Case Law Details
Brief of the Case: In the cited case, Delhi High Court held that the monopoly enjoyed by the assessee in respect of the product manufactured, the continuous functioning, the large volume of orders at hand when the collaboration transaction took place, were sufficient basis for valuation.
Facts of the Case: The assessee was taken over by a new company (i.e. M/s Motherson Sumi Systems Pvt. Ltd) in terms of a collaboration agreement dated 03-12-1986. The new company was promoted by the assessee and two Japanese companies. The Collaboration Agreement provided that the consideration of the unit as a going concern could be adjusted against the goodwill of the assessee. The valuation of the goodwill was to be based on “assumptions and projections” approved by the investing Japanese Companies and evaluated by a chartered accountant nominated with the concurrence of the Japanese companies. This agreement was approved by the Central Government. The total consideration (including the goodwill) agreed upon by the parties was Rs.60.90 lakhs.
During assessment proceedings for AY 1987-88, the assessee claimed the value of goodwill transferred to be Rs.51,30,338/-. AO was of the opinion that valuation of the goodwill was not based on any established or known principle and that the assessee had not acquired expertise of such order as to claim to possess such goodwill. Also, the assessee had incurred loss during the previous year and further the goodwill claimed was founded on the expertise drawn from the collaborating investors. Hence, the assessee’s claim was disallowed.
On aggrieved by AO’s order, assessee preferred appeal before the CIT(A) who rejected the assessee’s claims and confirmed the AO’s corresponding addition.
Assessee moved appeal before ITAT, which set aside the order of the CIT(A) and allowed the assessee’s appeal.
The revenue questioned the correctness of the order of the ITAT before the High Court. The question of law which arises for determination in this case was:
“Whether the Tribunal was justified in law in holding that the sum of Rs.51,30,338/- was received by the company from its collaborators on account of goodwill and, therefore, not exigible to tax ?”
Held by CIT (A): The findings of the AO, as mentioned above in the facts of the case, was approved by the CIT (A) and accordingly, the claim of the assessee was rejected.
Held by ITAT: ITAT noticed that the report of the chartered accountant supported the assessee’s stand. It was also held that though the assessee was incorporated in 1984, it had taken over the business of an existing firm, Sehgal Cables. Furthermore, it was noticed that though the assessee incurred losses during the first year of its operation, those losses were wiped out during the next year; moreover, the assessee had orders worth Rs.4.87 crores in its hand when the takeover transaction had taken place and that it had a manufacturing monopoly over the product, i.e wireless harness. Consequently, the ITAT allowed the assessee’s appeal.
Contention of the Revenue before the High Court: The Revenue argued that the goodwill could be valued at such high rate as was done in the present case, for which the assessee had to furnish a scientific basis. It was emphasized that the mere existence of a huge or substantial order could not have meant that such orders would have necessarily resulted in a profit and the basis for ITAT’s order was unsustainable.
Held by High Court: The High Court inter-alia noted that in S. C. Cambatta and Co. Private Limited v. Commissioner of Excess Profits Tax, Bombay (41 I.T.R. 500), Supreme Court held 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…….”
Further noted that in Commissioner of Income Tax v. Official Liquidator 151 ITR 781, the Madras High Court held that “the other circumstances, such as, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, etc., are all matters to be considered” while evaluating goodwill.
The High Court also noted the basis for valuation of goodwill in this case. i.e,
(a) the assessee, though established in 1984 in a sense was continually engaged in business since 1975, when Sehgal Cables (which was assimilated by the assessee) started functioning;
(b) the assessee had unexecuted orders worth Rs.4.87 crores in hand, when the collaboration agreement was signed; its profit for one year offset the loss for the previous year;
(c) the assessee held a manufacturing monopoly over one product, i.e wireless harness.
The High Court, after examining the facts and circumstances, held that the monopoly enjoyed by the assessee in respect of the product manufactured, the continuous functioning since the business of Sehgal Cables had been taken over by the assessee, the large volume of orders at hand when the collaboration transaction took place, were sufficient basis for valuation.
The appeal of the Revenue was accordingly dismissed.
