ORDER
Egbert Singh, Accountant Member
1. This appeal is by the revenue by which it is contended that the Appellate Controller erred in holding that the goodwill in the concerns was to be computed on the basis of the net annual average commercial profit as against average commercial profit taken in the assessment and that too after allowing deduction of 18 per cent return on average capital employed and 25 per cent of profit for managerial remuneration out of the average annual business profit.
2. It is also the appeal by the revenue that in the circumstances of the case in the alternative, the Appellate Controller erred in deleting the amount of Rs. 83,716, Rs. 11,276 and Rs. 6,326 in respect of the goodwill of the different three firms, whereas the correct amounts of the assessee’s share were Rs. 65,598, Rs. 824 and Rs. 2,148.
3. In the assessment order, the Assistant Controller noted that the deceased died intestate on 19-4-1969. He was survived by his only son, Shri Ghanshyamdas Binani who filed the return of the estate duty in the capacity of an accountable person. The net principal value of the estate was returned at Rs. 8,37,752. The Assistant Controller heard the accountable person and pointed out that the assessee carried on the business as a sole proprietor in the name of G.D. Binani & Co. apart from his partnership business in Mathuradas Govardhandas (2/5th share), Star Dye Castings (3/16th share), General Metal Trading Co. (9/16th share) and Plastic Enterprise (50 per cent share). He pointed out also that the deceased was the karta of the HUF styled as G.D. Binani and had 50 per cent interest in the HUF as the other 50 per cent belonged to the said son.
4. Amongst other things, the jewellery, cash, etc., were included. The Assistant Controller apparently was of the view that the assessee had interest in his share of the goodwill of the partnership firms, companies and proprietary concerns. The accountable persons filed a statement of computation of goodwill dated 24-3-1983. Later on, the accountable person filed letter dated 19-12-1984 and letter dated 11-2-1985 in which objections were raised in the matter of adoption of value of goodwill. The Assistant Controller was of the opinion that the goodwill of a business should be computed on the death of the deceased in respect of other business in which he was a proprietor or a partner of a firm. He concluded that in all the firms and companies in which the deceased had interest, the appropriate goodwill would have to be calculated and added to the estate. In this connection he referred to the decision of the Hon’ble Calcutta High Court in the case of CED v. Annaraj Mehta and Deoraj Mehta [1979] 119 ITR 544 with emphasis at page 551. He reproduced the relevant extract in the assessment order.
5. He also considered the decisions in Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba AIR 1970 SC 1147, S. Devaraj v. CWT [1973] 90 ITR 400 (Mad.), CED v. Ibrahim Gulam Hussain Currimbhoy [1975] 100 ITR 320 (Mad.), Smt. Summbayi Ammal v. CED [1976] 103 ITR 358 (Mad.) and CED v. John Gregory Apcar [1979] 119 ITR 192 (Cal.).
6. He proceeded and computed the value of the estate including the value of the share of the goodwill of the deceased in those firms, as per the assessee’s letter dated 24-3-1983. The total value of the estate was computed at Rs. 24,49,759. He allowed appropriate deduction, etc.
