1. The following question has been referred to this court for its opinion by the Tribunal at the instance of the Revenue :
'Whether, on the facts and in the circumstances of the case, it is correct and legal to exclude a part of the sale proceeds as relating to the goodwill ?'
2. The assessee in this case is the official liquidator representing M/s. Shanmugar Mills (in liquidation). The said Shanmugar Mills was under liquidation and it was actually wound up by an order of the company court dated April 30, 1959, in O.P. No. 297 of 1957. The winding-up order was the subject-matter of an appeal before this court in O. S. A. No. 68 of 1959. The said order of winding up was affirmed by the appellate court. With the approval of the appellate court, the official liquidator sold the said company as a going concern to one M/s. Jayajothi and Company, who were then working the mills as lessee. The total consideration paid by the purchaser, viz., M/s. Jayajothi and Company was Rs. 6,76,000. The official liquidator apportioned the said consideration of Rs. 6,76,000 as under :
Rs.'Sale price of land 1,00,000Value of goodwill estimated 1,00,000Balance being the consideration in respect ofmachinery 4,76,000----------Total 6,76,000'----------
3. The purchaser for the purpose of his assessment had apportioned the said sum of Rs. 6,76,000 paid by him as consideration as follows :
Rs.Land 42,000Factory building 2,38,000Machinery 3,96,000
4. For the assessment year 1970-71, the ITO did not accept the allocation of Rs. 1,00,000 made by the official liquidator towards goodwill on the grounds :
'(1) that the company had no goodwill at all as even before its liquidation in 1957, the company was in trouble and that, therefore, it could not have acquired any goodwill at all prior to liquidation;
(2) even if any goodwill had been created prior to liquidation, the same should have lost its value between 1957 and 1970, when the mill was worked by the lessee;
(3) neither the High Court nor the parties concerned has fixed any amount towards the value of the goodwill and, therefore, the purchase price cannot be taken to have included the value of any goodwill; and
(4) even assuming that the value of the goodwill was Rs. 1,00,000 as allocated by the official liquidator, it will be assessable as capital gains.'
5. This view of the ITO was challenged in appeal by the official liquidator before the AAC. The AAC, however, without a detailed discussion, held that the allocation of Rs. 1,00,000 towards the value of the goodwill by the official liquidator is in order, as it represent one year's income from the property. He also held that the goodwill is not taxable as capital gains relying on a decision of this court in CIT v. Rathnam Nadar : 71ITR433(Mad) . He, therefore, directed the exclusion of the said Rs. 1,00,000 from the computation of income.
6. The Revenue took the matter in appeal to the Income-tax Appellate Tribunal, contending that Shanmugar Mills was always running at a loss and, therefore, there could be no goodwill at all and that the AAC is in error in upholding the allocation of Rs. 1,00,000 towards goodwill on the basis that it represents one year's income. The Tribunal, after calling for information regarding the value of the assets as taken in the assessment of the purchaser for the purpose of allowance of depreciation, etc., and based on the successful working of the mills by the purchaser for the years subsequent to his purchase, held that though allocation of the sale consideration made by the purchaser is not conclusive, the profits earned by the purchaser for the years 1970-71 to 1974-75 can be taken note of for the purpose of working out the value of the goodwill of the company. As a matter of fact, the Tribunal while accepting the value of the land as given by the official liquidator did not accept his estimate on the value of the building and machinery, but proceeded to make a different estimation of the building and machinery, and determined the value of the goodwill at Rs. 75,000. The Tribunal more or less assumed that goodwill existed and proceeded to determine the value of the goodwill by taking the net profits earned by the purchaser by successfully working the mill after his purchase in 1970. The Tribunal then proceeded to hold that the value of the goodwill is not liable to be charged under the head 'capital gains'. Thus, the Tribunal directed the deduction of Rs. 75,000 from the computation of income as representing the value of the goodwill. Aggrieved by the order of the Tribunal, the Revenue has obtained a reference to this court on the question set out above.
