1986 (7) TMI 156 - AT - Income Tax

Summary

Issues Involved:
1. Computation of goodwill based on net annual average commercial profit.
2. Deletion of specific amounts related to goodwill.
3. Inclusion of goodwill in the estate.
4. Rate of interest and managerial remuneration for goodwill computation.
5. Inclusion of lineal descendants' share for rate of duty calculation.

Issue-wise Detailed Analysis:

1. Computation of Goodwill Based on Net Annual Average Commercial Profit:
The revenue contended that the Appellate Controller erred in holding that goodwill should be computed on the basis of net annual average commercial profit, allowing deductions for 18% return on average capital employed and 25% for managerial remuneration. The Appellate Controller directed that goodwill should be computed after ascertaining the net annual average commercial profit for three years, allowing deductions for normal interest at 18% and managerial remuneration at 25%. The Tribunal agreed that the net annual average commercial profit is the proper method for computing goodwill, considering various factors like type of business, location, and earning capacity.

2. Deletion of Specific Amounts Related to Goodwill:
The revenue also contended that the Appellate Controller erred in deleting specific amounts related to goodwill of three firms. The Assistant Controller had included goodwill based on a letter from the accountable person, which was later withdrawn. The Appellate Controller noted that the Assistant Controller did not consider the subsequent letters withdrawing the initial computation. The Tribunal found that the Assistant Controller did consider these letters but did not provide a separate computation. The Tribunal directed that the Assistant Controller should verify the figures and recompute the goodwill, considering all relevant factors and documents.

3. Inclusion of Goodwill in the Estate:
The accountable person argued that no goodwill should be included in the estate. The Appellate Controller held that goodwill, if any, must be included. The Tribunal agreed with the authorities that there was goodwill in the concerns in which the deceased had an interest, based on various High Court decisions. The Tribunal emphasized that the value of goodwill should be computed considering all relevant factors and documents.

4. Rate of Interest and Managerial Remuneration for Goodwill Computation:
The revenue argued that the deductions for 18% interest and 25% managerial remuneration were excessive. The Tribunal found the 18% interest rate, including a risk element, to be high and reduced it to 15%. The Tribunal also directed that managerial remuneration should be considered only if it was not already deducted in the commercial profit computation. The Tribunal emphasized that the goodwill computation should be based on net annual average commercial profit, excluding disallowances and additions from the assessment.

5. Inclusion of Lineal Descendants' Share for Rate of Duty Calculation:
The Appellate Controller deleted the inclusion of the lineal descendants' share, following the Supreme Court's dismissal of a special leave petition in a similar case. The revenue argued that this dismissal did not establish a binding precedent. The Tribunal noted conflicting High Court decisions on this issue but found that the Calcutta High Court upheld the inclusion of lineal descendants' share for rate purposes. The Tribunal directed the Assistant Controller to include only the share of the lineal descendants, excluding the share of the widow or wife of coparceners, for rate calculation under section 34(1)(c).

Conclusion:
The Tribunal partly allowed the revenue's appeal, modifying the Appellate Controller's order to reduce the interest rate to 15% and directing the Assistant Controller to recompute the goodwill, considering all relevant factors and documents. The Tribunal also directed the inclusion of the lineal descendants' share for rate purposes, excluding the share of the widow or wife of coparceners.