1979 (8) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of the will of Govindji Madhavji regarding the property passing on the death of Jamnabai.
2. Method of valuation of shares of limited companies, specifically whether the goodwill should be computed before or after deduction of taxes.

Detailed Analysis:

Issue 1: Interpretation of the Will of Govindji Madhavji
The primary question was whether the Tribunal erred in law by holding that only one-half of the property left by Govindji Madhavji passed on the death of Jamnabai and became liable for estate duty. The determination of this issue required a true construction of the will of Govindji and the effect of an agreement executed on July 19, 1915.

Key Findings:
- Govindji's will created life estates in favor of Javerbai, Jamnabai, and Damodardas, with an absolute remainder vested in Damodardas.
- Clause 5 of the will expressed Govindji's desire for his family to live together peacefully and provided for monthly allowances if they chose to live separately. However, this clause was deemed precatory and did not create a binding trust or obligation.
- Clauses 11, 12, and 13 of the will specified that the life tenants had the right to enjoy the income of the residuary estate but could not alienate the property.
- The life interests were defeasible if the life tenants stopped living together.
- The principle of "Equality is Equity" was applied, leading to the conclusion that the life tenants shared equally in the income of the property.

Conclusion:
- The court held that each life tenant (Javerbai, Jamnabai, and Damodardas) had an equal share in the income of the property. Upon the death of Javerbai, Jamnabai and Damodardas each had a one-half share in the income. Therefore, only one-half of the property passed on the death of Jamnabai.

Issue 2: Valuation of Shares of Limited Companies
The second question was whether the goodwill of such companies should be computed with reference to maintainable profits before or after deduction of taxes.

Key Findings:
- The Deputy Controller valued the shares by adding the goodwill of the business to the net assets. Goodwill was valued using the super profits method, where maintainable profits were calculated before deduction of taxes.
- The Tribunal rejected the contention that provision for taxes should be deducted from the net profits to arrive at maintainable profits, reasoning that it would amount to a double deduction of taxes.

Conclusion:
- The court disagreed with the Tribunal's reasoning, stating that the provision for taxes should be deducted when valuing goodwill, as it would not result in a double deduction.
- The question was reframed to address whether the maintainable profits (less tax thereon) should be considered in the super profits method of valuation. The court answered this reframed question in the negative, indicating that taxes should be deducted.

Final Judgment:
1. Question 1: The Tribunal erred in law, and only one-half of the property passed on the death of Jamnabai.
2. Question 2 (Reframed): The Tribunal was wrong in holding that maintainable profits should not consider tax deductions in valuing goodwill.

The Tribunal was directed to reconsider the respondents' objections to the valuation of goodwill in light of this judgment. The applicant was ordered to pay the respondents' costs of Rs. 250.