M/S. S. C. Cambatta & Co. Private LTD., v. the Commissioner of Excess Profits Tax, Bombay

Hidayatullah J. HIDAYATULLAH, J.-These are two appeals, with special leave, against an order of the High Court of Bombay rejecting a petition under s. 66(2) of the Indian Income-tax Act and the order of the Income­ tax Appellate Tribunal, Bombay, in respect of which the petition to the High Court was made. Messrs. S. C. Cambatta & Co. (Private) Ltd., Bombay, have filed these appeals, and the Commissioner of Excess Profits Tax, Bombay, is the respondent. We are concerned in these appeals with three chargeable accounting periods, each ending respective­ ly on December 31, beginning with the year, 1943 and ending with the year, 1945. .- II ~ 2 S.C.R. SUPREME COURT REPORTS 807 The appellants carry on various businesses, and one 1960 such business was the running of a theatre and restau- M c rant, called the Eros Theatre and Restaurant. In Cambl~~:·s. c October, 1943, a subsidiary Company called the Eros Pri:ate Ltd., 0 Theatre and Restaurant, Ltd. was formed. The paid- Bombay up capital of the subsidiary Company was Rs. 7,91,100 v. divided into 7,911 shares of Rs. 100 each. 7,901 shares The Commissioner were allotted to the appellant Company as considera- 0 ~/xce~ P~ofits tion for assets, goodwill, stock-in-trade and book debts ax, 0111 ay which were taken over by the subsidiary Company, Hidayatullah J. and the remaining 10 shares were held by the Cam- batta famify. The assets which were transforred were as follows: Assets: Assets transferred Stock-in-trade Book debts Rs. 1,28,968 Rs. 40,000 Rs. 100 Rs. 1,69,068 They together with the capital reserve of Rs. 6,21,032 made up the amount of Rs. 7,90,100. In the books of the Sl,lbsidiary Company, the share capital account was shown separately as follows: Rs. 2,50,000 debited to the various assets account. Rs. 5,00,000 debited to the goodwill account. Rs. 40,000 debited to the stock-in-trade account. Rs. 100 debited to the book debts account. It will thus appear that goodwill was not shown sepa­ rately in the appellants' account books, but only in the accounts of the subsidiary Company. In working out the capital of the two Companies for excess profits tax, a sum of Rs. 5,00,000 was claimed as goodwill as part of the Qaphal of the subsidiary Company. Both the Department as well as the Tribunal held that s. 8(3) of the Excess Profits Tax Act. applied; and the goodwill was not taken into account in working out the capital. The Tribunal declined to state a case, but the High Court directed that a reference be made on two questions, which were framed as follows: sos SUPREME COURT REPORTS [1961) 1960 "(I) Whether on the facts of the case, the Appel- late Tribunal was right in applying section 8(3) of the M/s. s. c. Excess Profits Tax Act? Cambqtta ($.. Co. Privote Ltd., (2) Whether in the computation of the capital Bombay employed in the business of the assessee, the Tribunal v. erred in not including the value of the goodwill or any "he Commissioner portion thereof?" 0! Excess Profits The High Court by its judgment and order answer­ Tox, Bqmb•y ed the first question in the negative and the second, Hidayatullah J. in the affirmative. It held that sub-s. (5) and not sub-s. (3) of s. 8 of the Excess Profits Tax Act was applicable. It, therefore, hel<j. that "the Tribunal should have allowed for the value of the goodwill whatever it thought was reasonable at the date of the transfer." When the matter went before the Tribunal again, three affidavits and a valuation report by a firm of architects were filed. The goodwill, according to the report of the architects, amounted to Rs. 25 lakhs. It may be mentioned here that the subsidiary Com­ pany was using the premises under a lease granted on November 20, 1944, for three years beginning from April I, 1944, on a rental of Rs. 9,500 per month. The Tribunal came to the conclusion that no good­ will had been acquired by the business of the Theatre as such, and that whatever goodwill there was, related to the site and building itself. They then proceeded to consider what value should be set upon the good­ will on the date of the transfer of the subsidiary Com­ pany as directed by the High Court. They took into account certain factors in reaching their conclusions. They first considered the earning capacity of the busi­ ness, and held that prior to 1942 the business had not made profits, and that the name of Eros Theatre and Restaurant thus by itself had no goodwill at all. They, therefore, considered that the only goodwill which had. been acquired attached to the lease, which the trustees had given to the Eros Theatre and Res­ taurant Ltd., and computing the goodwill as the value of the lease to the subsidiary Company, they felt that Rs. 2 lakhs was a liberal estimate of the value of the goodwill in the hands of Eros Theatre and Restau­ rant, Ltd. at the material time. 2 S.C.R. SUPREME COURT REPORTS 809 Petitions under ss. 66(1) and 66(2) read withs. 21 of c96o the Excess Profits Tax Act were respectively rejected M c by the Tribunal and the High Court; but the appel- Camb~~·,;·& ·co. lants obtained special leave from this Court, and filed Private Ltd., these appeals. , , Bombay In our opinion, a question of law did arise in the v •.. case whether the goodwill of the Eros Theatre and The Commissioner Restaurant, Ltd., was calculated in accordance with 0!