7. In this case, the ITO has proceeded to hold that no part of the sale consideration can be taken to relate to goodwill, since the seller has not demanded and the High Court has not approved any amount as the value of the goodwill and, therefore, the entire consideration should be taken to relate only to the tangible assets of the company. However, we are not in a position to accept that reasoning. If the parties bargained for a lump sum consideration without valuing each of the assets, that cannot be a ground to say that the entire consideration was paid only towards tangible assets and not in respect of any intangible assets, such as goodwill. The payment of Rs. 6,76,000 is for the entire undertaking known as Shanmugar Mills and the assets of the undertaking should be taken to include both tangible and intangible assets, such as goodwill. We cannot, therefore, hold that merely because the parties have not contemplated a separate payment towards goodwill and this court, while approving the sale of the assessee's concern as a going concern, did not specify the amount to be paid for goodwill, there cannot be any goodwill at all. These facts cannot be taken to be conclusive.
8. The crucial point to be considered in this case is whether there is, in fact, goodwill. If there is, in fact, goodwill and even if there is a lump sum consideration paid by the purchaser, a portion of the consideration has to be apportioned towards the value of goodwill. As already stated, the ITO specifically held that the company, it was in difficulties which ultimately resulted in the company being liquidated by an order of the court dated April 30, 1959, and that at no stage the company is found to have prospered. He was also of the view that even if any goodwill had been created prior to the liquidation, the same should have lost its value during the period between 1957 and 1970, when the mill was leased out to a third party. The AAC without going into the question as to whether the company, in fact, had acquired any goodwill at all before its liquidation, held that the allocation of Rs. 1,00,000 towards goodwill is in order, being one year's income from the property. The AAC also appears to have proceeded certain erroneous basis that the company had, in fact, goodwill and that goodwill could be estimated at Rs. 1,00,000 taking note of the one year's income earned by the lessee by working the mills. When the matter reached the Tribunal, the Tribunal without going into the question as to whether the company had acquired any goodwill before its liquidation and whether any such acquisition of goodwill has lost its value during the period between 1957 and 1970, when the company was leased out to a third party, has proceeded on the assumption that the company should have acquired goodwill and proceeded to determine the value of the goodwill by taking note of the income earned by the purchaser during the assessment years 1970-71 to 1974-75 and observed that 1 1/2 year's profit would be Rs. 75,000 and, therefore, the sum of Rs. 75,000 should be taken as the value of the goodwill. Though the Tribunal is aware of the order of the ITO holding that the assessee could not have acquired any goodwill before its liquidation and that even if the company has acquired any goodwill, it should have been lost during the period between 1957 and 1970, it has not considered the tenability or otherwise of the said reasoning given by the ITO for rejecting the assessee's claim for deduction.
9. In this case, it has been clearly found by the ITO that the company, ever since it started running the mill, was in difficulties, which ultimately led to the winding up petition being filed by the creditors and its winding up by an order of this court. From the fact that the company did not prosper well even from the beginning, the ITO has proceeded on the basis that the company could not have acquired any goodwill at all. He also held that having regard to the fact that from 1957 to 1970, the mill was leased out to a third party and the company was not working the mill, the company would have lost the goodwill even if it has been earned before the filing of the liquidation petition. These are all relevant materials which the Tribunal has failed to consider. The question as to whether any portion of the sale consideration paid by the purchaser is referable to the goodwill has to be decided with reference to the facts and circumstances of this case, particularly the working of the company prior to its liquidation.
10. The law relating to goodwill is by now well established. In Cooper v. Union of India : 3SCR530 , the Supreme Court had observed thus (p. 611 of 1970 AIR); (p. 385 of 40 Comp Cas) :
'Goodwill of a business is an intangible asset; it is the whole advantage of the reputation and connections formed with the customers together with the 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 earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features : Trego v. Hunt  AC 7 . Goodwill of an undertaking therefore is the value of the attraction to customers arising from the name and reputation for skill, integrity, efficient business management, or efficient service.'
11. No doubt, in that case, the Supreme Court has taken goodwill as one of the important components of the undertaking, which has to be taken into account while determining the compensation payable for the undertaking.
12. In CIT v. Srinivasa Setty : 128ITR294(SC) , the Supreme Court while holding that since goodwill is a self-generating asset and any transfer of goodwill would not give rise to a capital gain, dealt in detail with the concept of goodwill. The court has observed as follows (p. 298) :
'Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye  17 Ves 335, that goodwill was nothing more than ' the probability that the old customers would resort to the old places' was expanded by Wood V. C. in Churton v. Douglas  John 174 to encompass every positive advantage' that has been acquired by the old firm in carrying on its business, whether connected with the name of the old firm, or with any other matter carrying with it the benefit of the business' - In Trego v. Hunt  AC 7 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.'
