1982 (10) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Goodwill of the firm.
2. Basis adopted for the valuation of the goodwill.
3. Valuation of the goodwill as two years' purchase of average of three years' profits.
4. Valuation of unquoted equity shares.
5. Exclusion of the value of shares in house property for rate purposes.

Issue-wise Detailed Analysis:

1. Goodwill of the Firm:
The Tribunal was justified in holding that there was goodwill of the firm. The accountable person contended that the nature of the business (wholesale trading in foodgrains and kirana goods) did not generate goodwill. However, this contention was not raised before the Tribunal. The Tribunal considered relevant facts and found as a fact that the firm had goodwill. Thus, the Tribunal did not commit any error of law in holding that the firm had goodwill.

2. Basis Adopted for the Valuation of the Goodwill:
The Tribunal considered the contention that some articles dealt by the firm resulted in losses and there was a downward trend in profits. Despite this, the Tribunal held that two years' purchase would be a fair estimate of the goodwill. This basis was deemed appropriate given the circumstances, and the Tribunal did not err in law.

3. Valuation of the Goodwill as Two Years' Purchase of Average of Three Years' Profits:
The Tribunal's decision to use two years' purchase of the average of three years' profits as the valuation method for goodwill was upheld. The Tribunal took into account the fluctuating profits and determined that this method was fair. The Tribunal's approach was legally sound, and the valuation method was affirmed.

4. Valuation of Unquoted Equity Shares:
The Asst. Controller valued the 640 equity shares of Hanuman Industries Pvt. Ltd. at Rs. 73,265, based on the accountable person's initial valuation. The Appellate Controller, however, valued them at Rs. 36,480, considering the balance-sheets and applying Rule 1D of the Wealth-tax Rules, 1957. The Tribunal reverted to the initial valuation of Rs. 73,265, but this was contested. The accountable person can correct the valuation if material is provided. The Appellate Controller's valuation was based on substantial material and principles from Rule 1D, which is permissible in the absence of specific rules under the E.D. Act. The Tribunal's decision to revert to the initial valuation was unjustified without proper verification. Thus, the valuation made by the Appellate Controller was upheld, and the Tribunal's valuation was rejected.

5. Exclusion of the Value of Shares in House Property for Rate Purposes:
The Tribunal excluded the share of the three lineal descendants in the house property known as Parvati Bhawan from the total computation under Section 33(1)(n) read with Section 34 of the Act. This reasoning was found unintelligible and contrary to the provisions of Section 34(1)(c), which requires aggregation of the interest of all lineal descendants for determining the rate of estate duty. The Karnataka High Court in CED v. K. Nataraja and the Division Bench of this court in Smt. Gunvantibai v. CED supported this view. Thus, the Tribunal erred in excluding the value of the shares of the lineal descendants for rate purposes. The correct legal position is that the value of the lineal descendants' shares must be aggregated for rate determination, and the Tribunal's decision was reversed.

Conclusion:
The reference is answered with the Tribunal's decisions on issues 1 to 3 being upheld, while the decisions on issues 4 and 5 are reversed. The parties shall bear their own costs of this reference.