RAJESH BROTHERS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) PURSUANT to the directions given by this Court, the following questions have been referred at the instance of the assessee under S. 256(2) of the IT Act, 1961 (in short "the Act"), by the Tribunal (in short "the Tribunal"), for the opinion of this Court :

(2.) THE assessee, a registered firm, started film exhibition business w.e.f. 9th Oct., 1969. The land was acquired in the year 1967 and g later a building was constructed thereon and the cinema theatre was being run under the name and style of Apsara cinema at Delhi U.P. border, since 9th Oct., 1969. After running the cinema hall for some years, the assessee sold the same to Star Exhibitors and Agencies (P) Ltd. for a total consideration of Rs. 9 lakhs. On the date of sale, the book value of various assets including cinema building, machinery, etc., was Rs. 6,78,974. The assessee claimed goodwill of Rs. 2,09,268 and, brokerage to the extent of Rs. 31,500 paid with the result that according to it, there was a loss of Rs. 19,742 in this transaction. The ITO (in short "the ITO"), did not accept the assessee's contention. He found that there was no goodwill attached to the cinema business run by the assessee. He found that during the assessment years prior to the sale, the profits of the business for previous three years were as under : The ITO further found that the gross receipts from the sale of tickets during the previous four assessment years was as under :

(3.) GOODWILL is a thing very easy to describe, but 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 customers. It is the magnetic quality of a particular trade or business which attracts customers to it as a matter of course. This quality springs from and is developed by various contributing factors that earn a reputation for honest dealing, quality and standard. It is an intangible asset being the whole advantage of the reputation and connections formed with the customers together with the circumstances which make connections durable. It is the component of total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features [see Khushal Khemgar Shah vs. Mrs. Khorshed Banu Dadiba Boatwaua, AIR 1970 SC 1147]. Goodwill is 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 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. [see IRC vs. Muller & Co.'s Margarine Ltd. (1901) AC 217 (HL)]. A some what similar view was expressed by the apex Court in Rustom Cavasjee Cooper vs. Union of India (1970) 40 Comp Cas 325 : AIR 1970 SC 564.