TMI Blog1961 (11) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness 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 Immovable properties all of them together being now assessed to the value of ₹ 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 ₹ 1,000. 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 separate property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultural land in Konnuseri in south Mallabar Dt. On 30th September 1924, that property was sold for a sum of ₹ 600/- The need for the sale is not disclosed in the document. One Rao Saheb Arni Srinivasa Mudaliar who was at one time chairman of Arni Municipality has sworn to an affidavit that the coffee hotel business at Vellore was started by the deceased Ambi Iyer in 1924, on his advice and that he advance loans on occasions to the deceased Ambi Iyer. 2. 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 categorically states that Ambi Iyer, with the proceeds of the sale of his family property in Malabar started the coffee 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 with the latter right from the beginning when he started his business at Vellore confirms that statement. 3. The Assistant Controller and the Central Board of Revenue have rejected the evidence afforded by these affidavits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily. 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 persons were born to the deceased only subsequent to the establishment 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. 6. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f at the time of the winding up of the concern. But at the same time it is obvious that goodwill is inseparable from the business 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 distinguish an old established business from anew business at its first start. The goodwill of a business must emanate from a particular 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 a variety 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 until nothing is left but a dry residuum ingrained in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down his Vellore business probably for the reason of the increased prosperity of the Madras business. There can be no doubt that on the materials available Ambi's Cafe was an established business 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 class of assessing the value of the goodwill of a business. 12. Mr. Thiagarajan appearing for the accountable persons contended that as running of a coffee hotel business 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 heart of the City would undoubtedly have contributed to acquire 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 most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill 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 valuing the goodwill the Assistant Controller did not make allowance for interest on the capital advanced. We shall presentably 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 ₹ 25000/- which works out to about 1 1/2 years assessed profits. 16. In J. R. Batliboi's Advanced Accounting (20th Edn at page 888) it is stated that a rough for ascertaining the value 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 own ..... X X X X Extracts X X X X X X X X Extracts X X X X
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