T.N. Singaravelu, J.
1. Suit is to recover sum of Rs. 1,16,540.30 ps. with future interest and for another sum of Rs. 1,914.17 p. The plaintiffs' case is this ; The first defendant, namely, Messrs. G Bell and Company was carrying on business with the two plaintiffs as partners. Defendants 2 and 3 are the other partners of the firm and each of them had contributed Rs. 10,000 towards capital and the total capital was Rs. 40,000. On 30th June, 1977, the partners agreed that the plaintiffs may retire from the partnership and that the defendants 2 and 3 will take the partership firm of Messrs. Bell and Company with all rights and goodwill as a going concern. The goodwill was to be ascertained as per the agreement and half share of the goodwill evaluated shall be paid to the account of the first plaintiff. The accounts were audited and a certificate was issued on 16th August, 1979. Thus, the balance due to the first plaintiff is Rs. 1,10,617.88 p. and to the second plaintiff is Rs. 26,407.48 p. The mode of payment was also agreed to by the partners. The defendants made a part payment and the balance is due as per the plaint. Future interest is claimed at 18 per cent per annum from the due date.
2. The defendants resisted the suit and contended as follows :--The partnership and the retirement of the plaintiffs in 1977 are admitted. It is true that it was agreed that the goodwill shall be evaluated as per the terms of the partnership deed and half share shall be credited to the account of the first plaintiff. But, there was no goodwill of the firm, and therefore, no amount was credited in the books of accounts. The balance sheet itself does not mention anything about the goodwill. These defendants have paid the plaintiffs sums of Rs. 25,000 each and this itself was an excess payment. Thus, the suit claim based on an alleged auditor's certificate, dated 16th August, 1979, is not maintainable in law, since the accounts between the parties have already been settled. The claim of a large sum of money as goodwill is imaginary and untenable. In any event, no interest is payable on goodwill. The suit is also bad for misjoinder of causes of action.
3. The following issues were framed for trial--
1. Whether the suit is maintainable ?
2. Whether the plaintiffs are entitled to the suit claim?
3. Whether the suit is bad for misjoinder of causes of action?
4. To what relief, if any, are the parties entitled?
4. Issue No 2 : The partnership deed, dated 25th April, 1970 (Exhibit P-2) and the retirement of the plaintiffs as partners and the deed Exhibit P-1, dated 29th June, 1977, are not in dispute. The defendants, who are continuing the first defendant firm Messrs. Bell and Company have already paid a sum of Rs. 25,000 to each of the two plaintiffs in a lump sum when they retired. Now, this suit is only for recovery of the amount subsequently ascertained as goodwill by the auditors. Clause 14 of Exhibit P-2 reads that on dissolution of the firm, goodwill shall be assessed as three years' profits of the average of the last five years. As per the auditor's certificate Exhibit P-3 the plaintiffs claim the suit amount payable to them as goodwill. Thus, in short, the amount claimed represents the goodwill which was ascertained by the auditors after the dissolution of the firm as per the agreement.
5. The parties herein have been carrying on business in partnership under the partnership deed, Exhibit P-2. dated 25th April, 1970, and they were selling and packing Honey-rex. The partnership was in existence only for a period of seven years and the partnership was dissolved in June, 1977 under Exhibit P-l. The capital contributed by each of the four partners was only Rs. 10,000, aggregating to a total of Rs. 40,000. Now, the first plaintiff claims a sum of Rs. 1,16,540.30 p. and the second plaintiff claims Rs. 1,914.17 p. as goodwill. This claim is stoutly resisted by the defendants as disproportionate and imaginary.
6. To appreciate this controversy it is necessary at the outset to find out what is goodwill in law..It has been answered by Lord Macnaughten in Inland Revenue Commissioners v. Muller and Co.'s Margarine Ltd (1901) A. C. 217. It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the 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 businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts to a dry residum ingrained in the actual place where the business is carried on while everything is in the air, seems to me to be as useful for practical purposes as it would be to dissolve 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.
