Case: M/S. S. C. Cambatta &amp; Co. Private Ltd., Bombay Vs. The Commissioner Of Excess Profits Tax Bombay

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.6. Petitions under Ss. 66(1) and 66(2) read with S. 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.7. 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 v. Lye, (1810) 17 Ves 335, 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 his been considered in two cases by the House of Lords. The first case is Trego v. Hunt. 1896 AC 7, 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 v. Muller and Co.s Margarine, Ltd., 1901 AC 217 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 goodname, 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".8. These two cases and others were considered in two Australian cases. The first is Daniell v. Federal Commissioner of Taxation, (1928) 42 CLR 296 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 v. Williamson, (1943) 67 CLR 561, 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 Jowitts 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".9. It will thus been seen that the goodwill 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, 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.10. 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. 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.It will thus been seen that the goodwill 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, 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.10. 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.