Hardayal Hardy, J.
(1) This reference under Section 27 of the Wealth Tax Act, 1957 relates to three separate persons, namely, Mr. K. N. Khanna, Mr. B. K. Khanna and Mrs. S. Khanna of New Delhi. In the case of Mr. K. N. Khanna, the assessment years are 1959-60 and 1960-61 while in the case of Mr. B. K. Khanna the assessment years are 1959-60, 1960-61 and 1961-62. In the case of Mrs. S. Khanna the assessment years' are 1957-58, 1958-59, 1959-60, 1960-61 and 1961-62. The applications which raise a common question of law out of the orders of the Income-tax Appellate Tribunal in the various Wealth tax appeals filed before it, a common statement of case has, thereforee, been presented by the Tribunal and the following question of law has been referred to this Court :-
'WHETHER on the facts and in the circumstances of the case, the value of the goodwill shown at Rs. 2,50,000.00 in the balance sheet of the company M/s. B. K. Khanna and Co. (P) Limited is an 'asset' as defined in section 2(e) of the Wealth Tax Act, 1957?'
(2) The facts are very simple. The assesseds in these cases are Mr. K. N. Khanna, Mr. B. K. Khanna and Mrs. S. Khanna. All of them owned, shares in Messrs B. K. Khanna and Co. (P) Limited. Messrs K. N. Khanna and B. K, Khanna each owned 2221 shares while Mrs. S. Khanna owned 556 shares in the said company. While ascertaining the value of a share of the said company with reference to the value of assets thereof, the question arose as to whether any value in regard to the goodwill of the said company was taken into consideration. The Wealth Tax Officer valued the shares at Rs. 145.00 per share. When the assesseds took it up' in appeal to the Appellate Assistant Commissioner it was contended by them that the value of goodwill taken in the sum of Rs. 2,50,000.00 in respect of the shares of B. K. Khanna and Co. (P) Limited should be excluded while computing the share value of the said company. The Appellate Assistant Commissioner took the view that goodwill of a business was a capital asset which is as much realisable as any other tangible asset. He further observed that the said company enjoyed a substantial goodwill in the market and that the value of this goodwill should not be less than Rs. 2,50,000.00. He thereforee held against the assesseds on this point.
(3) The assesseds went up in further appeal to the Income-tax Appellate Tribunal and it was argued on their behalf that there could be no value of goodwill as it was an intangible asset though an artificial value had been given when the company was formed. On behalf of the Revenue, it was contended that the value of goodwill is always taken note of in assessments completed under the Gift Tax Act, 1958 and the Estate Duty Act, 1953. It was, thereforee, submitted that due consideration should be given to the value of goodwill while ascertaining the value of a share of the company in question. The Tribunal however was of the opinion that by the definition of the word 'assets' given in the Wealth Tax Act, 1957 only tangible properties and not intangible properties could be held to be included within the meaning of the term 'assets'. The Tribunal, thereforee, held that the goodwill, whatever its value, could not be included in the word 'assets' in the Wealth Tax Act, 1957 and it, thereforee, directed the Wealth Tax Officer to compute the value of the shares of the afore-mentioned company after excluding the value that was attributed to them as and for goodwill while computing the net wealth of the assessed in respect of their share holdings in the company.
(4) The Commissioner of Income-tax was aggrieved by this decision and asked for a question of law being referred to this Court. It is in these circumstances that the question mentioned at the beginning of this order has been referred to us.
(5) We are told that the above question has not come up for decision before any other court and is, thereforee, res-integra although the words 'goodwill' has been considered in some of the decisions. In Section 2(e) the word 'assets' has been defined. The relevant part of the definition reads as under :-
'ASSETS' includes property of every description, movable or immovable, but does not include-. . . . . .'
(6) It will be seen that the definition is an inclusive definition and only some of the properties mentioned therein have been exluded. For the purpose of determining the amount of tax which is payable under the Act, the relevant portion of the term 'net wealth' which has been defined in S. 2(m) reads as under :-
'NET wealth' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all assets, wherever located, belonging, to the assessed on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessed on the valuation date other than. .........'