7. The accountable person in appeal before the Appellate Controller, contended that the Assistant Controller erred in including the alleged value of the share of the goodwill of the deceased in the firms, company, etc. The Appellate Controller observed that the Assistant Con-roller has neither computed nor mentioned any basis for computation of goodwill of his own, but has valued the goodwill on the basis of a letter filed on behalf of the accountable person. He pointed out that this letter was withdrawn by the accountable person on 18-12-1984 and 11-2-1985, by which it was categorically stated that the earlier letter was withdrawn as the contents thereof were not according to law and the facts of the case. The other letter stated that goodwill should not and could not be included in the estate. Copies of those letters dated 18-124984 and 11-2-1985 were placed before the Appellate Controller who noted that it was curious that no cognisance was taken of those letters and that the Assistant Controller had not even mentioned these letters in the assessment. The main contention made on behalf of the accountable person before the Appellate Controller was that no goodwill could have passed on the death of the deceased in respect of the above firm. The Appellate Controller, however, was of the view that goodwill, if any, has to be included in the estate, of course if the business had a goodwill. He referred to the decisions of the Hon’ble Madras High Court in the cases of A.K.D. Dharmaraja v. CED [1978] 111 ITR 72 and CED v. Estate of Late V.R.M. Valliappa Chettiar [1980] 125 ITR 181. The Appellate Controller indicated that in order to estimate the value of goodwill, the only accepted method was the ‘super-profit method’ as adopted by the Hon’ble Patna High Court in the case of Das & Co. v. CIT [1962] 45 ITR 369 and also by the Hon’ble Calcutta High Court in the case of CED v. Biswanath Rungta [1968] 67 ITR 748. He accordingly held that the goodwill in each of the concerns has to be computed after ascertaining the net annual average commercial profit of the business for three years. He thereafter directed that the deduction should be allowed for normal rate of interest of 18 per cent and also on account of managerial remuneration at 25 per cent of the average profit. He pointed out that the normal bank rate was about 15 per cent. 3 per cent was added for risk element. He concluded, therefore, that if there was any surplus, from the average annual business, the amount relating as goodwill would be includible. He observed that on perusal of the facts as per the assessment order and on the facts submitted before him by the accountable person it was indicated that in none of these five concerns, there was any positive figure and, therefore, the question of including goodwill in the estate did not arise. He, therefore, directed that the amount of goodwill included in the assessment should be deleted.
8. The Appellate Controller went on to say that the Assistant Controller would verify the factual correctness of the business profits and the average capital employed and to consider the deductions as directed by him in the appellate order. Hence, this appeal by the revenue.
9. It is submitted by the learned departmental representative that the Appellate Controller had admittedly accepted the action of the Assistant Controller in including the value of the share of the deceased in the goodwill of the firms, companies, etc., in principle. It is urged, however, that the Appellate Controller erred in giving excessive and uncalled for deduction to the extent of 18 per cent interest when the bank rate prevailing at the time of death was very much less. It is also urged that the rate of managerial remuneration also was excessive on the facts of the case. It is vehemently urged that considering the assessment order as a whole, the Appellate Controller erred in deleting the above amounts added in respect of the different firms.
10. The learned counsel for the accountable person, on the other hand, submits that the contention of the accountable person right from the start was that there was no goodwill in those firms which called for evaluation and inclusion as done by the Assistant Controller. It is, however, argued that since the accountable person received full relief in the hands of the Appellate Controller, the appeal was not preferred by the accountable person against the order of the Appellate Controller holding that there was a goodwill to be included in the estate. As far as the computation of the goodwill of the different firms is concerned, the learned counsel submits that the rate applied by the Appellate Controller was on widely accepted principle. It is submitted that the rate of interest on the return on capital was quite appropriate and reasonable, which included the element of risk also. It is also urged that the deceased in the commercial world was known as metal king during his lifetime and in fact his devotion in the management along with others, was quite substantial and, therefore, the amount of the remuneration awarded by the Appellate Controller was reasonable and adequate. In brief, it is urged that the minor computation was quite sustainable and, therefore, the appeal by the revenue on this point may not be accepted.
11. We have heard both the sides at length and we have perused the orders of the authorities below and other papers placed before us for our consideration. We have also gone through the decisions cited before us. The learned counsel for the accountable person also submits that it is the commercial profit which has to be taken into account after allowing tax for the purpose of evaluation of goodwill relying on the decision of Biswanath Rungta’s case (supra). It is also submitted that the number of years of purchase has been adopted at two years in the cases of K. Ismail v. CED [1974] 97 ITR 201 (Mys.), Smt. Kamlawati Raizada v. CED [1976] 105 ITR 703 (All.), Das & Co’s case (supra) and Smt. Vindoor Bai v. CED [1981] 132 ITR 421 (All.).
