1. A simple question which may be made to look a little complicated arises on this reference. The assessee company owned a business, among other businesses, of Eros Theatre and Restaurant and on the October 1, 1943, a subsidiary company was formed to which this business of Eros Theatre and Restaurant was transferred. The case of the subsidiary company was that it paid Rs. 5,00,000 for the goodwill of the two businesses which it had purchased, and the question that arose before the taxing authorities was whether any amount should be allowed for goodwill in computing the capital of the subsidiary company during the chargeable accounting period which is from the October 1, 1943, till the December 31, 1943.
2. Now, the view taken by the Tribunal and which has been supported before us by Mr. Joshi is that inasmuch as this was a capital acquired by the subsidiary company by purchase, the amount paid by the subsidiary company for the purpose of the goodwill cannot be taken into consideration. In order to understand this contention it is necessary to look at a few of the sections of the Excess Profits Tax Act and to some of the rules in the Schedule. Section 8 deals with successions and amalgamations. As the very title suggests, it deals with two different subject-matters. Sub-section (3) of Section 8 deals with a case when the whole of a business is transferred and what it provides is that when such a transfer takes place, no regard shall be had to any consideration given in respect of the transfer of the business or any of the assets thereof on the occasion of the change, because the principle underlying sub-section (3) is that when a business is discontinued by reason of a change, for the purposes of excess profits tax shall not be deemed to have been discontinued. Then sub-section (4) of Section 8 deals with amalgamation; and then we come to sub-section (5) :-
'Where, on or after the September 1, 1939, part of a business is transferred as a going concern by the person theretofore carrying it on to another person, the part transferred and the part not transferred shall each be deemed for the purposes of the provisions of this Act relating to the computation of standard profits to be a continuation of the original business, and the said provisions, including the provisions of this section relating to amalgamations, shall apply accordingly.'
3. Therefore, whereas sub-section (3) deals with the transfer of the whole of the business of the transferor, Sub-section (5) deals with the transfer of a part of the business of the transferor, and the effect of such a partial transfer is that each part shall be deemed to be a continuation of the original business. Therefore, in this case when the assessee company, which is the principal company, transferred part of its business to the subsidiary company, the business of the subsidiary company must be deemed to a continuation of the original business. Then we come to Section 9 which deals with inter-connected companies, and that section provides that when you have a principal company and a subsidiary company, the profits of the two companies and the capital employed within the chargeable accounting period of the two companies shall be aggregated and the assessment of excess profits tax is on the principal company. Therefore in respect of the subsidiary company with which we are dealing, the assessee is not the subsidiary company but the principal company and the tax is to be charged upon the profits of the principal company.
4. Then we have Schedule II which contains rules for computing the average amount of capital, and sub-rule (1)(c) of rule 1 provides that the average amount of the capital employed in a business shall be taken to be, so far as it consists of any other assets which have been acquired otherwise than by purchase as aforesaid, the value of the assets when they became assets of the business, subject to the said deductions. The contention of the assessee is that the principal company which was doing the business of Eros Theatre and Restaurant acquired the goodwill in 1943. It was an acquisition otherwise than by purchase, and whatever the value of that goodwill might be, inasmuch as the business of the subsidiary company is deemed to be a continuation of the original business, if the original business has acquired an asset otherwise than by purchase and if the original business is entitled to take that asset into consideration for the computation of the average amount of capital, the subsidiary company is equally entitled to do so. The principle on which the assessee takes his stand is very clear. If a business had gone on and after passage of time it had acquired a goodwill, it is not disputed by Mr. Joshi for the taxing authorities that that acquisition of capital would have fallen under sub-rule (1)(c) and the assessee would be entitled to take into consideration the value of that capital for the purposes of computing the average amount of capital used. If that can be done in the case of the original business, it is difficult to understand on principle why the same benefit should not be given to the transferee to whom part of the business is transferred if under the Excess Profits Tax Act the capital and the profits of both have got to be aggregated. Apart from all technicalities that is the position in principle. The assessee is not claiming that the taxing authorities should take into consideration the price paid by the assessee for the goodwill. The whole approach of Mr. Joshi, with respect to him, is erroneous. What he says is that we are ascertaining the capital employed by the subsidiary company, the subsidiary company has paid Rs. 5,00,000 for the acquisition of goodwill, it is an acquisition by purchase and such an acquisition by purchase cannot fall under rule 1(1)(c), and therefore such an acquisition of an asset cannot be taken into consideration for the purposed of computing the average amount of capital. But we are not taking into consideration Rs. 5,00,000 paid by the subsidiary company for the acquisition of this asset. What we are considering is the acquisition of an asset to the original business, which acquisition was without purchase. Goodwill is not acquired by purchase; it is a matter of growth; and in October, 1943, it was open to the assessee company to say : 'We have done this business for so many years. According to us it has now acquired goodwill, and the value of the goodwill is this.' Therefore, by reason of the original business acquiring a goodwill, under the provisions of Section 8(5) the transferee company is entitled to the benefit of that acquisition of capital. It is true that in one sense we are considering the capital employed by the subsidiary company, but in another sense we are considering the capital employed by the principal company, because the capital of both the companies has got to be aggregated for the purposes of assessment and the law provides that the capital employed by the principal company shall be considered to be the capital employed by the subsidiary company.
5. Mr. Joshi has asked us to consider the terms of sub-section (5) of Section 8 and he says that the last words of that sub-section are : 'and the said provisions including the provisions of this section relating to amalgamation shall apply accordingly', and he says that when we turn to the provisions of amalgamation in sub-section (4) it provides that no regard shall be had to any consideration given in respect of the transfer of any of those former businesses or any of the assets thereof on the occasion of the amalgamation. Now, it is not correct to suggest that sub-section (5) provides that partial transfer shall be deemed to be an amalgamation within the meaning of sub-section (4). If that is what sub-section (5) had provided, then Mr. Joshi would be right in asking us to read the provisions of sub-section (4) into the provisions of sub-section (5). All that sub-section (5) says is that after providing for cases of a partial transfer it makes the provisions of the Act with regard to the computation of standard profits and also the provisions contained in sub-section (8) including the provisions with regard to amalgamation applicable to the extent that they are applicable. It is not as if the provisions of sub-section (5) themselves make a partial transfer an amalgamation. But if in a partial transfer a transaction of amalgamation arises, to that extent the provisions of sub-section (4) will apply.
6. We wish to make it clear that the taxing authorities should in no way be bound by the figure of Rs. 5,00,000 shown in the books of the subsidiary company as having been paid for the purchase of the goodwill. It will be for the taxing authorities to determine whether there was any goodwill acquired at all by this particular business, and if any goodwill was acquired, again it will be for the taxing authorities to determine what the value of that goodwill was. The payment of Rs. 5,00,000 is entirely irrelevant for the consideration of both these questions. The fallacy into which, with respect, the Tribunal fell was that it took the view that the case was governed by sub-section (3) of Section 8. As already pointed out, that sub-section only deals with a case where there is a transfer of the whole of the business of the transferee. The Tribunal did not apply its mind to sub-section (5) of Section 8. We are sure that if it had looked at the matter from the point of view of sub-section (5), it would have come to the same conclusion to which we have come.
7. The answers to the two questions submitted to us will be : (1) In the negative. (2) In the affirmative; the Tribunal should have allowed for the value of the goodwill whatever it thought was reasonable at the date of the transfer.
Commissioner to pay the costs.
8. Reference answered accordingly.