1967 (9) TMI 16 - HC - Income Tax

Assessee claimed abatement on the increase in capital employed on the basis of the goodwill - If for the purpose of the assessment the valuation of the goodwill is necessary, such valuation has to be made as on the 1st day of the relevant year - goodwill should be value for each chargeable period

Summary

Issues:
1. Valuation of goodwill for excess profits tax abatement.
2. Determination of goodwill value at different time points.
3. Consideration of various factors in goodwill valuation.
4. Interpretation of Supreme Court directive on goodwill valuation.

Analysis:

The judgment by the Bombay High Court involved the valuation of goodwill for excess profits tax abatement and the determination of goodwill value at different time points. The assessee, a private limited company, transferred its business to another company in exchange for fully paid-up shares. The assessee claimed abatement on the increase in capital employed based on the goodwill of the transferred business at Rs. 5 lakhs. However, the department and the Tribunal rejected the claim, citing section 8(3) of the Excess Profits Tax Act. Upon a reference, the High Court concluded that the case was governed by section 8(5) and directed the Tribunal to determine the value of the goodwill at the date of transfer.

The Tribunal assessed the goodwill value primarily based on the value of the lease to the company, valuing it at Rs. 2 lakhs. The assessee contended that the goodwill valuation should consider various factors such as location, service, business standing, and competition. The Supreme Court agreed with the assessee, emphasizing that goodwill depends on a combination of circumstances. It directed the High Court to frame questions regarding the legality of the Tribunal's goodwill calculation.

Regarding the first question on whether the goodwill was calculated according to law, the High Court answered in the negative, stating that goodwill valuation needs a broader consideration. The Tribunal was instructed to reevaluate the goodwill based on all relevant factors as per the Supreme Court decision. For the second question, the High Court clarified that the valuation should be determined on specific dates, not constant over the years. The value of goodwill fluctuates based on circumstances, necessitating a fresh valuation for each relevant year. The High Court affirmed that the valuation should be made as on the 1st day of each relevant year, allowing for fluctuations in goodwill value.

In conclusion, the High Court's judgment highlighted the importance of considering various factors in goodwill valuation, ensuring a comprehensive assessment at different time points to reflect the changing nature of goodwill. The Tribunal was directed to reconsider the goodwill valuation in line with the Supreme Court's directive, emphasizing the need for a detailed evaluation based on all relevant circumstances.