12. After going through the assessment order, it is seen that the Assistant Controller did mention the subsequent letters dated 18-12-1984 and 11-2-1985 addressed to him by the accountable person, as mentioned by us earlier. So, it is not correct for the Appellate Controller to say that the Assistant Controller curiously enough did not take cognizance of the subsequent two letters of the accountable person. We find that the Assistant Controller considered those letters, before coming to the conclusion that there was a goodwill in the firms which has to be valued and included in the assessment. Of course, the Assistant Controller did not indicate what was the working or valuation or computation of the goodwill of those firms in the assessment order. On the contrary, he has adopted the figures furnished by the accountable person at the first instance, in the first letter dated 24-3-1983, which according to the Appellate Controller was withdrawn and cancelled by the accountable person. The Appellate Controller considered the various aspects of the matter and has given his own observation and conclusion as briefly discussed by us in the preceding paragraph. On principle, we agree with the authorities below that there was a goodwill in those concerns in which the deceased had interest keeping in view the ratio of the decisions of the Hon’ble Calcutta High Court and other High Courts as well. That apart, as indicated hereinbefore, the accountable person did not file any appeal against that part of the order of the Appellate Controller upholding the view that there was a goodwill in those concerns. Therefore, we need not enter into this controversy. In the case of Kushal Khemgar Shah (supra), it was held amongst other things that goodwill of a firm is an asset and a deed of partnership would have to be considered. It was held also in that case that interest of the deceased in the goodwill would devolve on the surviving partners and, therefore, Section 5 would apply in respect of the share of the deceased in the goodwill. In the case of Surajmall Gouti v. CED [1979] 119 ITR 182 the Hon’ble Calcutta High Court has held that the share of a deceased partner in the firm would have to be considered in respect of the entire share as shown in the balance sheet and the value cannot be determined by adding up break-up value of each and every asset of the firm. But in the present case balance sheets of those firms are not available. In the case of Biswanath Rungta (supra) on the facts of that case, it was held by the Hon’ble High Court that although goodwill was not shown in the balance sheet but it has to be taken as being worth 1 to 3 years’ purchase of the annual profit. It was also observed that goodwill is the value attaching to a successful business beyond intrinsic worth of the net asset employed therein, because of its good reputation, established connection, continued prosperity, etc., and the hope that the business will maintain similar profit-earning capacity in future. Thus, it is seen that in computing the value of a goodwill one has to take various factors into account like type of business, location of the business, earning capacity, etc. Reference may be made to the decision in the case of Mehru Belgam Vala v. G. Bell & Co. [1984] 150 ITR 51 (Mad.) and also in the case of Smt. Surumbayi Animal’s case (supra).
13. One has to ascertain whether the firms in which the deceased was a partner had been making progressive profits. In the case of Smt. Vindoor Bai (supra) the Hon’ble Allahabad High Court on the facts of that case held that the method adopted for valuing the goodwill of the firm was a proper method and that there was no evidence to show that the firm had no goodwill or that the application of three years’ purchase was inappropriate. It was held also that in view of Section 14 of the Indian Partnership Act, 1932, it cannot be denied that the goodwill of the partnership is an asset of the partnership, which, would not mean that every partnership has a goodwill, as it depends on various factors. In the case of Vindoor Bai (supra) the application of three years’ purchase was considered not inappropriate after considering the decisions in the case of Biswanath Rungta (supra), Das & Co. (supra) and also as decided by the Hon’ble Madras High Court in the case of K.A. Subramaniam v. CED [1962] 46 ITR (ED) 1. The Hon’ble Gauhati High Court in the case of CED v. Kanta Devi Taneja [1981] 132 ITR 437 on the facts of that case held that the interest of a partner in the firm is a property within the meaning of Section 2(15) of the Estate Duty Act, 1953 (‘the Act’), and such interest extends to the share in the assets including goodwill.
14. In the case of S.C. Cambatta & Co. (P.) Ltd. v. CED [1961] 41 ITR 500 the Hon’ble Supreme Court on the facts of that case held that the goodwill of a business depends on a variety of circumstances or a combination of them like location, service, standing of the business, honesty of the management, lack of competition, etc. The Hon’ble Karnataka High Court in the case of Bhaktavarmal Shivalal Ostwal v. CED [1983] 140 ITR 871 have also applied the ratio of the decision in the case of Kushal Khemgar Shah (supra).
15. Thus, having regard to the facts of the case and the orders of the authorities below, we find that the Appellate Controller was justified in holding that goodwill of a firm in which the deceased has share or interest, would have to be included in the estate, of course, the amount to be included depends on various factors. In fact, before him, there appeared to be no material for ascertaining the correct computation and that was why he has directed the Assistant Controller to verify the figures furnished by the accountable person before him. We would, however, modify his order to the effect that in ascertaining the value of the share of the deceased in the goodwill and in computation of the goodwill various factors should be taken into account as dealt with by various Courts as discussed by us above, also after taking into account the balance sheets, deed of partnership, etc., which in the present case are not available at all. In fact, the Assistant Controller has not made separate computation as he has depended on the computation of the accountable person, who withdrew the computation statement, at a later stage.
