Ramachandra Iyer, C.J.
(1) These two references arise under S. 64(1) of the Etate Duty Act during the course of assessment to duty of the estate left by the late K.S. Ambi Iyer who was running a hotel at Madrus. He died in a railway accident on 27th september 1954. He is survived by his two sons who were living with him. One of them was aminor at the time of death. They are now the accounting persons for the purpose of levy of estate duty.The deceased Ambi Iyer stared life by establishing a hotel at Vellore originally under the name of AmbikaLunch home and later on as Ambi's cafe. The business prospeed and in couse of time a meals section and lodging house were added to the coffe hotel. In 1935, a branch of the business was opened at Broadway, Madras, very near the Law college where the premises were taken on lease.This business also flourishedf. Some years thereafter the business at vellore was entrusted to other persons and ultimately it was closed doen. During the course of his life, Ambi Iyer acquired several items of moveable and immoveable properties all of them together being now assessed to the value of Rs. 2,90,958. This valuation of the assets is not now contested.It also not disputed that the properties were acquired out of the income income from the hotel business. But the accounting person contested before the assistant Controller of Estate Duty that the business run by the deceased was a joint family business started with aid of ancestral nucleus in which the sons of the deceased (accountable persons) had an interest along with their father and the entire property having survived to them the interest of the deceased which ceased on his death should be evaluated in accordance with the provisions of S. 7 of the Estate Duty Act. They also stated that the goodwill of the business should be valued at Rs. 1,000.
(2) The Assistant Controller, however, rejected the case that the business run by the deceased was a joint family concern and he therefore brought to duty the entire estate left by the deceased Ambi Iyer as his seprate property. The accountable persons who originally conceded that the goodwill attached to the business of Ambi's cafe had a value and estimated the same at Rs. 1,000, took up a different stand before the Assistant Controller namely that the goodwill of the business had no vaule at all. The Assistant Controller refused to accept this plea and taking the average annual income on the basis of the profits earned for years preceding the death of Ambi Iyer, he valued the goodwill attached to the business at three years' purchase and assessed it in a round figure of Rs. 45,000. There was an appeal by the accountable persons to the Central Board of revenue affirmed the view of the Assistant Controller that the hotel business run by the deceased and the properties acquired from and out of the profits thereof were hisw seprate properties the accounting persons having no interest therein during the lifetime of the deceased. The Board, however, held that the value fixed by the Assistant Controller for the goodwill of the business was excessive in view of the fact that the premises where the business was run did not belong to the deceased, but was merely held under a precarious tenancy and reduced the value of the goodwill to Rs. 25,000/-. At the request of the accountable persons the board has referred for the opinion of this Court the following two questions which respectively conform to the subject of reference in T.C. No. 109 of 1958 and 81 of 1960.
1. Whether on the facts and circumstances of thecase, the estate of the late Ambi Iyer was a joint family property in which he had only one third share or was it his seprate property.
2. Whether the hotel business of Ambi Iyer had any goodwill had to be assessed as property, What was the basis of such assessment.
3. Question No. 1: As stated earlier there is no controversy that the properties left by the deceased were acquired by the late Ambi Iyer out of the profits from his coffe hotel business run by him at Vellore and at Madras. The case for the business at Vellore was provided from and out of the saleproceeds of an ancestral land owned by the deceased at Konunseri near Palghaf and that therefore the properties acquired from out of the profits of the business would be joint family properties. It is clear from the evidence, that Ambi Iyer had obtained at a partition a small area of agricultural land in Konnuseri in south Mallabar Dt. On 30th Semtember 1924, that property was sold for asum of Rs. 600/- The need for the sale is not disclosed in the document. One Rao Saheb A rni Srinivasa Mudaliar who was at one time chairman of Arni Municipality has sworn to an affidavit that the coffe hotel business at Vellre was started by the deceased Ambi Iyer in 1924, on his advice and that he advance loans on occasions to the deceased Ambi Iyer.