Hence, 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 all the surrounding circumstances. Thus, goodwill is composed of a variety of elements. It is a composite thing 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, etc.
7. The next question is, what is the normal method of evaluation of goodwill. In 'Good will and Direct Tax Laws' issued by the Bombay Chartered Accountants' Society, 1978 edition, it is stated that the method of valuing goodwill in practice is 'A certain number of years' purchase of past profits or earnings'. It is popularly known as a rough and ready method. It is calculated on the following basis : (a) The profits for an agreed number of years preceding the evaluation are averaged, so as to arrive at the averae annual profits earned during that period, and (b) The goodwill is then estimated to be worth so many years' purchase of such average profits.
8. The case law on the subject is more or less on these lines In Das and Company v. Commissioner of Income-tax, Patna : 45ITR369(Patna) , a Division Bench of the Patna High Court held that the proper approach to evaluate the goodwill of a business is to ascertain the net annual earning of the business after a careful investigation of the books of accounts and calculating the average net annual earnings on the basis of the past three to five years. In Controller of Estate Duty v. Biswanath Rungta : 67ITR748(Cal) , a Division Bench of the Calcutta High Court observed that a rough and ready method that is largely employed for ascertaining the value of goodwill is to take it as being worth one to three years' purchase of the annual profits of the two to five years immediately preceding the date of such valuation, without any deduction in respect of interest on capital and owner's services. The Bench further observed that capitalisation of the super profits is also an accepted method of valuing the goodwill of a company. In Smt. Vindoor Bai v. Controller of Estate Duty : 132ITR421(All) , the Allahabad High Court observed that the goodwill of a business is an intangible asset, and it is the whole advantage of the reputation and connection formed with the customer together with circumstances making the connection durable. It is further observed that the goodwill is the value of the attraction to customers arising from the name and reputation for skill, integrity and efficient management or efficient service. Thus, goodwill is acquired during the course of number of years of business. It rarely springs from the very institution of the firm In R. C. Cooper v. Union of India (popularly known as Bank Nationalisation case) : 3SCR530 , the Supreme Court observed that the goodwill of business is an intangible asset and that goodwill is composed of a variety of elements and all the surrounding circumstances must be taken into account as a whole.
9. Bearing these principles in mind, let us consider the claim of the plaintiffs who had evaluated the goodwill on 16th August, 1979, at a sum of Rs. 85,678.88. Exhibit P-3 is the certificate issued by the Chartered Accountants of the plaintiffs. One of the auditors has also given evidence as P. W. 1 in support of the certificate. According to him, he took into account the profit and loss account for five years and divided it by five and multiplied it by three. But, it was elicited from him in cross-examination that this calculation was not made out of the books of accounts and that this goodwill was kept out of the accounts and out of the balance sheet. In particular, P. W. 1 fairly conceded that the goodwill was outside the balance-sheet and that the balance-sheet will not reflect the valuation of the goodwill. Thus, his evidence is that the working computation was kept outside the books and the balance sheet.
10. As against this, the defendants examined their own auditor as D. W. 2, who is a Chartered Accountant of Messrs Bell and Company from July, 1979. D. W. 2 has stated that he was asked to compute the goodwill of the business and that for that purpose he looked into the balance-sheet of the company prior to 1978. According to him, generally, super-profits method is adopted for evaluation of the goodwill of a firm. Exhibit D-7 is his calculation of the goodwill. He further stated that there is no goodwill in respect of the firm Messrs Bell and Company in the balance-sheet and that no particular method of evaluating of goodwill is mentioned under clause 14 of Exhibit P-2. He finally added thus--
The goodwill of a concern is something extra which the concern has apart from the provision for capital and exertion of partners The extra is called 'super profits'. Multiplying it by a certain number, we are evaluating the goodwill. This is the most commonly accepted method.
