Appeals Nos 776 and 777 of 1957
Appeals by special leave from the judgment and order dated September 25 1956 of the Bombay High Court in Income tax Application No 48 of 1956 and from the judgment and order dated March 171954 of the Income tax Appellate Tribunal Bombay in EPTA Nos 757 903 and 944 of 1948 49 respectively
A V Viswanatha Sastri and G Gopalakrishnan for the appellants
A N Kripal and D Gupta
for the respondent
November 30
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 662 of the Indian Income tax Act and the order of the Income tax Appellate Tribunal Bombay in respect of which the petition to the High Court was made
Messrs section C Cambatta  Co Private Ltd Bombay have filed these appeals and the Commissioner of Excess Profits Tax Bombay is the respondent
We are concerned in these appeals with three chargeable accounting periods each ending respectively on December 31 beginning with the year 1943 and ending with the year 1945
807 The appellants carry on various businesses and one such business was the running of a theatre and restaurant called the Eros Theatre and Restaurant
In October 1943 a subsidiary Company called the Eros Theatre and Restaurant Ltd was formed
The paid up capital of the subsidiary Company was Rs 791100 divided into 7911 shares of Rs 100 each
7901 shares were allotted to the appellant Company as consideration for assets goodwill stock in trade and book debts which were taken over by the subsidiary Company and the remaining 10 shares were held by the Cam batta family
The assets which were transferred were as follows Assets Assets transferred
Rs128968 Stock in trade
Rs40000 Book debts 
Rs100 Rs169068 They together with the capital reserve of Rs 621032 made up the amount of Rs 790100
In the books of the subsidiary Company the share capital account was shown separately as follows Rs 250000 debited to the various assets account
Rs 500000 debited to the goodwill account
Rs 40000 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 500000 was claimed as goodwill as part of the capital of the subsidiary Company
Both the Department as well as the Tribunal held that section 83 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 follows 808 1 Whether on the facts of the case the Appellate Tribunal was right in applying section 83 of the Excess Profits Tax Act 2
Whether in the computation of the capital employed in the business of the assessee the Tribunal erred in not including the value of the goodwill or any portion thereof The High Court by its judgment and order answered the first question in the negative and the second in the affirmative
It held that sub section
5 and not sub section
3 of section 8 of the Excess Profits Tax Act was applicable
It therefore held that the Tribunal should have allowed for the value of the goodwill whatever it thought was reasonable at the date of the transfer
 When the matter went before the Tribunal again three affidavits and a valuation report by a firm of architects were filed
The goodwill according to the report of the architects amounted to Rs 25 lakhs
It may be mentioned here that the subsidiary Company was using the premises under a lease granted on November 20 1944 for three years beginning from April 1 1944 on a rental of Rs 9500 per month
The Tribunal came to the conclusion that no goodwill had been acquired by the business of the Theatre as such and that whatever goodwill there was related to the site and building itself
They then proceeded to consider what value should be set upon the goodwill on the date of the transfer of the subsidiary Company as directed by the High Court
They took into account certain 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
809 Petitions under sections 661 and 662 read with a 21 of the Excess Profits Tax Act were respectively rejected by the Tribunal and the High Court but the appellants obtained special leave from this Court and filed these appeals
In our opinion a question of law did arise in the case whether the goodwill of the Eros Theatre and  Restaurant Ltd was calculated in accordance with law
The Tribunal seems to have taken into account only the value of the leasehold of the site to the subsidiary Company and rejected other considerations which go to make up the goodwill of a business
No doubt in Cruttwell vs Lye1 Lord Eldon L C observed that goodwill was nothing more than the probability that the old customers would resort to the old place
The description given by Lord Eldon has been considered always to be exceedingly narrow
The matter has to be considered from the nature of the business because the goodwill of a public inn and the goodwill of a huge departmental stores cannot be calculated on identical principles
The matter has been considered in two cases by the House of Lords
The first case is Trego vs Hunt 2 where all the definitions previously given were considered and Lord Macnaghten observed that goodwill is the whole advantage whatever it may be of the reputation and connection of the firm which may have been built up by years of honest work or gained by lavish expenditure of money
In a subsequent case reported in Inland Revenue Commissioners vs Muller  Cos
Margarin Ltd 3 Lord Macnaghten at pp
223 and 224 made the following observations
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 in it is the attribute 1 346
2 3 810 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 Australian cases
The first is Daniell vs Federal Com missioner of Taxation 1 where Knox C J observed My opinion is that while it cannot be said to be absolutely and necessarily inseparable from the premises or to have no separate value prima facie at any rate it may be treated as attached to the premises and whatever its value may be should be treated as an enhancement of the value of the premises
In the second case reported in Federal Commissioner of Taxation vs Williamson 2 Rich J observed at p 564 as follows Hence to determine the nature of the goodwill in any given case 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 the surrounding circumstances 
The goodwill of a business 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 many customers being no doubt actuated by mixed motives in conferring their custom
In Earl Jowitt s Dictionary of English Law 1959 Edn goodwill is defined thus The goodwill of a business is the benefit which arises from its having been carried on for some time in a particular house or by a particular person or firm or from the use of a particular trade mark or trade name It will thus be seen that the goowill of a business depends upon a variety of circumstances 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 1  2  811 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 did arise in the case and in our opinion the High Court should have directed the Tribunal to state a case upon it
Civil Appeal No 776 of 1957 is allowed
The High Court will frame a suitable question and ask for a statement of the case from the Tribunal and decide the question in accordance with law
The costs of this appeal shall be borne by the respondent but the costs in the High Court shall abide the result
There will be no order in Civil Appeal No 777 of 1957
C A No 776 of 1957 allowed


Summary:
The appellant carried on various businesses and one such was the running of a Theatre and Restaurant
In October 1943 a subsidiary company was formed which was using the premises of the Theatre under a lease granted to it from April 1944
In working out the capital of the two companies for excess profits tax a claim of rupees five lakhs for goodwill as part of the capital of the subsidiary company was not taken into account
On reference to the High Court it held that the Tribunal should have allowed the value of the goodwill whatever it thought was reasonable at the date of transfer
Thereafter the Tribunal took into account only the value lease hold of the site to the subsidiary company and came to the conclusion that no goodwill had been acquired by the business of the Theatre as such and whatever goodwill there was related to the site of building itself and estimated the value of goodwill at rupees two lakhs
Petition under sections 661 and 662 read with section 21 of the Excess Profits Tax Act being rejected by the Tribunal and the High Court the appellants came appeal by special leave
Held that the goodwill of a business needed to be considered in a broader way
It depended upon a variety of circumstances or a combination of them
The nature the location the 1 102 806 service the standing of the business the honesty of those who run it and the lack of competition and many other factors went individually or together to make up the goodwill though the locality always played a considerable part
Shift the locality and the goodwill may be lost but it was not everything
The power to attract custom depended on one or more of the other factors as well
In the instant case a question of law did arise whether the goodwill of the Eros Theatre and Restaurant Ltd was calculated in accordance with law
Cruttwell vs Lye 1810 17 ves
335 Trego vs Hunt L Inland Revenue Commissioners vs Muller  Co s Margarin Ltd 9101 A C 217 H L Daniell vs Federal Commissioner of Taxation  and Federal Commissioner of Taxation vs Williamson   discussed