Per Shri R. L. Sangani, Judicial Member - This appeal by the department arises out of the proceedings for assessment to estate duty on the estate of late shri Vilaschandra G. Jain, who died on 12-3-1970.
2. The deceased was a partner in the firm of C.J. Textiles & Accessories accountable person, the deceased's interest in the good will of the said firm was declared at nil, although clauses 14 of the partnership deed provided for the computation of goodwill in case a partner retired or died. The Assistant Controller observed that the firm had been earning profits and that the business was being carried on in a commercial locality. Consequently, the said firm had acquired goodwill. He estimated the value of the goodwill at three years purchase of the average assessed profits for the last three years. This value came to Rs. 50,000 and the share of the deceased therein came to Rs. 25,000. He included that amount of Rs. 25,000 in the principal value of the estate.
3. In the appeal file by the accountable person, the grievance was that the amount payable by the said firm as has under the Income-tax Act, 1961 (the 1961 Act), should have been deducted from the assessed profits, and that assessed profits as reduced by the said tax, should have been taken as a base for calculating three years purchases. This contention was accepted by the Controller (Appeals) as he issued necessary directions. The department has now come in appeal before us on this point.
4. the learned departmental representative relied on the decision of the Bombay High Court in the case of Smt. Urmila v. CED : 122ITR958(Bom) in support of the contention that assessed profits should not be reduced by the registered firms tax in calculation of three years purchase in estimating value of the goodwill.
5. The learned representative of the assessee, on the other hand, relied on the order of the Tribunal in CED v. Harackachand shah [ED Appeal No. 13 (Pune) of 1976], in which this very point had been decided in favour of the assessee.
6. We have considered the rival submissions. The question is whether or not a purchaser of the goodwill of a firm would take into account the registered firms tax the is payable on the profits earned by the firm in making his estimate about the value of the goodwill. It is true that the quantum of income-tax payable on the profits would depend on the fact whether the business concern is a proprietary concern or a registered firm or a company. This is because the rates of tax payable by the individual, a registered firm and a company are different. A purchaser of the goodwill would not take into account the amount of income-tax that was being paid by the particular vendor. What he would take into account would be the amount of income-tax payable at an estimated average standard rate. The rate of tax payable by the registered firm is minimal under the Finance Act. The purchaser of good will would normally take into account the registered firms tax payable under the 1961 Act in estimating the value of goodwill. Consequently, the registered firms tax should be deducted from the assessed income and the balance should be taken into account in calculating three years purchase. It appears to be a well-established principle of accounting that in valuing goodwill, income-tax at an estimated average standard rate should always be deducted from the amount of estimated super profits upon which the value is based.
7. The decision of the Bombay High court to which our attention has been invited on behalf of the department, is not on this point. The question that arose for decision in that case was as to which of the two profits, namely, the returned profits or assessed profits, should be taken into account in estimating the value of the goodwill. The answer given by the High Court was that it is the assessed profits and not the returned profits which should be taken into account. The question as to what should be further deducted from the assessed profits was not before their Lordships and, as such, that aspect was not the subject-matter of adjudication in that case. Consequently, the said decision is not an authority for the proposition that registered firms tax cannot be deducted from the assessed profits in estimating the value of the goodwill.
8. The view that we have taken find support from the order of the Tribunal, relied on by the assessee as referred to above. A similar view has been taken by the Bombay Bench of the tribunal in D. J. Bhansali v. fifth ACED [ED Appeal Nos. 18 and 22 (Bom) of 1982 dated 4-10-1983]. We rely on those decisions and confirm the order of the Controller on this point.
9. The next point is with regard to the value of the open plot No. 3 atvile Parle. The value declared by the accountable person was in accord with the valuation report of the architect who had taken into account all the relevant factors. The Assistant Controller did not accept the value shown in the said report and made additions. The Controller (Appeals) has observed that no convincing reasons had been given by the Assistant Controller for taking the value of Rs. 140 per square yard in place of Rs. 80 per sq. yard, mentioned in the valuation report. He therefore, deleted the said addition. The learned departmental representative relied on the order of the Assistant Controller on this point.
10. We have gone through the order of the Assistant Controller on this point. We agree with the Controller (Appeals) that there was not material on this basis of which the Assistant Controller could have inferred that the valuation made by the registered value was erroneous. We, accordingly, uphold the order of the Controller (Appeals) on this point.
11. In this result, the appeal fails and is dismissed.