16. After considering the rival contentions of both the sides, we are of the opinion that the rate of interest allowed by the Appellate Controller at 18 per cent including the element of risk, was on higher side. We consider that the rate of 15 per cent on the facts of the case, would be appropriate and reasonable. As far as the managerial remuneration is concerned, we are of the opinion that one has to take into account whether such remuneration was allowed as reduction in the computation of the commercial profit or not, at the first instance. If the same had not been so deducted, then a deduction of 25 per cent would be within a reasonable limit. Thus, the Assistant Controller would have to verify the balance sheets, profit and loss account, etc., of the firms concerned while computing the value of the goodwill of a particular firm. The appeal by the revenue on this point mainly is that the average commercial profit taken in the assessment should be taken into consideration and not the net annual average commercial profit. We do not find any force in this part of the contention of the revenue, keeping in mind that in the assessment, there would have been various types of disallowances and additions which would not virtually form part of the annual commercial profit. Thus, it is not safe to say that the computation of the goodwill should be based on the commercial profit as taken in the assessment, particularly in this case as there is no indication that the commercial profit taken into assessment did not include various disallowances of expenditure. Keeping in view the decisions discussed earlier, the net annual average commercial profit would be the proper method on the basis of which computation of goodwill could proceed.
17. Thus, the directions given by the Appellate Controller in the present case are modified to the above extent. The Assistant Controller will bring various basic facts and materials on record for fresh computation of the goodwill after giving the accountable person an opportunity of being heard, as indicated above.
18. The next ground of appeal by the revenue is that the Appellate Controller erred in deleting the lineal descendants’ share in computing the rate of duty payable.
19. As indicated earlier, the deceased was a karta in the HUF and had 50 per cent interest therein. The Assistant Controller has indicated that the remaining 50 per cent belonged to Shri Ghanshyamdas Binani, another coparcener who is also the accountable person. In his computation, the Assistant Controller included Rs. 1,12,534 being the share of the lineal descendants. The accountable person appealed to the Appellate Controller that the inclusion of the lineal descendants’ share under Section 34(1)(c) of the Act by the Assistant Controller was not proper as it was violative of article 14 of the Constitution as decided by the Hon’ble Madras High Court in the case of V. Devaki Ammal v. ACED [1973] 91 ITR 24. The Appellate Controller pointed out that lineal descendants’ share should be excluded by virtue of the Hon’ble Supreme Court dismissal in the case of CED v. R.K. Chettiar [SLP (Civil) No. 5098 of 1981] filed by the department against the decision of the Hon’ble Madras High Court in CED v. R.K. Chettiar [1980] 125 ITR 605. The said dismissal was in [1983] 143 ITR St. 67. According to the Appellate Controller, the dismissal of the special leave petition by the Hon’ble Supreme Court settled all controversies on the inclusion of the lineal descendants’ share for the rate purpose. Following that decision, he directed that the lineal descendants’ share should be deleted completely. In view of this, the Appellate Controller did not go into the merits of the other contentions of the assessee regarding exclusion of the share of the wife of the lineal descendants, as per the Hon’ble Calcutta High Court decision in the case of Satyanarayan Saraf v. ACED [1978] 111 ITR 432.
20. The contention on behalf of the revenue is that the Appellate Controller erred in giving the above direction, having regard to another decision of the Hon’ble Supreme Court in the case of Daryao v. State of U.P. AIR [1961] SC 1457 in which it was held that dismissal by the special leave petition at the admission stage without giving reasons does not lay down any binding principal under article 141 to be followed by the High Courts.
21. It is submitted by the learned departmental representative that in view of the above position in law, the Appellate Controller erred on principle in deleting the share of the lineal descendants for inclusion for rate purpose under Section 34(1)(c). The learned counsel for the accountable person submits that the dismissal of the special leave application on similar point implies that the decision of the High Court concerned was quite valid.
