1971 (1) TMI 23 - HC - Wealth-tax

Company aquiring the business of a firm - amount paid as consideration for goodwill - computation of value of company s shares

Summary

Issues Involved:
1. Whether the value of goodwill shown at Rs. 2,50,000 in the balance-sheet of the company, M/s. B. K. Khanna and Co. (P.) Ltd., is an 'asset' as defined in section 2(e) of the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Definition and Inclusion of Goodwill as an Asset:
The primary issue was whether the goodwill valued at Rs. 2,50,000 in the balance sheet of M/s. B. K. Khanna and Co. (P.) Ltd. qualifies as an 'asset' under section 2(e) of the Wealth-tax Act, 1957. The Tribunal had initially held that goodwill, being an intangible asset, could not be included under the term 'assets' as defined in the Wealth-tax Act, 1957. However, the High Court examined the broader definition of 'assets' which includes "property of every description, movable or immovable," and noted that the definition is exclusive, only excluding certain specified properties.

2. Judicial Precedents and Interpretation of Goodwill:
The judgment referenced several precedents to elucidate the nature of goodwill. In *Commissioners of Inland Revenue v. Muller & Co.'s Margarine Ltd.*, Lord Macnaghten described goodwill as "the benefit and advantage of the good name, reputation, and connection of business." Goodwill was considered inseparable from the business and was defined to include various intangible benefits that add value to a business. Similarly, in *Dulaldas Mullick v. Ganesh Das Damani*, goodwill was described as encompassing every positive advantage acquired by a business.

3. Goodwill as a Capital Asset:
The court noted that goodwill, despite being intangible, is a capital asset that is realisable and adds value to a business. This was reinforced by references to cases like *New Gujarat Cotton Mills Ltd. v. Labour Appellate Tribunal* and *S. C. Cambatta and Co. P. Ltd. v. Commissioner of Excess Profits Tax*, which recognized goodwill as an asset that contributes to the overall value of a business.

4. Valuation and Inclusion in Wealth Tax:
The judgment emphasized that the value of goodwill must be considered when assessing the net wealth of an individual or entity. The Wealth-tax Rules, particularly rule 2C(b), indicate that the market value or the price paid for goodwill should be taken into account for balance sheet adjustments. The court dismissed the argument that goodwill should not be included in share valuation because the assessees did not directly purchase it. It was clarified that the goodwill paid by the private limited company for acquiring the business must be reflected in the value of the shares held by the assessees.

Conclusion:
The High Court concluded that goodwill is indeed an asset within the meaning of section 2(e) of the Wealth-tax Act, 1957. The value of goodwill must be included in the valuation of shares for wealth tax purposes. The question posed was answered in the affirmative, favoring the revenue and against the assessee. The Commissioner was awarded costs of the proceedings, with counsel's fee set at Rs. 250.