There other affidavits are also in evidence. The first is by sivakrishana Iyer aged about 83 years who is the paternal uncle of the deceased. He catecagorically states that Ambi Iyer, with the proceeds of the sale of his family property in Malabar started the coffe hotel business at Vellore. The brother in law of the deceased one K. N. Krishna Iyer who subsequent took on lease the hotel business at Vellore has sworn to the same fact in his affidavit. K. R. Swami Iyer a cousin of the associated wiuth the latter right from the beginning when he started his business at Vellore confirms that statement.
(4) The Assistant Controller and the Central Board of Revenue have rejected the evidence afforded by these affidavits on the ground that no the last three persons were closely related to the deceased and that it was highly doubtful whether Rao Sahib Srinivasa Mudaliar would have remembered afte4r all these years the exact year in which the late Ambi Iyer started his hotel business at Vellore. There was, however, no justification for the Central Board of Revenue to doubt the veracity of these persons as therewas no other evidence apart from afew circumstances which we shall examine presently, to discredit them. The three relations of the deceased are possibly the best persons who could speak about the origin of the business run by the deceased; indeed theirs was the only evidence before the authorities. If the Board of Revenur suspected that the might be interested, they should upon the accountable persons to produce those persons befpre them for the purpose of cross-examination as to their knowledge, interest etc. This, however, was not open to the Central Board of Revenue to simply reject the uncontradited evidence before them and then that they say that there was no proof that the amount got from the sale of the ancestral property provided the nucleus for the starting of the business by the deceased.
Apart from this the Central Board of Revenue has referred to thre relevant circumstances which in their own view showed that the business was not a joint family business. Reference is first made to two leases in respect of the Vellore business granted by the deceased in favour of K. N. Krishna Iyer, wherein it has been mentioned that Ambi Iyer was the owner of the business. It is pointed out that there was no reference in those documents show that the property and the business were those of the deceased but they do not say that they were his self-acquired properties. In a joint Hindu family the father or the manager so completly reprents the other coparceners of the family in regard to transactions with third parties that it is not necessary for the names of the other members being mentioned therein or their behalf as well. No inference therefore can be drawn either way by the mere fact, that the leases of the buswiness were granted by the father in his own name.
The second circumstance relied on to discredit the evidence afforded by the affidavits is that the deceased while submitting his in-come tax returns showed his status as an Hindu undivided family. There can no doubt that this conduct is against the contention of the accountable persons particularly so because if the deceased had really been assessed as undivided Hindu family there should be a reduction in the amount of tax payable. But it must be remembered that the accountable persins were born to the deceased only subsequent to the establisment of the hotel business. It is just possible that originally the income-tax returns were submitted as an individual by deceased and that practice was presumably continued even after sons were born to him. In the absence of other evidence to show that Ambi Iyer ever claimed his business as his separate property as against his sons, the assessment to income-tax cannot be taken as decisive of the question of issue.
(5) Sometime after Ambi Iyer's death, his sons had to submit their returns as his legal representative in respect of the income earned from the properties after the death of their father. It is stated that in such returns their status was shown as an individual. We cannot however, attach much importance to this circumstance; for it cannot be otherwise when the sons were assessed in respect of their father's liability on succession. Secondly the probative value of this circumstance is csiderably minimissed when he find that almost simultaneously that is on 25-4-1955, the sons have claimed in their letter to the In come-tax Officer Estate duty cum Income-tax Circle, Madras, that they were members of a joint Hindu family along with their father and that the properties were joint family properties. None of the above circumstances evidence afforded by the affidavits.
