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PETITIONER: M/S.  S. C. CAMBATTA & CO.  PRIVATE LTD., BOMBAY

       Vs.

RESPONDENT: THE COMMISSIONER OF EXCESS PROFITS  TAX BOMBAY

DATE OF JUDGMENT: 30/11/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

CITATION:  1961 AIR 1010            1961 SCR  (2) 805  CITATOR INFO :  R          1972 SC2373  (11)

ACT: Excess   Profits   Tax--Assessment--Sale  of   theatre   and restaurant--Goodwill--Value  of--Principle  of  computation- Excess Profits Tax Act, 1940 (XV of 1940).

HEADNOTE: 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. 222. 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

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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.

JUDGMENT: 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 respondent. 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: 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 account. Rs.  5,00,000    debited to the goodwill account. Rs.  40,000      debited to the stock-in-trade account.

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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

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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 follows: "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 goowill of a business  depends upon  a variety of circumstances or a combination  of  them. The location, the service, the standing of the business, the

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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 it. 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.