TMI Blog1961 (7) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,000. The Income-tax Officer held that the stock-in-trade should not have been sold by the assessee to the company at cost price, and on the statement of gross profits disclosed by the assessee the Income-tax Officer found that the assessee was earning a gross profit on an average of 35 per cent. per year, and the finding of the Income-tax Officer was that on this basis the sale value of the stock-in-trade should be over ₹ 1,50,000 and profit of ₹ 50,000 should have accrued to the assessee in respect of the stock-in-trade sold to the company. The view taken by the Income-tax Officer apparently was that the sum of ₹ 50,000 paid to the assessee for the sale of goodwill did not really represent the price of the goodwill but represented the profits made by the assessee on the transaction of the sale of the stock-in-trade. Accordingly, the Income-tax Officer added a sum of ₹ 50,000 to the gross profit of the assessee for the accounting year in question. The assessee took the matter in appeal to the Appellate Assistant Commissioner, who took the view that the value of the goodwill should be placed at ₹ 25,000 and the profits made by the assessee on the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) the book debts had not been transferred to the company; and (3) the contacts which the assessee might have established over a period of years were not made available to the company. There is no relevancy in the third and fourth reasons given by the Appellate Tribunal, and as regards the fifth reason the registered sale deed dated 22nd August, 1951, clearly indicates that the right of representation was transferred by the assessee along with the goodwill and contacts of the assessee were made available to the new company. In any event, there is no finding by the Appellate Tribunal that the transaction of the sale of goodwill is a sham transaction, and in the absence of such a finding it was not open to the Appellate Tribunal to say that the price paid for the stock-in-trade by the company to the assessee was not the amount mentioned in the contract, but something more than that amount, namely, the difference between the market price and the cost price (sic) and that this difference in amount should be taxed as the profits of the assessee. The view we have expressed is supported by the decision of the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading results of the company showed a profit. On appeal to the General Commissioners against the assessment the respondent company contended, inter alia, (i) that in computing the profits the amount to be debited in respect of the opening figure of stock was the purchase price, which was the price it had agreed to pay, and that the amount paid in shares should be taken at the par value of the shares; and (ii) that, in any event, the stock exchange prices did not, in the circumstances of the case, represent the true market value of the investments and there was no evidence what such true market value was. The Commissioners found as a fact that, in the circumstances of the case, if the respondent company had set out to buy the investments at the stock exchange prices, those prices would have risen against it, though it was impossible to say by how much, and they discharged the assessment. In the High Court the Crown abandoned the contention that the investments should be valued at the stock exchange prices on 15th June, 1932, but claimed that the disparity between the purchase price and the stock exchange prices was so great that the real value of the investments must have been ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause 1 as a contract of sale and purchase. It is a contract under which the respondents acquired the investments in consideration of their undertaking to the syndicate and its liquidator to assume the liability on the debentures and to issue the fully paid shares. These were the rights and obligations imported by the contract. Their legal effect is beyond dispute. By what process of reasoning they are to be disregarded and treated as non-existent I am at a loss to understand. The respondents did in fact, as they were bound to do, take over the liability and issue the shares. It was on these terms, and these terms alone, that they acquired the investments. The carrying out of these terms was in law the price which they paid for the investments, and it seems to me quite impossible to accept the view upon which Mr. Stamp's whole argument was based that they must be taken as having acquired the investments in a manner which was not in law contractual and for no consideration at all. Mr. Stamp went so far as to say that not even the liability undertaken in respect of the debentures ought to be regarded as an item of cost, contrary to the position accepted by the Solicitor-Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, while determining the value of goodwill, the purchaser has mainly to ascertain as to what future annual super-profit he can reasonably except from the business he wishes to acquire; and for this purpose, super-profit may be defined as the amount by which the future profits of any undertaking are likely to exceed a normal rate of interest as would ordinarily be earned in a like business. The first step towards arriving at a fair exchangeable value of goodwill is to ascertain the net annual earnings of the business. For this purpose, it would not be safe to take the net earnings of any one normal year, but to find out after a careful and exhaustive investigation of the books of accounts, the average net annual earnings on the basis of the past three to five years. From the average net profits arrived at, there should be deducted interest at least 6 per cent. on the capital outlay involved in the carrying on of the business, and a sum as would cover the proprietor's services to the business, if the same has not been charged against the profits, in the past....... The prospective purchaser having thus ascertained the probable net annual income to be derived from th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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