It is clear on the materialsw in the case, that the Vellore business must have been started in 1924. Ambi Iyer who was a keen businessman would not have fritted away the money he got by the sale of ancestral properties in the same year but on their hand he would in all probalibility have invested it in the business. This is a reasonable inference from the fact that he sold his property in 1924 and the business at Vellore was also started in the same year. We are, therefore of the opinion that on the materials on the records the only inference deducible is that Ambi Iyer started his coffe hotel business at Vellre with the proceeds got by the sale of his ancestral property and that the business and acquisitions made from the profits earned thereform really formed part of the assets of the joint family, which survived to the accountable persons on the death of their father. The estate left by Ambi Iyer should therefore be valued in accordance with S. 7 of the Estate Duty Act. We answer the question referred to us in T. C. No. 109 of 1958 that the property is joint family property and in favour of the accountable persons.
(6) Question No. 2: The first aspect of the question referred to us is substantially one of fact. We have only to consuider whether there are materials in the case to sustain the conclusion arrived at by the Assistant Controller and the Central Board of Revenue that the hotel business of the assessee had a goodwill. The goodwill of a business is the intangible value to it independent of its visible assets by reason of the business being a well established one having a good reputation. Generally where the owner of a business sells it as such, the goodwill enables the purchaser to trade as a recognised successor to the business. It has been recognised that the business reputation or goodwill owned by a partership or by a company is avaluable asset which can be disposed of at the time of the winding up of the concern. But at the same time it is obivious that goodwill is inseparable from the busines to which it adds value. In the Commissioner of Inland Revenue v. Muller and Co's Margarine Ltd. 1901 AC 217, Lord Macnaghten, observed:
'What is goodwill? It is is a thing very easy to describe, very difficulty to define. It is the benefit and connection of a business. It is the attractive force which brings in custom.
It is the thing which distinguhes an old established business from anew business at its first start. The goodwill of abusiness must emanate from aparticular center 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 avariety of elements. It differs in its composition in different trades and it different business in the same trade. One element may prenderate here and elements there. To analyse goodwill and split it up into its components parts, to pare it down as the commissioners desire to do untill nothing is left but a dry residuum 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 huma body into various sustances of which it is said to be composed. The goodwill of a business is one whole and in acase like this it must be dealt with as such.'
Under the Estates Duty Act duty is payable on the principal value of the property passing or deemed to pass on the death of a person. Section 36 of the act defines the principal value as being the price which in the opinion of the Controller the property would fetch if sold in open market at the time of the death of deceased.' It may be taken as well aettled that in assessing estate duty the goodwill of the business left by the deceased would be taken as property passing on his death and in estimating the value of the estate the Controller will have to fix its value. An established business with a reputation behind it generally consists of certain taingible assets and also the goodwill acquired by reason of its standing and reputation, the use of the latter having an undoubted value to its successors. The value of the goodwill of a business while assessing estate duty will therefore be the value which a reasonable and prudent buyer would give for the business as a going minus the value of the tangible assets.
As stated in 'Law of Death and Gift duties' in Newzealand (2nd Edn.) by Adam
' Goodwill has had many definitions. In death and duty matters, however, it simply means an additional value over and above the value of the tangible assets which a reasonable prudent buyer would give for the business as going concern. In all these we have to as certain what hypothetical purchaser would be likely to pay for the deceased's or donor's share therei. To value the goodwill the value of the business and all its assets as a going concern should first be obtained and from this should be deducted the valur of the tangible assets leaving the balance as the true vale of the goodwill.'
(7) Ambi's Cafe at Madras was establisment as 1935 in an important locality. The accountable persons themselves originally admitted that there was a goodwill attached to the business qand valued it at Rs. 1000/- The business expanded considerably since its inception and the late Ambi Aiyer himself thought it fit to close down his Vellore business probably for the reason of the increaseed prsperity of the Madras business. There can be no doubt that on the materials available Ambi's Cafe was an established usiness at the time of the death of Ambi Iyer. It should also have acquired a reputation. We are therefore, of the opinion that the hotel business of the deceased had a goodwill. The next point for consideration is how to value such goodwill. There can be no doubt that the nature and cass of assessing the value of the goodwill f a business.
