TMI Blog1960 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsidiary company, and rejected other considerations which go to make up the goodwill of a business. It is manifest that the matter of goodwill needs to be considered in a much broader way than what the Tribunal has done. A question of law did arise in the case, and, in our opinion, the High Court should have directed the Tribunal to state a case upon it. Appeal allowed. - C.A. 776 OF 1957 - - - Dated:- 30-11-1960 - Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.--These are two appeals, with special leave, against an order of the High Court of Bombay rejecting a petition under section 66(2) of the Indian Income-tax Act and the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goodwill account. Rs. 40,000 debited to the stock-in-trade account. Rs. 100 debited to the book debts account. It will thus appear that goodwill was not shown separately in the appellants' account books, but only in the accounts of the subsidiary company. In working out the capital of the two companies for excess profits tax, a sum of Rs. 5,00,000 was claimed as goodwill as part of the capital of the subsidiary company. Both the Department as well as the Tribunal held that section 8(3) of the Excess Profits Tax Act applied ; and the goodwill was not taken into account in working out the capital. The Tribunal declined to state a case, but the High Court directed that a reference be made on two questions, which were framed as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain factors in reaching their conclusions. They first considered the earning capacity of the business, and held that prior to 1942 the business had not made profits, and that the name of Eros Theatre and Restaurant thus by itself had no goodwill at all. They, therefore, considered that the only goodwill which had been acquired attached to the lease, which the trustees had given to the Eros Theatre and Restaurant Ltd., and computing the goodwill as the value of the lease to the subsidiary company, they felt that Rs. 2 lakhs was a liberal estimate of the value of the goodwill in the hands of Eros Theatre and Restaurant Ltd. at the material time. Petitions under sections 66(1) and 66(2) read with section 21 of the Excess Profits Tax Act wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations : " What is goodwill ? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the 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 . . . . . if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again. " These two cases and others were considered in two Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time, locality is not everything. The power to attract custom depends on one or more of the other factors as well. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill. From the above, it is manifest that the matter of goodwill needs to be considered in a much broader way than what the Tribunal has done. A question of law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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