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TMI Blog2001 (8) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... t in law in holding that there was no goodwill attached to the assessee's cinema theatre known as Apsara? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee's method of evaluation of goodwill was not the correct method, according to the recognised principles of evaluation of goodwill?" The assessment year involved is 1972-73. The factual position in a nutshell is as follows: The assessee, a registered firm, started film exhibition business with effect from October 9, 1969. The land was acquired in the year 1967 and later a building was constructed thereon and the cinema theatre was being run under the name and style of Apsara cinema at Delhi-U.P. border, since Octob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------- Assessment year Gross Profit -------------------------------------------------------------------------------- 1969-71 1,87,761 for 4 1/2 months 1970-72 6,24,100 for full year 1971-72 5,70,170 for full year 1972-73 49,49,490 for about 11 months -------------------------------------------------------------------------------- The Income-tax Officer worked out the average yearly profit of the assessee for the three years immediately preceding the date of sale which came to Rs.67,000. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no appearance on behalf of the assessee despite service of notice. Learned counsel for the Revenue submitted that the Income-tax Officer, the Commissioner of Income-tax (Appeals) and the Tribunal have analysed the factual position to hold that there was no goodwill. The conclusions arefactual giving rise to no question of law. The Tribunal has referred to the method of valuation of goodwill which is normally adopted in such cases. Goodwill is a thing very easy to describe, but very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in customers. It is the magnetic quality of a particular trade or business which attracts customers to it as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases which is commonly known as "three years purchase of five years' profits". There is another method which is also referred to as the "super profit method". There is yet another method which is called the annuity method which is another name for the super profit method. So far as the super profit method is concerned, the maintainable profits of the firm of which goodwill is for sale, are compared with the normal profits of the firm, i.e., profits which would have been earned with the same capital by an average firm. If the estimated future profits are more than the normal profits the difference is known as super profit. This is the measure of the extra profits obtained by the firm. Goodwill is found by multiplying the super profits by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss where the retiring proprietor was the main reason for success will have goodwill based on one or two years' purchase of goodwill. Three to five years' purchase is commonly adopted. If super profits are large, a large number of years' purchase is allowed. If the profits are declining the number of years for purchase of goodwill will probably be only one or two. Theoretically the number of years is to be determined with reference to the probability of a new business catching up with the old established business. Goodwill is generated as the business is carried on and may be augmented with passage of time. Because of its intangible nature, goodwill remains insubstantial in form and nebulous in character. In a progressing business goodwill t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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