/xce~s P;ofits law. The Tribunal seems to have taken into account ax, 0 "' ay only the value of the leasehold of the site to the sub- Hidayatullah J. sidiary Company, and rejected other considerations which go to make up the goodwill of a business. No doubt, in Oruttwell v. Lye (1), Lord Eldon, L. C. observed that goodwill was "nothing more than the probability that the old customers would resort to the old place". The description given by Lord Eldon has been considered always to be exceedingly narrow. The matter has to be considered from the nature of the business, because the goodwill of a public inn and the goodwill of a huge departmental stores cannot be calculated on identical principles. The matter has been considered in two cases by the House of Lords. The first case is Trego v. Hunt (2), where all the defini- tions previously given were considered, and Lord Macnaghten observed that goodwill is f'the whole advantage, whatever it may be of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expen- diture of money". In a subsequent case reported in Inland Revenue Commissioners v. Muller & Oo.'s Mar- garin, Ltd. (8), Lord Macnaghten at pp. 223 and 224 made the following observations: "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 connec­ tion of a business. It is the attractive force which brings in custom. It is the one thing which distin­ guishes an old-established business from a new busi- ness at its first start .................. If there is one attri- bute common to all cases of goodwill it is the attribute (1) (1810117 Ves. 335, 346. (2) ( 18Q6) A. r:. 7 (H.L.). (~) fiooI) A.C. 217 (H.L.). '960 of locality. For goodwill has no independent exis­ tence, It cannot subsist by itself. It must be a.tta.ch-M/s. S. C. b cambatta s, co. ed to a usiness. Destroy the business, and the good- Private Ltd., will perishes with it, though elements remain which Bombay may perhaps be gathered up and be revived a.gain". · v. These two cases and others were considered in two "he Commissio11er A t l" Th fir t · Da · ll F-.> l C 1 E P 'fit us ra. ian cases. e s 1s nie v. .,.,,era om- 0 r.:'.'~.m~~Y' missioner of Taxation (1), where, Knox, C. J. observed: ' "My opinion is that while it cannot be said to be Hidayatullah J. absolutely and necessarily inseparable from the pre­ mises or to have no separate value, prima facie at any rate it may be treated as attached to the premises and whatever its value may be, should be 'treated as an enhancement of the value of the premises". In the second case reported in Federal Commissioner of Taxation v. Williamson('), Rich, J., observed at p. 564 as follows : "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 pa.rt to the way in which it is conducted and the personality of those who conduct it, and in pa.rt to the likelihood of competition, many customers being no doubt actuated by mixed motives in confer­ ring their custom". In Earl Jowitt's Dictionary of English Law, 1959 Edn., "goodwill" is defined thus: "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". It will thus be seen that the goowill of a business depends upon a. variety of circumstances or a combi­ nation of them. The location, the service, the stand­ ing of the business, the honesty of those who run it, and the la.ck of competition a.nd many other factors go individually or together to make up the goodwill, (1) (1928) 42 C.L.R. 2g6. (2) (1943) 67 C.L.R. 561. 2 S.C.R. SUPREME COURT REPORTS SU though locality always plays a considerable pa.rt. 1 960 Shift the l?cality, ai;id t~e goodwill ~ay be lost., At M/s. s. c. the same time, locality is not everythmg. The:~power cambatta a;. Co to attract. custom depends on one or more of the other Pr{vate Ltd., factors as well. In the case ofa theatre or restaurant, Bombay what is catered, how the service is run and what the c v .. , t •t• ·· t "b t I t th d ill The ommissson compe i ion is, con ~i ~ e a s~ o e goo w . of Excess Profit From the above; it is marufest that the matter of Tax, Bombay goodwill needs to be considered in a much broader way than what the Tribunal has done. A question Hidayatullah J of law did arise in the case, and, in our opinion, the High Court should have directed the Tribunal to state a case upon it. Civil Appeal No. 776 of 1957 is allowed. The High Court will frame a suitable question, and ask for a statement of the case from the Tribunal, and decide the question in accordance with law. The costs of this appeal shall be borne by the respondent; but the costs in the High Court shall abide the result. There will be no order in Civil Appeal No. 777 of 1957. · O. A. No. 776 of 1957 allowed. JESTAMANI GU~ABRAI DHOLKIA AND OTHERS v. THE SCINDIA STEAM NAVIGATION COMP ANY, BOMBAY AND OTHERS (P. B. GAJENDRAGADKAR and K. N. WANCHoo, JJ.) Industrial Dispute--:-Employee loaned to existing air company, if and when its employ~e'-Air Corporations Act, z953 (XXV II of x953), s. 20(1). Section 20(1) of the Air Corporations Act, 1953 (XXVII of 1953)" read with the proviso, is a perfectly reasonable provision and in the interest of the employees-and it is not c;orrect to say that it can apply only to the di-rect recruits of the existing air r960 Novemb" 30