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I. T. R. No. 1 of 1979, decided on 12th August, 1987.

---S. 2(e)--Wealth Tax Rules, 1963, R. 8--Assets--Definition--Terms "Goodwill" and "Property"- 4Meening--Incorporeal property includes Patents, Copyrights, Trade Marks, Goodwill and such property is considered to be movable property--Goodwill is intangible property which is also considered to be movable property--Goodwill is property and, therefore, is asset and accordingly, the value of goodwill will be the price, which it would fetch if sold in the open market on valuation date.

1974 P T D (Trib) 21; W.T.A.No.97/KB of 1972/73; Controller of Estate Duty, Lahore v. Muhammad Bashir Muhammad Nazir and others 1974 P T D 1; The Commissioners of Inland Revenue and Muller & Co's. Margarine Limited 1901 A C 217; Messrs S.C. Cambatta & Co. Private Ltd., Bombay v. Commissioner of Excess Profits Tax, Bombay A I R 1961 S C 1010; Introduction to the Law of Property by Lawson; Salmond on Jurisprudence, 12th edition, by P.J. Fitzgerald; Salmond, 12th Edition, p. 111 and Commissioner of Income-tax, Madras v. K. Rathnam Nadar 1971 P T D 982 ref.

---R.8--Scope and application of R.8--Valuation of assets other than cash--Rule 8 provides method of valuation of certain classes of property but if the property is not covered by those classes it does not mean that it cannot be valued or taxed--Criterion for assessment of value for purposes of levy of Wealth Tax for such property would be the market price it would fetch if sold in open market--Opinion of Wealth Tax Officer about price of such property has not to be subjective or whimsical or arbitrary but has to be based on some material.

Nasrullah Awan for Applicant.

Ali Athar for Respondent.

Date of hearing: 14th May, 1987.

.-- By this reference under Section 27 (1) of the Wealth-tax Act (XV of 1963 (hereinafter referred to as the Act) the following question of law said to arise out of the order of the Income-tax Appellate Tribunal dated 18-6-1976, has been referred to this Court for answer:-

"Whether in the facts and circumstances of the case the learned Tribunal was justified in holding that goodwill is not an asset within the meaning of Section 2 (e) of the Wealth-tax Act "

2. The facts as given in Statement of Facts are as follows:----

Wealth Tax Officer while making assessment under Section 16 (3) of the Act added the estimated value of the goodwill to the wealth assessment as detailed below.

3. The respondent preferred appeals with the Appellate. Assistant Commissioner of Income-tax C' Range, Karachi, who-excluded the value of goodwill from the Wealth-tax assessment.

4. From this, order the Revenue preferred appeals with, the Income-tax Appellate Tribunal. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner of Income Tax following their decision reported.as-1974 P T D (Trib.) 721 and W.T.A, No.97/KB of 1972-73. In the ease reported as the 1974, P .T. D. (Trib.,) 721 Tribunal gave the following reasons.

"Relying, can the definition of 'asset' in Section .2 (e) although it includes properties of several descriptions; movable or immovable, we must hold this definition-clearly envisaging that the property, whether movable or immovable," should lie capable of a description which means that there should be a definiteness and precision with which the property can be ascertained, Now this property which does not taken any tangible or cohate form till a certain stage occurs cannot, be- termed either as movable property or immovable property of any proportion; since it cannot be described unless the event on which it is to be ascertained occurs:

5. Thereafter the Income-Tax Appellate Tribunal at the request of the Commissioner of Income Tax West Zone has referred the question mentioned hereinbefore to this Court.

6. We have heard Mr. Nasrullah Awan Advocate for the applicant and Mr. Ali Athar Advocate for, the respondent.

7. It is submitted by Mr. Nasrullah 4Awan that the Tribunal erred in excluding -the goodwill which was, liable to be' included- in the assets for the assessment years mentioned above.. He solely relied on a decision of Lahore High Court in the case of Controller of Estate Duty, Lahore v. Muhammad Nazir and others 1974 P T D I wherein it was held that the shares of the deceased partners in the partnership assets including the good will was property, which definitely passes to his legal representatives and that the, view of the Tribunal that it was incapable of passing under Section 4 read with section, 2 (14) of the Estate Duty Act, 1950 was not correct: With regard for the cited case we may state that what 'Was considered in that case was the definition of, the word property as given in .Section, 2 (14), of the Estate Duty: Act, which, reads, as follows:-----

(1) .not material

(2) .to (13) not material

(14) "Property" includes any interest in property movable or immovable and the proceeds of sale thereof and any: money or investment for the time being representing the proceeds of sale.

Explanation.---(1) The creation by a person or with hit consent of a debt or other right enforceable against him, personally or against property of which he was or might become competent to disposes or to charge or burden for his own benefit shall be deemed to have been a disposition made by that person, and in relation to such a disposition the expression "property" Shall include the debt or right created.