22. He have heard both the sides and we have gone through the orders of the authorities below for our consideration-[1983] 143 ITR St. 67-the dismissal of the special leave petition was rejected. It is seen therefrom that no reason has been given for the dismissal of the special leave petition filed by the department. As contended on behalf of the revenue, the Hon’ble Supreme Court in the case of Daryao (supra) has directly dealt with this point, which was also considered by the Hon’ble Karnataka High Court in the case of Amrut Talkies v. Second ITO [1984] 150 ITR 386 with emphasis at page 392. In the case of CIT v. Sheo Kumari Debi [1986] 157 ITR 13 the Full Bench of the Patna High Court has taken a similar view on the effect of the dismissal of a special leave petition by the Hon’ble Supreme Court. The Hon’ble Gujarat High Court in the case of CIT v. Indradaman Amratlal [1985] 156 ITR 493 had also given a similar view on the point.
23. As indicated by the learned counsel for the accountable person, the Hon’ble Madras High Court has not upheld the inclusion of the lineal descendants’ share for the purpose of Section 34(1)(c). An opposite view has been taken by the Hon’ble Allahabad High Court in the case of S. Devendra Singh v. CED [1982] 136 ITR 176 and also in another case of Maharani Raj Laxmi Kumari Devi v. CED [1980] 121 ITR 1002. The Hon’ble Calcutta High Court in the case of Satyanarayan Saraf’s case (supra) has upheld the inclusion and aggregation of interest of lineal descendants for the purpose of Section 34(1 )(c). It was held on the facts of that case that the share of the wife of the coparcener was not liable to be included for the purpose of aggregation. In other words, only the share of the lineal descendants would be includible for the purpose of aggregation to ascertain the rate under Section 34(1 )(c). In fact, this is also one of the submissions made by the learned counsel for the accountable person that if inclusion of the descendants’ share, if any, has to be made, the share of the lineal descendants only should be included and not of the share of widow or the wife of coparceners of the present HUF.
24. In this connection it may be pointed out also that the Hon’ble Madhya Pradesh High Court in the case of CED v. Santram [1981] 130 ITR 38 and in the case of Smt. Gunvanti Bai v. CED [1981] 130 ITR 122 has upheld aggregation. In view of all these decisions we are of the opinion that the Appellate Controller erred in deleting the addition for the purpose of aggregation for rate purpose only under Section 34(1)(c). Of course, we would direct the Assistant Controller to include the share of the lineal descendants only in view of the decision of the Hon’ble Calcutta High Court mentioned above.
25. Before we close, it is essential that we should refer also to a decision of the Appellate Tribunal, Delhi Bench ‘C’ in the case of K.B. Rohetgi v. ACED [1984] 10 ITD 714 in which it was urged on behalf of the accountable person that in view of the dismissal of the special leave application by the Hon’ble Supreme Court in the case of V. Devaki Ammal’s case (supra), aggregation under Section 34(1)(c) should not be made. The Appellate Tribunal indicated that it was unable to accept the contention because the Hon’ble Supreme Court had similarly refused special leave petition against the contrary decisions taken by other High Courts, i.e., the Allahabad High Court, the Gujarat High Court, the Madhya Pradesh High Court, etc.
26. In this connection it is necessary that we should also refer to the latest decision of the Hon’ble Supreme Court in the case of Naresh Chandra Kantilal [1986] 2 SVLR (T) 20 in which the accountable person contended that the deceased had no interest in the assets of the firm and so his share in the goodwill did not pass and that according to the partnership agreement, the partnership was to continue on the death of any of the partners and that it was stipulated that the deceased would have no interest in the goodwill of the firm on his death. It was, therefore, submitted that the goodwill did not pass and was not liable to the charge of estate duty. The Tribunal rejected the contentions which were allowed by the High Court. The Hon’ble Supreme Court held that the share of the deceased in the partnership did not evaporate or disappear-it went together with other assets and should be valued in the manner contemplated under Rule 7(c) of the Estate Duty Rules, 1953. The Assistant Controller, therefore, should proceed to compute the value of the goodwill after bringing material facts on record as discussed earlier keeping in view the decisions mentioned above.
27. In the result, the appeal by the revenue is partly allowed.