follows:

Assets :

Assets transferred ... Rs. 1,28,968

Stock-in-trade ... Rs. 40,000

Book debts ... Rs. 100

____________

Rs. 1,69,068

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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 account.

Rs. 5,00,000 debited to the good will account.

Rs. 40,000 debited to the stock-in-trade account.

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 :

"(1) Whether on the facts of the case, the Appellate Tribunal was right in applying Sec. 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?"

4. 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-sec. (5) and not sub-sec. (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."

5. 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 p

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