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TMI Blog1971 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, the value of the 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 ? " The facts are very simple. The assessees in these cases are Mr. K. N. Khanna, Mr. B. K. Khanna and Mrs. S. Khanna. All of them owned shares in Messrs. B. K. Khanna and Co. (P.) Ltd., Messrs. K.N. Khanna and B. K. Khanna, each owned 2,221 shares while Mrs. S. Khanna owned 556 shares in the said company. While ascertaining the value of a share of the said company with reference to the value of assets thereof the question arose as to whether any value in regard to the goodwill of the said company was taken into consideration. The Wealth-tax Officer valued the shares at Rs. 145 per share. When the assessees took it up in appeal to the Appellate Assistant Commissioner it was contended by them that the value of goodwill taken in the sum of Rs. 2,50,000 in respect of the shares of B. K. Khanna and Co. (P.) Ltd. should be excluded while computing the share value of the said company. The Appellate Assistant Commissioner took the view that goodwill of a business was a capital asset whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " which has been defined in section 2(m) reads as under : " 'Net wealth' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than........ " From that definition again certain other debts and taxes, etc., have been excluded. Section 3 of the Act is the charging section which lays down that there shall be charged for every assessment year commencing on and from the 1st day of April, 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. Section 4 mentions certain assets which are to be included in computing the net wealth of an individual while section 5 lays down the exemptions in respect of the assets mentioned therein. Such assets shall not be included in the wealth of the assessee. Section 6 prescribes the assets and debts which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de-marks, etc. " We have not had the benefit of seeing this book as neither counsel was aware of it nor are we in a position to say whether the " valuation of shares " was being considered by the learned author from the point of view of the Wealth-tax Act. The question has, therefore, to be viewed as to what should be the ordinary meaning of the term " goodwill " and whether the same enters into calculation while considering the wealth of a man assessable to tax. In Commissioners of Inland Revenue v. Muller Co.'s Margarine Ltd. the meaning of the words " property locally situate out of the United Kingdom " was under discussion before the House of Lords in connection with the payment of ad valorem duty under the Stamp Act of 1891. The question was that, though the agreement was made in England, whether the goodwill was " property locally situate out of the United Kingdom " within the meaning of section 59(1) of the said Act so that its valuation could also be included for the purpose of computing the stamp duty. If goodwill was property the ad valorem duty would have been payable on the agreement as if it were conveyance or sale. Lord Macnaghten observed " What is goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own. In Dulaldas Mullick v. Ganesh Das Damani, P. B. Mukharji J. (as he then was) sitting with Bachawat J. (as he then was) referred to two old cases at page 282 of the report. Vice-Chancellor Wood in Churton v. Douglas quoted with approval the well-known observations of Lord Eldon, where the learned Lord had said : " 'Goodwill' must mean every advantage---every positive advantage, if I may so express it, as contrasted with the negative advantage of the late partner not carrying on the business himself---that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on, or with the name of the late firm, or with any other matter carrying with it the benefit of the business. The other case referred to by the learned judge is Cruttwell v. Lye. Lord Eldon again made the emphatic observation at page 346 : " T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbatta and Co. P. Ltd. v. Commissioner of Excess Profits Tax Hidayatullah J. (as he then was) referred to some of the cases to which we have already drawn attention and then alluded to the case of Federal Commissioner of Taxation v. Williamson, where Rich J. has observed : " Hence to determine the nature of the goodwill in any given case, it is necessary to consider the type of business and the type of customer which such a business is inherently likely to attract as well as the surrounding circumstances....The goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom " ; and ended by referring to Earl Jowitt's Dictionary of the English Law where " goodwill " is defined as follows : " The goodwill of a business is the benefit which arises from its having been carried on for some time in a particular house, or by a particular person or firm, or from the use of a particular trade mark or trade name " ; and said : " It will thus be seen tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised before the Tribunal. In S. Kuppuswami v. Commissioner of Income-tax, the question before the High Court of Madras was with regard to the nature of the expenditure incurred on account of payment for goodwill. The claim on behalf of the assessee was that the sum of Rs. 5,000 paid by him amounted to a revenue expenditure while the department had held that it was a capital expenditure. The learned judges referred to a judgment of the Bombay High Court in Vithaldas Thakordas and Co. v. Commissioner of Income-tax, where M. C. Chagla J. (as he then was) had observed : " If the partnership had acquired the goodwill by paying a lump sum, undoubtedly that would have been a capital expenditure ; or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain instalments, each instalment would have been in the nature of a capital expenditure. But in this case, as the partnership did not acquire anything in the nature of a permanent asset, the payment to Bai Tarabai is not a capital but a revenue expenditure. " The test, obviously, was whether the assessee became the owner of the goodwill or was merely a user of the goodwill. In the former case, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) merely deals with the case of goodwill purchased by an assessee for a price and, since the assessees in the instant case did not make the purchase, their shares cannot be valued by the addition of the goodwill. We fail to understand this argument. The payment of goodwill was made by the private limited company for the purpose of acquiring the business of a running partnership. Whatever amount was paid by the said company on account of goodwill has got to be added to the value of the shares which were allotted to the present assessees. It appears that the amount paid for goodwill was Rs. 2,50,000. The assessees among themselves hold more than 98 per cent. of the shares. In such a situation the price paid by the company on account of goodwill has to be reflected in the shares held by the assessees. The question as to whether goodwill is a tangible or an intangible asset is neither here nor there. Goodwill of a business is a capital asset which is as much realisable as any other tangible asset and, therefore, the value of shares has to be determined by the addition of that amount to the goodwill value of the company as reflected in the shares. The question has, therefore, to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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