Mr. Thiagarajan appearing for the accountable persons cotended that as running of a coffe hotel usiness depended upon the skill of the person managing it no goodwill value can be attached to such a business on his death. We cannot agree. The business of Ambi's Cafe was admittedly a large one employing as it did a number of persons. The situation of the business in the heartof the City would undoubtedly have contributed to acqure for it during all these years a reputation which can be said to be independent of the personal factor. After all Ambi Iyer did nothing for the business except to manage it. The reputation of a hotel arises mostly by reason of the quality of the articles supplied by it. The reputation of a hotel arises mostly by reason of the quality of the articles supplied by it and the amennities it provides for its customers. It was then contended that as the reputation of the business was acquired purely out of its local situation no value could be attached to the goodwill as the right to the premises which the business was run a precarious one having no market value.
(8) In 1901 AC 217 Earl of Halsbury L.C. observed,
' The right to trade under the name of a firm which has acquired a reputation is not confined to a particular locality or to any particular premises. The right would remain if the business were transferred to another site else-where or if the premises were entirely altered. In the case of a public house owing to the convenience of is situation and ts being known as a favourite place of resorts, the advantages of its situation are so mixed up with the goodwill of the business that as a matter of fact it may well be that it is very difficult to sever them and to say how much is goodwill and how much is local situation. But those difficulties of fact will not necessarily make separate existence impossible.
(9) Once such separate existence is possible the valuation has to be made under the provisions of section 36 of the Estates Duty Act. There are no matarials on records to show what the terms of the tenancy were under which the late Ambi Iyer held the premises for the purposes of his business whether it was a lease for a term or one at will even assuming that the was one at will there was a statutory protection afforded to the leasse by reason of the Madras Building (Lease and Rent Control) Act, 1951. That statutory right was, of course, not alienable but it would have a value in the hands of the legal representatives of the deceased who were given the same protection under the statue as the deceased. We are therefore, of the opinion that, althrough the fact that the deceased had only a lease-hold interst in the business premises has a material bearing in valueing the goodwill of the business and althrough the locality of the business does contribute its own value to it, a proper valuation can still be made for the bgoodwill after making due allowance for these matters.
(10) The Assistant Controller considered while assessing the value of the goodwill of the business, the nature of the business, the risks involved, skill in management location, future competition, trade name, money market conditions and trends of profits for five years immediately preceding the date of valuation as a proper one. Mr. Thyagarajan contented that in so valuingthe goodwill the Assistant Controller did not make allowance for interest on the capital advanced. We shall presentaly show that for making a rough and ready valuation that factor does not enter into computation. The Central Board of Revenue took into consideration the absence of a long term lease arrangement in favour of the hotelier and reduced the value to Rs.25000/- which works out to about 1 1/2 years assessed profits.
In J. R. Batliboi's Advanced Accounting (20th Edn at page 888) it is stated that a rough for ascertaining the vqalue of the goodwill of a business is to take it as being worth one to three years' purchase of the annual profits of the business such profits being based on the average annual profits of the two to five years immediately preceding the date of such valuation without any deduction in respect in respect of interest on capital and owner service. IT this principal that by adopted both by the Assistant Controller and by the Central Board of revenue, the former at three years' purchase while the latter reducing it to nearly less than halr thereof. It is no doubt true true if one of the two methods recognised in 'Diamonds Death Duties' 13th Edn. 511 were to be adopted, allowance has got to be made for interest on capital. But under that method the number of years purchase will have to be increased. Taking the entire circumstances into consideration we cannot say that the procedure adopted by the Central Board of Revenue is opposed to sound principles of accounting. While answering the question referred to us in T. C. No. 81 of 1960 in manner indicated above we hold that the assessment of value of the goodwill attached to Ambi's Cafe by the Central Board of Revenue is Unassailable. There will be no order as to costs.
(11) Answer accordingly.