He then stated that this method is accepted by Taxation Laws as well and upheld by the various High Courts. D. W. 2 then pointed out the mistakes in the valuation prepared by the auditor P. W. 1. According to this witness, the goodwill account does not find a place in-any of the accounts, balance sheet or any other account. He then stated that unless the company has something extra other than the capital employed and the exertion of the partners, there can be no goodwill. He also added that the method adopted by P. W. 1 is not in vogue now and it has become obsolete. He finally stated that taking into consideration the totality of the circumstances of the business, capital, reputation, standing, etc. he would state thus--
The firm's goodwill is Rs. 9,675 as per my working and the share of each partner is Rs. 4,838. Because the capital is always fixed amount, I have made a little higher interest at 12 per cent. on the capital. Even if you take the same interest rate which is provided for current account to the capital account also, then the goodwill is Rs. 13,275, and for each partner, the share is Rs. 6,638.
11. Now, we have before us the evidence of two auditors who have adopted two different methods. The plaintiffs' method of calculation is the multiplier method of the average profits preceding the evaluation, while the defendants' method is that of super profits. Learned Counsel for the plaintiffs ably argued that the agreement Exhibit P-2 itself provides for a certain method of valuation, and therefore, it should be accepted. In other words, the contention of the plaintiffs is that the goodwill shall be assessed as three years' profits of the average of the last five years. 1 have carefully considered this argument, but I am unable to accept this method if we take into consideration the totality of the surrounding circumstances. The nature of business, the possible advantages of the good name of the firm, etc. As pointed out by the Supreme Court, goodwill is a composite thing composed of a variety of elements including the conduct and personality of the partners, likelihood of competition, a good reputation, established connections, etc. Therefore, it depends upon a computation of the various circumstances like the location, service, standing of the business and many other factors.
12. As already pointed out, this concern was started only in the year 1970 by some persons who hail from North India. They are not local persons and the business is also one of sale and packing of honey. It is not a thing to be manufactured as such. It does not require any special skill or efficiency, since the firm is mainly dealing in packing and distribution of honey. As already stated the firm itself was started only in the year 1970 and the firm was dissolved in 1977. The capital for this business was a mere Rs. 40,000 contributed by four partners at Rs. 10,000 each. Therefore, taking all these surrounding circumstances into account it appears to me that the claim of Rs. 1,10,617.88 p. towards the goodwill is very much on the high side. It will be more reasonable to follow the method adopted by the auditor D. W. 2 which is the super profits method. It is the 'extra' other than the capital employed and the exertion of the partners that could be considered as the goodwill of the firm. Thus, having regard to the fact that this is an ordinary unskilled customary business, the method adopted by D. W. 2 is more acceptable. It is not as if the business involves any distinguishable teatures or that the firm deals in standard articles manufactured by someone else which one can get from anywhere. Therefore, the goodwill of this business, in my opinion, is only minimal. For all these reasons, I accept the evaluation made by D. W. 2.
13. Then D. W. 2 has stated that the share of the goodwill of each of the partners would work out to Rs. 4,838. But if we take the same interest rate which is provided for the current account to the capital account also, admittedly, the goodwill will come to Rs. 13,275, and for each of the two partners, the share will be Rs. 6,638. The agreement provides that only the first plaintiff and the second defendant are entitled to share the goodwill in equal moieties. Therefore, my finding on this issue is that the plaintiff will be entitled to a goodwill of Rs. 6,638 being his share as on 16th August, 1979. This issue is answered accordingly.
14. Issue Nos. 1 and 3 : These issues were not seriously argued before me In the written statement, it was contended that two different claims are made by the two plaintiffs, and therefore, a single suit is not maintainable. I am unable to agree. For one thing, the claim itself arose out of a single partnership deed between the plaintiffs and the defendants and not independently. For another, the second defendant is not granted any relief in this suit since I have found that no amount is due to him. Therefore, I hold that the suit is not bad for misjoinder of causes of action and that the suit as framed is maintainable.
15. Issue No. 4 : The result is the first plaintiff is entitled to a decree for Rs. 6,638 with interest at 12 per cent. per annum from the date of the plaint till the date of realisation. The first plaintiff would be entitled to proportionate costs of the suit from the defendants. The claim of the second plaintiff is dismissed without costs.