(7) From that definition again certain other debts and taxes etc., have been excluded. Section 3 of the Act is a charging Section which lays down that there shall be charged for every assessmen year commencing on and from the first day of April, 1957 a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. Section 4 mentions certain assets which are to be included in computing net wealth of an individual while Section 5 lays down the exemptions in respect of the assets mentioned therein. Such assets shall not be included in the wealth of the assessed. Section 6 prescribes the assets and debts which are located outside India while Section 7 provides for the method of valuation of the assets which have to be computed for the purpose of determination of the tax. According to the section, subject to any rules made in that behalf, the value of any asset, other than cash, for the purposes of the Act shall be estimated to be the price which in the opinion of the Wealth Tax Officer, the said asset would fetch if sold in the open market on the valuation date. The valuation date is defined in S. 2(q) and is a date in relation to any year for which anassessment is to be made under the Act. It means the last day of the previous year as defined in Section 3 of the Income-tax Act if an assessment were to be made under that Act for that year. The term 'valuation date' also has three provisos but we are not concerned in this case with those provisos. While framing the assessment the Wealth Tax Officer has thereforee to take into consideration the value of any asset on a valuation date and in doing so, he has to arrive at an estimate about the price which in his opinion the said asset would fetch if sold in the open market on the valuation date. It is not disputed that both under the Gift Tax Act, 1958 and the Estate Duty Act, 1953 the value of goodwill is taken note of in the assessments, but accoring to the assessed, goodwill is neither movable property and thereforee it cannot be included within the term 'assets' as defined in the Wealth Tax Act. According to the Tribunal, the definition of the word 'assets' merely talks of only tangible property and not intangible property. The Tribunal has also referred to a passage in the book 'Valuation of Shares' by Robert Longfield Sidney where the author is said to have explained the practical method of ascertaining the value of the assets. According to him, the asset value of the shares means the value as represented by tangible assets less external liabilities. By the term 'tangible assets' it is said that those which are either concrete salable commodities or choses in action recovered at law but not including claims for un-liquidated damages or rights enforceable without a recoverable monetary value or any value appearing as 'goodwill'. According to the learned author, these assets are like 'preliminary expenses, development expenses, goodwill and its allied assets, patent and trade-marks etc.'
(8) We have not had the benefit of seeing this book as neither counsel was aware of it nor are we in a position to say whether the 'valuation of shares' was being considered by the learned author from the point of view of Wealth Tax Act.
(9) The question has, thereforee, to be viewed as to what should be the ordinary meaning of the term 'goodwill' and whether the same enters into calculation while considering the wealth of a man assessable to tax.
(10) In The Commissioner of Inland Revenue and Muller & Co.'s Margarine, Limited (1901 A C 217 the meaning of the words 'property locally situate out of the United Kingdom was under discussion before the House of Lords in connection with the payment of ad valorem duty under the Stamp Act of 1891. The question was that though the agreement was made in England but whether the goodwill was 'property locally situate out of the United Kingdom' within the meaning of Section 59(1) of the said Act so that its valuation could also be included for the purpose of computing the stamp duty. If goodwill was property the ad valorem duty would have been payable on the agreement as if it were conveyance or sale. Lord Macnaghten 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 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 has 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 business in the same trade. One element may preponderate here and another element there. To analyze goodwill and split it up into its component parts, to pare it down as the Commissioner's desire to do untill nothing is left out but a dry residum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such.'
(11) Going further the learned Lord observed :-
'FOR my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again. No doubt, where the reputation of a business is very widely spread or it is the article produced rather than the producer of the article that has won popular favor, it may be difficult to localise goodwill.'
(12) Lord Lindley at page 235 of the report also said that goodwill regarded as property has no meaning except in connection with some trade, business, or calling and went on to add : 'In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In. this wide sense, goodwill is inseparable from the business to which it adds value, and in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several business, each having a goodwill of its own.'
(13) In Duladas Mullick and others v. Ganesh Das Damani and others : AIR1957Cal280 (2), P. B. Mukherji J. (as he then was) sitting with Bachhawat J. (as he then was) referred to two old cases at page 282 of the report. Vice-Chancellor Wood in Churton v. Douglas reported in 1859 John 174 at page 188(3) quoted with approval the well-known observations of Lord Eldon where the learned Judge had said-:-
'GOODWILL' must mean every advantage -every positive advantage, if I may so express it, as contrasted with the negative advantage of the late partner not carrying on the business himself-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 late firm, or with any other matter carrying with it She benefit of the business.'