13. The Supreme Court has referred to with approval the observations of the Calcutta High Court in CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) as indicating the different approaches to the concept of goodwill wherein the Calcutta High Court has expressed as follows (p. 577-578) :
'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 historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt  AC 7 as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern.'
14. Thus, according to the Supreme Court, a variety of elements goes into the making of goodwill, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. However, because of its intangible nature, goodwill remains insubstantial in form and nebulous in character. It is because of this special feature, Lord Macnaghten remarked in IRC v. Muller & Co.'s Margarine Ltd.  AC 217 that although goodwill was easy to describe, it was none the less difficult to define. In a progressing business, goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition.
15. In a recent decision in Smt. Vindoor Bai v. CED : 132ITR421(All) , the Allahabad High Court has also dealt with the concept of goodwill and had an occasion to refer to all the relevant decisions, both English and Indian, dealing with 'goodwill'. In that case, the question arose as to the method of valuation adopted by the Income-tax Appellate Tribunal for valuing the goodwill of a firm in which the deceased was a partner for the purpose of the E.D. Act. While dealing with that question, the court posed the question as to what is the goodwill of a firm. After referring to the observation of Lord Macnaghten in IRC v. Muller & Co.'s Margarine Ltd.  AC 217 set out earlier, the court referred to the following observation of Lord Lindley in the same case (p. 426 of 132 ITR) :
'Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. 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 of 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 businesses, each having a goodwill of its own......
The goodwill of a business usually adds value to the land or house in which it is carried on if sold with the business....'
16. Thus, it is clear from the above decision dealing with the concept of goodwill and as pointed out by Lindley on Partnership, 13th edition, on page 463, that the term 'goodwill' can hardly be said to have any precise signification and it is generally used to denote the benefit arising from connection and reputation; and its value is what can be got for the chance of being able to keep that connection and improve it.
17. In this case to find out whether the assessee company had acquired any goodwill various factors and circumstances have to be taken into account, whether, the company had acquired a benefit arising from its connection and reputation and whether the other circumstances pointed out by the Supreme Court in CIT v. Srinivasa Setty : 128ITR294(SC) , are all relevant matters. The other circumstances, such as, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, etc., are all matters to be considered. Without referring to any of the matters on the basis of which the question as to whether the company has acquired any goodwill has to be considered, the Tribunal has straightaway proceeded on the basis that the company should have a goodwill, overlooking the finding rendered by the ITO that the company in the nature of things could not have acquired any goodwill and that even if any goodwill had been acquired before 1957, it would have been lost during the period between 1957 and 1970, when the mills belonging to the company has been leased out to a third party. The Tribunal, as already stated, has proceeded on the basis that since the purchaser has successfully worked the mills after his purchase, the company should be taken to have goodwill. The Tribunal also appears to have proceeded on the basis that every business undertaking should have a goodwill. But it is well established that there is no presumption that every business undertaking should have a goodwill. Whether the business undertaking has got a goodwill or not will depend upon very many criteria referred to above. Therefore, we cannot sustain the order of the Tribunal, which proceeds on the presumption that every business undertaking must have a goodwill. On the facts of this case, we are not in a position to answer the question referred to us straightaway on the material on record without a further enquiry by the Tribunal as to whether the assessee company could have acquired any goodwill before it went into liquidation. The working of the mills subsequent to the leasing out of the mills to a third party cannot be a relevant factor, for the lessee was managing the business by advancing his own fund and if at all, the subsequent successful working of the mill by the lessee will go to his credit and not to the credit to the assessee company so as to enable it to acquire goodwill. Similarly, the successful working of the mills by the purchaser after his purchase, is not also a relevant factor for considering whether the company has acquired any goodwill at the time when it was sold. In this view, we remit the matter back to the Tribunal for deciding the question as to whether the assessee company had in fact any goodwill before the order of winding up was made and whether the goodwill, if any, acquired was lost because of the fact that the mill was being managed by the lessee between 1959 and 1970. In view of the remand order and in view of the fact that we are not in a position to answer the question straightaway on the basis of the order of the Tribunal, the question is returned unanswered. There will be no order as to costs.