TMI Blog1983 (11) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 asunder: Rs. " Sale price of land 1,00,000 Value of goodwill estimated 1,00,000 Balance being the consideration in respect of machinery 4,76,000 ------------------- Total 6,76,000 " ------------------- 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 42,000 Factory building 2,38,000 Machinery 3,96,000 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on and may be augmented with the passage of time." The Supreme Court has referred to with approval the observations of the Calcutta High Court in CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566 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 [1896] AC 7 (HL) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ........ 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. 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 [1981 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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