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TMI Blog2014 (11) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... uation Officer and adopted his own method and arrived at erroneous conclusions - the value of goodwill determined by the Registered Valuers viz. M/s. S.I. Mogul & Co., ₹ 1,60,00,000/- being based on accepted method of accountancy and settled principles of law – the order of the Tribunal is upheld – Decided against revenue. Addition on technical know-how deleted – Held that:- The know-how was generated in the course of day to-day business operations of the assessee company. It did not separately pay for acquiring this capital asset – the Tribunal tightly recorded that the technical know how is obviously a capital asset - The price realised on sale of capital asset would be a capital receipt - The only facts certain expenses for calender years 1968 and 1969 of research section had been allowed as deduction - It is not brought on record by the ITO as to what was the nature of those expenses which had been allowed and what amount has been allowed - there was no cost of this asset and it could not be therefore liable to capital gain tax - the goodwill which was assessed by the valuer in scientific method - There was no substitute opinion by any competent officer – the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has been incurring losses right from its inception the cost of development of products and the use of expertise, was estimated at ₹ 50,000/- which included the expenses incurred by the assessee in connection with the obtaining and transfer of drug licences for the manufacture of drugs. 5. The assessee filed appeal before the CIT(A) who held that in respect of goodwill, the method adopted by the Registered valuer was in consonance with the law. The Assessing Officer had not referred the matter to the valuation cell. The Assessing Officer was directed to accept the valuation of goodwill at ₹ 1,60,00,000/-. The CIT(A) further held that the acquisition of technical knowhow did not cost the assessee something in terms of money and directed the Assessing Officer to delete the addition of ₹ 78,65,000/- to the total income on account of the amount received on technical knowhow. . 6. On further appeal, at the instance of the revenue, the Tribunal upheld the findings of the CIT(A) on both the issues and dismissed the revenue s appeal. Hence the above questions of law are referred for the opinion of this Court. 7. Learned counsel Mr. Parikh for the applicant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue regard to the nature of the risk involved. In other words, while determining the value of goodwill, the purchaser has mainly to ascertain as to what future annual super profit he can reasonably expect from the business he wishes to acquire, and for this purpose, super profit may be defined as the amount by which the future profits of any undertaking are likely to exceed a normal rate of interest as would ordinarily be earned in a like business. The first step towards, arriving at a fair exchangeable value of goodwill is to ascertain the net annual earnings of the business. For this purpose, it would not be safe to take the net earning of any one normal year, but to find out after a careful and exhaustive investigation of the books of accounts, the average net annual earnings on the basis of the past three to five years. From the average net profits arrived at, there should be deducted interest at least 6 per cent on the capital outlay involved in the carrying on of the business, and a sum as would cover the proprietor s services to the business, if the same has not been charged against the profits, in the past. The prospective purchaser having thus ascertained the probable ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealise at the very outset that when one acquires a firm and its goodwill, one is hoping to earn good profits in the future. If, for any reason, it is evident that profits in future will be low, one will not pay much for goodwill perhaps one will decline to acquire the firm itself. Good past profits are not relevant except to the extent they point to the possibility of earning good profits in the future also. Chapter 20, page 3. One who pays for goodwilll can look only to the future profits. Hence, the business will be thoroughly examined to see what special advantage it is in possession of and which of then are likely to continue with the change in ownership and passage of time. The attempt is to establish the future maintainable profits. From the above extracts from the standard books of accountancy, it is evident that expected super profits method of valuation of goodwill is an accepted method. This method was adopted by the Hon ble Patna High Court in the case of DASS CO. (supra); a part of quotation that we have extracted from Batliboi s book was also quoted with approval. The above method was also adopted by the Hon ble Madras High Court in the case of K.A. Subra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted the addition. The Tribunal upheld the findings of the ld. CIT(A). The Tribunal has given its reasoning at paragraph No. 12 which is reproduced as under: We have considered the rival submissions and perused the facts on record. We accept the assessee s plea that technical knowhow was generated in the course of day to-day business operations of the assessee company. It did not separately pay for acquiring this capital asset. The ratio laid down by the Tribunal in the case of BALKRISHNA V. DOSHI VS. ITO (24 TTJ 424); ITO VS. S.C.A. (P) LTD. (4 Taxman 568) and DY. CIT VS. GUJARAT SMALL INDUSTRIES CORPORATION (supra), will squarely apply to the facts of the present case. In the latest decision reported in DY. CIT VS. G.S.I.C. (supra), the Tribunal has held as under: `The technical know how is obviously a capital asset. The price realised on sale of capital asset would be a capital receipt. The only facts certain expenses for calender years 1968 and 1969 of research section had been allowed as deduction. It is not brought on record by the ITO as to what was the nature of those expenses which had been allowed and what amount has been allowed. If they represented ..... X X X X Extracts X X X X X X X X Extracts X X X X
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