(14) The ether case referred to by the learned Judge is Crutwelle v. Lye-reported in (1810)17 Ves 335. Lord Eldon again made the emphatic observation at page 346: 'The goodwill is nothing more than the probability that the old customer will resort to the old place.'
(15) A reference was also made to what was said by Lord Westbury in Ricket v. Metropolitan Ry. Co. (1867) 2. H.L. 185 (4). This is what the learned Lord said:-
'IT is a fallacy, almost a mockery, to answer, the custom is one thing and the house another and the injury is to the custom, not to the house. You cannot severe the custom from the house itself, or from the interest of the occupier, turn the custom is the thing appertaining to the house which gives it its special character, and constitutes its value to the occupier.'
(16) All these cases clearly go to show that goodwill is in-eparable from the business to which it adds value and exists where the business is carried on. Such business may be carried on in one place or country or in several and if in several there may be several business, each having ing a goodwill of its own.
(17) In New Gujarat Cotton Mills Limited v. Labour Appellate Tribunal and others : (1957)IILLJ194Bom , J. C. Shah J, (as his Lordship then was) sitting with Palnitkar J. dealt with the question of goodwill in a case under the Bombay Industrial Relations Act 11 of 1947 where the company had gone into liquidation and its assets and goodwill had been sold and purchased by a new company. While refuting the argument of Mr. N. A. Palkhiwala who appeared on behalf of the new company, observed :-
'THERE is necessarily no direct connection between the stoppage of the factory and the stoppage of a business of the concern. For diverse reasons the factory may have closed but that does not lead to the conclusion that the business comes to an end. Again the goodwill of a business is inclusive of positive advantages such as carrying on the commercial undertaking at a particular place and in a particular name, and also its business connections, its business prestige, and several other intangible advantages which a business may acquire. Unless there is clear evidence to show that this goodwill which was intended to be sold and in fact sold by the Liquidator to the New Company, was nothing but a name. we will not be justified in holding that no real and substantial goodwill of the Old Company was conveyed. In coming to that conclusion we are impressed by the circumstances that the goodwill has been separately mentioned and has been valued in the sale-deed.'
(18) In S. C. Cambatta and Co. Private Limited v. Commissioner of Excess Profits Tax, Bombay : 41ITR500(SC) . Hidayatullah J. (as he then was) referred to some of the cases to which we have already drawn attention and then alluded to the case of Federal Commissioner of Taxation v. Williamson (1943)67 C.L.R. 56, where Rich J. had observed:-
'HENCE to determine the nature of the goodwill in any 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 being referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers, being no doubt actuated by mixed motives in conferring their custom' and ended by referring to Ear] Jowitt's 'Dictionary of English Law' where 'goodwill' is defined as follows :- '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 goodwill of. a business depends 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 the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill. 'From the above, it is manifest that the matter of goodwill needs to be considered in a much broader way than what the Tribunal had done. A question 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.'
(19) This was indeed a case where the Supreme Court was concerned with a petition under Section 66(2) under the Excess Profits Tax Act (XV of 1940) where the Tribunal had not taken into account the goodwill of the company in working out its capital. The Supreme Court directed the Tribunal to state the case with reference to the matter of goodwill and, thereforee, goes to show that apart from the Gift Tax Act, the Estate Duty Act, the question of goodwill is also to be considered in a case arising under the Excess Profits Tax Act 15 of 1940.
(20) In Jogta Coal Corn. Ltd. v. Commissioner of Income-tax, West Bengal : 36ITR521(SC) the Supreme Court was dealing with a case under the Indian Income-tax Act, 1922. The question had arisen in connection with the sale of certain lease hold property of Jogta Colliery with other mokarari potlahs etc. In the sale deed there was no specific mention of the sale of goodwill, but counsel for the respondent had submitted that the sale of Jogta Colliery for Rs. 23,000.000.00 included among other things the goodwill. Kapur J. who wrote the judgment of the Court observed 'that goodwill is a commercial terms and is well understood in business and is an asset which is capable of valuation.' The case was thereforee remitted to the Tribunal although the decision on the question 'whether on the interpretation of the sale deed it could be said that any goodwill was purchased by the assessed' was not allowed to be raised as the same had not been raised before the Tribunal.
