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TMI Blog1967 (8) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is not disputed that the total of ordinary shares issued by Messrs. Minerals Metals Private Ltd. was 2,020 shares of ₹ 100 each fully paid up. It is not also disputed that the shares were not quoted in the stock exchange. In determining the value of the shares held by the deceased, the Assistant Controller of Estate Duty proceeded to determine the break-up value of the shares on the basis of the net assets of the company as disclosed in the balance-sheet as on June 18, 1958. He computed the net assets of the company, firstly, at ₹ 4,05,034. In arriving at the figure, he did not allow any deduction for proposed dividend, which was shown as liability in the balance-sheet. As the balance-sheet did not include any value for the goodwill of the company, he estimated the value of the goodwill at ₹ 1,10,000 and added back the same to the value of the net assets as computed by him. The method employed by the Assistant Controller in valuing the goodwill is hereinafter set out: The value of each share in the company on the book-value of the assets as on June 18, 1958, comes to nearly ₹ 200. The average annual profits of the company for the 3 years ended Jun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goodwill taken at 4 year's purchase of the annual superprofits was in any event too high. The Tribunal partly accepted the contention of the accountable person with the following observation: There can be no doubt that goodwill, if there is one, can be computed and taken into consideration in placing the valuation on the shares of the company. In this case, Minerals and Metals Private Ltd. have been consistently earning considerable profits. In computing the goodwill, the Assistant Controller had allowed 20 per cent. margin for any future fall in the profits and it is after this deduction that the annual profits were estimated at ₹ 87,500. But to value the goodwill at four years' purchase of the annual super-profits of ₹ 27,500 was, in our opinion, very high. Taking into consideration the fact that the deceased was holding a minority interest in this private limited company and could exercise no control over the dividend policy of the company, in our opinion, a round figure of ₹ 50,000 for the value of the goodwill on the basis of two years' purchase of the super-profits would be a more correct estimate of the value of goodwill. The net assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll maintain the same profit earning capacity in future. Were we called upon to consider such a question, we would have been inclined to hold that goodwill has a marketable value and forms part of the assets of a company and that there is no reason to exclude that value when valuing the assets of the company. Then the question is how the goodwill is to be valued. There are several methods of valuation of goodwill to be found in standard books of accountancy. In Batliboi's book on Advanced Accounting , 22nd edition, at pages 887-88, the following passage appears: ...while determining the value of goodwill, the purchaser has mainly to ascertain as to what future annual super-profits 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 earnings of any one normal year, but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot forget to mention that there have been extreme cases where the amount of goodwill has been ascertained by capitalising super-profits of five to ten years. In Dymond's Death Duties (14th edition), at pages 613-14, the learned author observes: With business of a substantial size, there are two common ways of computing the goodwill value, viz., the 'super-profits' method and the 'total capitalisation' method. The two methods, which are complementary and may often be used as a check upon each other, and which may theoretically give the same results, may conveniently be illustrated by an example (the figures given are purely illustrative and not to be regarded as any indication of the appropriate yields in any particular case). In each case it is necessary to estimate the probable amount of the future profits (after making a reasonable allowance for management remuneration)-suppose these are taken at ? 20,000 per annum. Then-- (a) quot;Super-profits quot; method: Estimated value of tangible assets employed, say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill appears to have been adopted by the Madras High Court in K.A. Subramaniam v. Controller of Estate Duty. [1962] 46 I.T.R. (E.D.) 1 Thus, for valuation of goodwill, capitalisation of super-profit method appears to be an accepted method of valuation. The Tribunal did not condemn the valuation of the goodwill by the method employed by the Assistant Controller of Estate Duty (as was affirmed by the Appellate Controller, subject to certain reliefs for contingent liabilities) but differed on the ground that the deceased was holding a minority interest in this private limited company and could exercise no control over the dividend policy of the company and, therefore, the number of years by which the super-profits should be multiplied should be reduced from four years to two years. In so doing, the Tribunal went wrong. The Tribunal was called upon to consider the value of the goodwill of Messrs. Minerals and Metals Private Limited so as to value the shares in the said company held by the deceased. The value of the goodwill by the company was not dependent upon the number of shares held by the deceased. The Tribunal was not considering the value to the deceased of the goodwill of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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