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10 Estate duty — Valuation of goodwill — Super Profits method
— There is no hard and fast rule regarding multiplier to be applied for
evaluating goodwill — Value would depend on the nature of business and
prevailing market conditions — Property passing on death — Claim pending
adjudication on date of death — Not a property available at the time of death.
[Controller of Estate Deputy v. Nalini V. Saraf, (2009) 319
ITR 303 (SC)]
One V. G. Saraf passed away on October 18, 1984. He was a
partner in M/s. Saraf Trading Corporation, a partnership firm carrying on
business as commission agents and exporters of tea. It exported tea to U.S.S.R.
The firm was constituted under deed of partnership dated November 27, 1963. The
firm had three partners. The deceased had fifty per cent share in profit and
loss. On September 16, 1981, the firm was reconstituted with the admission of
one more partner and a minor. The Assistant Controller of Estate Duty, inter
alia, held that for determining the value of goodwill, there were two methods of
valuation, namely, super profits method and total capitalisation method. The
Assistant Controller
preferred the super profits method. Applying the super profits method, the
Assistant Controller applied the multiplier of three years’ purchase, whereas
the assessee-respondent contended that 3X was excessive. The Assistant
Controller further held that refund of income-tax, which became due after the
demise of V. G. Saraf, constituted property of the deceased, which was also
disputed by the legal representatives of the deceased.
On the facts, the Tribunal found that at the relevant time,
the market conditions in the U.S.S.R. were not congenial; that there was huge
volatility in the tea export business even otherwise; and in the circumstances,
the Tribunal applied the multiplier of one year’s purchase instead of three
years’ purchase. This finding was upheld by the High Court.
The Supreme Court noted that in this case, the method was not
in dispute. The Supreme Court held that there was no hard and fast rule
regarding the multiplier to be applied for evaluating the goodwill of the firm.
It all depended on the nature of the business and the prevailing market
conditions. Hence, the Supreme Court was of the view that this aspect was a pure
question of fact and did not call for interference by the Supreme Court.
On the question as to whether the refund in question, which became payable
after the death, the Tribunal and the High Court concurrently held that the
refund had not become due (crystallised) on October 18, 1984, when V. G. Saraf
passed away. In fact, on that day, the claim for refund under the Act was
pending adjudication. Such refund stood determined only after the deceased.
Hence, the Supreme Court held that such refund could not be considered to be a
property available at the time of the death.