(21) In S. Kuppuswami v. Commissioner of Income-tax, Madras : 25ITR349(Mad) , the question before the High Court of Madras was with regard to the nature of the expenditure incurred on account of payment for a goodwill. The claim on behalf of the assessed was that the sum of Rs. 5000.00 paid by him amounted to a revenue expenditure while the department had held that it was a capital expenditure. The learned Judges referred to a judgment of Bombay High Court in Vithaldas Thakordas and Company v. Commissioner of Income-tax. Bombay : 14ITR822(Bom) where M. C. Chagla J. (as he then was) had observed:-
'IF the partnership had acquired the goodwill by paying a lump sum, undoubtedly that would have been a capital expenditure; or even if instead of paying a lump sum it had paid the amount fixed for the goodwill by certain Installments, each Installment would have been in the 'nature of a capital expenditure. But in this case, as the partnership did not acquire anything in the nature of a permanent asset, the payment to Bai Tarabai is not a capital but a revenue expenditure.'
(22) The test obviously was whether the assessed became the owner of the goodwill or was merely a user of the goodwill. In the former case, it will be a capital expenditure while in the later case it will be a revenue expenditure.
(23) In the present case, there is no dispute that B. K. Khanna and Co. (P) Limited had while acquiring the business of the partnership B. K. Khanna and Co. paid a sum of Rs. 2,50,000.00 as consideration for goodwill. The company, thereforee, became the owner of the goodwill and so long as the business of the company is being carried on. and it is apparent from the balance-sheets prepared by the said company that the business is thriving and has increased by leaps and bounds, the asset of the company have, thereforee, considerably increased in value. The goodwill of the company is no doubt an intangible asset but so long as the business is carried on, and it is not the case of the assesseds that it had gone down in value, the valuation of its shares which at the time when they were allotted to these assesseds had a face value of Rs. 100.00 have now a much greater value. In the case of a private limited company the valuation of such shares has to be made on the basis of the balance-sheet. In Annexures Iii and Iv attached to the Wealth Tax Rules, 1957 the value of all other assets except those on which wealth tax is not payable has to be mentioned.
(24) Sampath Iyengar in his work on Wealth Tax Act, 1957 (1966 Edition) has stated that in regard to the valuation of the goodwill the proper approach is to ascertain the net annual average earning of the business for the preceding 3 to 5 years including the year of transfer. From out of the sum thus arrived at a minimum of at least 6% on the capital out-lay involved in the carrying on of the business would be deducted. A further sum as would cover the proprietor's services to the business, if the same had not been charged against profits in the past, would be deducted and thus the net annual profit would be ascertained. It also appears under Rule 2-C(b) of the Wealth Tax Rules that in the case of goodwill purchased by the assessed for a price, its market value or the price actually paid by him, whichever is less. has to be taken into account for the purpose of adjustments in the value of an asset not disclosed in the balance sheet. This again goes to show that goodwill is an asset which has to be taken into account for the purpose of preparation of a balance-sheet.
(25) Learned counsel for the assesseds, however, submitted that rule 2-C(b) merely deals with the case of goodwill purchased by an assessed for a price and since the assesseds in the instant case did not make the purchase their shares cannot be valued by the addition of the goodwill. We fail to understand this argument. The payment of goodwill was made by the private limited company for the purpose of acquiring the business of a running partnership. Whatever amount was paid by the said company on account of goodwill has got to be added to the value of the shares which were allotted to the present assesseds. It appears that the amount paid for goodwill was Rs. 2,50,000/. The assesseds among themselves hold more than 98 per cent shares. In such a situation the price paid by the company on account of goodwill has to be reflected in the shares held by the assesseds. The question is to whether goodwill is a tangible or an intangible asset is neither here nor there. Goodwill of a business is a capital asset which is as much realisable as any other tangible asset and thereforee the value of shares has to be determined by the addition of that amount to the goodwill value of the company as reflected by the shares.
(26) The question has, thereforee, to be answered in favor of the Revenue and against the assessed. The Commissioner will also have his costs of these proceedings. Counsel's fee Rs. 250.00.