(2) 'The extinguishments of the expenses of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit as the debt or right was extinguished; and in relation to such a disposition the expression "property" shall include the benefit of conferred by the extinguishments of the debt or, right."

In this case we are concerned with the assets of the assessee the term 'assets is defined in section 2(e) of the Act which reads as follows:----

2(e) assets includes property of every description, movable or immovable, but does not include--

(i) agricultural laud and growing, crops grass or standing trees an such land;

(ii) any building owned or occupied by a cultivator or receiver of rent or revenue cut of agricultural land:

Provided that the' building-is on or in the immediate vicinity of the land and' is 'a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires' as a dwelling house or a store-house or an outhouse;

(iii) . not relevant,

(iv) not relevant

8. It will be seen, that the definition of .property as given in the Estate Duty Act includes any interest in movable or immovable property while under the Wealth Tax Act the term 'Assets' includes property of every description. It is, therefore, clear that the two definitions are not identical and unless it is found that the goodwill is 'property', the case cited will be of no help.

9. Now, before considering what is the meaning of the term property', I may consider what is meant by the term goodwill.

Lord Macnaghten in the case of The Commissioners of Inland Revenue and Muller, & Co's. -Margarine, Limited 1901 A C 217 said 'that it was a thing very easy to describe, very difficult to define. His. Lordship described it, at page 223 of the report as follows:--

"It is the benefit and Advantage of the good name, reputation and connection of a business'. It 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. The good will of 'a business must emanate from a particular centre or resource. However; widely extended or diffused its influence may' be, goodwill is worth nothing unless it has power of attraction sufficient to, bring customers home to the source from which it emanates Goodwill is composed, of a variety of elements. It differs in its composition in different trades if and in different businesses in the same trade. One element may, preponderate here and another element there. To analyse goodwill and split it up into its component parts to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purpose as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such.

For my part, I think that 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."

10. In the case of Messrs S. C. Cambatta and Co. Private Ltd. Bombay v. Commissioner of Excess Profits Tax, Bombay A I R 1961 S.C. 1010 the Supreme Court of India described the goodwill as follows: -

"9. It will thus be 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 t 'o the goodwill."

11. I must also refer to Lawson who in his Introduction to the Law of Property has this to say on "goodwill":-

"Goodwill is property of a highly peculiar kind. It is the right to enjoy all the advantages of an established trade connection. Customers who have been in the habit of dealing with a business will probably continue to do so, even if the business changes hands, and this probability is regarded as so valuable that large sums of money are commonly paid for it. So, well-established a head of property is it that its value must be taken into account for purposes of taxation. Yet it is an odd kind of property since only the person who has transferred the goodwill can be placed under a duty to respect it. He indeed can be restrained from soliciting his former customers and he may also agree not to carry on a competing business. But no third party can be restrained from trading in such a way as to reduce the value of the goodwill. Yet as a marketable object, goodwill must be considered property."

12. Now, considering the question what is the meaning of the term 'property', I may state according to Salmond property in its widest sense includes all a person's legal rights, of whatever description. He further says that a man's property is all that is his in law. But this definition seems to be obselete in view of what Blackstone Hobbes and Locke said about the term 'property'. One is however, well-established that the property is of various and here I may-state the various kinds of property as stated in Salmond on Jurisprudence, Twelth Edition, by P.J. Fitzgerald.

Property consists of two main kinds (1) Jura in re propria and (2) Jura in re aliens. The first kind of property is further divided into (a) Material things and (b) Immaterial things. The examples of material things are land, Chattels, which are termed asp 'Corporeal property'. The examples of material things are, Patents, Copyrights, Trade-marks etc. Such property is called 'incorporeal property'. The second kind of property i.e. Jura in re aliena consists of Leases, Servitudes, Securities etc.

13. It is now well-settled that incorporeal property includes Patents, Copyrights, Trade-marks, goodwill and such property is considered to be movable property and in support I may quote here a passage from Salmond, Twelfth Edition, page No.111.

"What shall we say, however, of those rights which have no material objects at all, such as a copyright, a patent, the goodwill of a business, a trade-mark, or the benefit of a contract The answer is that all such rights are classed by the law as movable. For the class of movable property is residuary, and includes all rights which can make good no claim to be classed as immovable."

14. Further, Lord Macnaghten in the case of the Commissioners of Inland Revenue and Muller & Co.'s Margarine, Limited 1901 A C 217 which is a House of Lords cases, held that goodwill is property. I may quote hereinbelow his observations, which appear at page No.223.

"I now come to the second point. It was argued that if goodwill be property, it is property having no local situation. It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired, I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will-- of course under the conditions attaching to property of that nature."

