1972 (8) TMI 12 - HC - Income Tax

Managing agency agreement - right to receive share income - basis adopted for the valuation of the goodwill - hold that the deceased s share in the two managing agency firms had rightly been included in his estate - Deputy Controller valued the goodwill by estimating the profits which would have been earned for the period of seven years. But the Board, on appeal, re-valued the goodwill on the basis of actual profits hold that valuation of goodwill on the basis of the actual profits would be proper

Summary

Issues:
1. Valuation of goodwill in managing agency firms for estate duty assessment.
2. Determination of whether managing agency agreements constitute property passing on death.
3. Assessment of the basis adopted for the valuation of goodwill.

Analysis:

Issue 1: Valuation of Goodwill
The judgment pertains to the estate duty assessment of a deceased individual, including the valuation of goodwill in managing agency firms. The accountable persons objected to the valuation by the Deputy Controller, arguing that goodwill attached to managing agencies is not property passing on death and has no saleable value. However, the Board rejected this contention, citing the Supreme Court's decision in J. K. Trust, Bombay v. Commissioner of Income-tax, which established that goodwill in managing agency firms constitutes property passing on death. The Board re-valued the goodwill based on actual profits earned by the firms, resulting in a revised valuation for the deceased's share in the two managing agency firms.

Issue 2: Managing Agency Agreements as Property
The accountable persons contended that managing agency agreements are merely contracts of personal service and do not possess goodwill or constitute property passing on death. However, the court rejected this argument, relying on legal precedents such as Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad and J. K. Trust, Bombay v. Commissioner of Income-tax. These cases established that managing agency is considered a business and profits derived from it constitute property. The court emphasized that the right to receive income from a business is itself property, as affirmed in M. E. Moolla Sons Ltd. v. Official Assignee, Rangoon.

Issue 3: Basis of Valuation
Regarding the basis for valuing the goodwill, the Deputy Controller initially estimated future profits for seven years to determine the present value. The Board, on appeal, re-evaluated the goodwill based on actual profits earned by the firms. The court upheld this re-valuation, noting that the accountable persons failed to propose an alternative valuation method. Consequently, both questions raised by the accountable persons were answered in the affirmative, affirming the inclusion of the deceased's share in the managing agency firms in his estate and directing the accountable persons to bear the costs of the revenue.

This judgment clarifies the legal status of managing agency agreements, establishes the valuation of goodwill in such firms for estate duty purposes, and underscores the broader definition of property under relevant legal precedents.