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TMI Blog1997 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of dealership of various products of Hindustan Petroleum Corporation Limited. He carried on the proprietary business till March 31, 1976. He took his son, Suresh Anand, as a partner with effect from April 1, 1976, Tilak Raj had 80 paise share in the partnership whereas the share of Suresh Anand was 20 paise in the rupee. Clause 2 of the instrument of partnership stated that the business of partnership was to deal in lubricants and other products of the corporation, which showed in effect that the partnership was intended to be a dealer of the products of Hindustan Petroleum Corporation Limited. After the death of Tilak Raj on July 19, 1977, the Assistant Controller proceeded to assess the value of the goodwill of the firm partly as his own estate and partly as a gift to his son, Suresh Anand, as a result of conversion of the proprietary business into a partnership firm. According to the Assistant Controller, the transfer amounted to a gift made to Suresh Anand for which no consideration had passed to the late father. Since the disposition or gift had taken place within two years of the death of Tilak Raj, the Assistant Controller proceeded under section 9 of the Act to asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 5. The question which requires adjudication in the present case is as to what is goodwill ? In IRC v. Muller and Co.'s Margarine Ltd. [1901] AC 217 (HL), Lord Macnaghen observed : "What is goodwill ? It is a thing very easy to describe, 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 custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it his power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Wood V.C. in Churton v. Douglas [1859] John 174, to encompass every positive advantage '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 old firm, or with any other matter carrying with it the benefit of the business'. In Trego v. Hunt [1896] AC 7 (HL), Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of the Property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas and Co. [1970] 76 ITR 566, the Calcutta High Court reviewed the different approaches to the concept : 'It has been horticulturally and botanically viewed as "a seed sprouting" or an "acorn growing into the mighty oak of goodwill". It has been geographically described by locality. It has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it and the lack of competition and many other factors go individually or together to make up the goodwill though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time locality is not everything. The power to attract custom depends on one or more of the other factors as well." In Smt. Vindoor Bai v. CED [1981] 132 ITR 421, a Division Bench of the Allahabad High Court dealt with the concept of goodwill and held that each and every right which passes on death of the partner has to be valued on the assumption that there is a willing purchaser for the right or property. Some of the observations made by the Division Bench are quite relevant. Therefore, the same are extracted below : "Goodwill of a business is an intangible asset. It is the whole advantage of the reputation and connection formed with the customer together with circumstances making the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R (ED) 1, a Division Bench of the Madras High Court held that the hotel business had a goodwill which has to be taken into consideration properly for determination of the value of the estate. The principles which emerge from the above discussion are : (i) The goodwill of a business is an intangible asset. It is the advantage or reputation and location found with the customer. It is that Component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features. (ii) The goodwill is comprised of a variety of elements. The location, the service, the standing of the business, the honesty of those who run it are some of the factors which contribute to the goodwill of the business. (iii) The goodwill is acquired during the course of a number of years of business. It is founded on the belief and faith of the customer. It rarely springs from the very inception of the firm. (iv) Under the Estate Duty Act each and every right which passes on death has to be valued on the assumption that there is a willing purchaser for the right or property. (v) The interest of a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was appointed a dealer. The dealership being terminated there could not possibly arise a question that the goodwill in that business of dealership could pass to the surviving partner or to the legal heirs of the late Shri Tilak Raj Anand." In our opinion, the Tribunal has decided the issue of goodwill on pure conjectures and surmises when it observed that the dealership also lapsed or was terminated with the death of Shri Tilak Raj Anand and that Suresh Anand and his mother formed another partnership because no evidence was produced by the accountable person regarding termination of the dealership. Similarly, the view taken by the Tribunal that the goodwill ended on the death of Tilak Raj Anand is clearly erroneous and against the law laid down by the various High Courts and the apex court. In our opinion, the goodwill earned by the firm as a dealer of the products of Hindustan Petroleum Corporation Limited constituted the property of the firm and it passed to the surviving partners after the death of Shri Tilak Raj Anand and, therefore, the Assistant Controller of Estate Duty was justified in including the value of the goodwill in the principal value of the estate of the decease ..... X X X X Extracts X X X X X X X X Extracts X X X X
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