In this very case Lord Brampton also was of the view that goodwill is property. The learned Lord while raising the question observed as follows:

"Granting that a goodwill is property, the question still remains, was the goodwill in this case, when it was purchased by the company, "property locally situate out of the United Kingdom "

15. I am further fortified in my view by a decision of Madras High Court in the case of Commissioner of Income-tax Madras v. K. Rathnam Nadar 1971 P T D 982, wherein quoting the description of goodwill from the introduction of Lawson to the law of property, the learned Judges of the Division Bench concluded "Goodwill can, therefore, be considered to be a capital asset".

15-A. It is pertinent to mention that sub-rule (5) itself provides the basis for valuation of intangible properties like copyrights, patents, designs and other similar assets for the purposes of assessment of wealth-tax.

16. Mr. Ali Athar submitted that under section 7 of the Wealth Tax Act, the value of any asset other than cash for the purposes the Act has to be assessed in accordance with the rules made under section 46 of the Act, and he further submitted that the rules framed under section 46 do not provide for assessment of goodwill and he, therefore, argued, that goodwill cannot be assessed.

17. Taking up the first submission, it is correct that the value of any asset other than cash has to be assessed in accordance with the rules framed under section 46 of the Act. As regards the second submission the rules framed under section 46 of the Act do not provide for assessment of goodwill, it is correct to the extent that no specific rule has been framed for valuation of goodwill as such, but rule 8 of the Rules, in my opinion, provides for assessment of value of any asset (other than cash) for the purposes of assessment of Wealth Tax, which would cover goodwill if it is an asset and I have already held that goodwill is property and, therefore, are asset and accordingly, the value of the goodwill will be the price, which in the opinion of Wealth Tax Officer it would fetch if sold in the open market on valuation date.

It may be convenient if rule 8 is quoted hereinbelow which reads as follows:-

"

(1) Subject to the provisions of sub-rules (2), (3), (3-A), (4), (5), (6), (7), (8) and (9), the value of any assets (other than cash) shall, for the purposes of assessment to wealth tax be estimated to be the price, which in the opinion of the Wealth Tax Officer. it would fetch if sold in the open market on the valuation date."

It may be stated that sub-rule (2) relates to the valuation of shares and securities, sub-rule (3) relates to the valuation of lands and buildings, excluding agricultural land, sub-rule (3-A) relates to agricultural land, sub-rule (4) relates to the valuation of mortgaged property, sub-rule (4-A) refers to the valuation of hotels inns motels, etc. sub-rule (4-B) relates to factories and mills, sub-rule (4-C.) relates to the valuation of halls let out on hire, sub-rule (4-D) relates 'to cold storages sub-rule (4-B) relates to cinemas, sub-rule (5) relates to the valuation of patents, copyrights, designs and other similar assets, sub-rule (6) refers to the valuation of life tenancies, sub-rule (7) refers to annuities, sub-rule (8) relates to the valuation of interest in partnership or association of persons, and sub-rule (9) concerns bulk valuation.

From the above-quoted Rule, it is clear that sub-rules provide the method of valuation of certain classes of property but if the property is not covered by those classes it does not mean that it cannot be valued or taxed. The criterion for assessment of value for the purposes of levy of Wealth Tax for such property would be the market price of the property, which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market. I have no doubt that the opinion of the Wealth Tax Officer cannot be objective or whimsical or arbitrary, and it is to be based on some material. Therefore, the arguments that since valuation of goodwill is not specifically provided it cannot be valid is not correct. But itself envisages the valuation of property other than those mentioned in, sub-rules (2), (3), (3-A) (4), (4-A), (4-B), (4-C), (4-D), (4-E), (5), (6), (7), (8) and (9).

18. Mr. Ali Athar heavily relied on Commissioner of Health Tax v. U.C. Mahatab (1973) 27 Tax 174. In this case while interpreting section 2(e) of the Wealth-Tax Act, 1957, the Wealth Tax Officer assessed the right of the assessee to receive compensation for the zamindary properties of the assessee, which had vested in the State under the provisions of West Bengal Estates Acquisition Act, 1953, at Rs.32,00,000. On appeal, the Appellate Assistant Commissioner reduced the value of the assessee's right to receive compensation to rupees three and a quarter lacs rejecting the assessee's contention that on the relevant date of valuation the assessees had no right to receive any compensation from the Government, and held that the assessee had an actionable claim assessable to wealth tax. On further appeal, the Appellate Tribunal held that under the West Bengal Estates Acquisition Act, 1953, the compensation was payable only to the intermediary whose right was acquired by the Government, after the compensation roll was prepared and finally published under section 21 of the Act, and as the compensation roll had not been prepared and published, the assessee had no right on the valuation date to receive any compensation for the acquisition of his Estate and that the assessee had no actionable claim which had a hypothetical market value on the valuation date, and accordingly deleted the valuation of rupees three and a quarter lacs from his net wealth as on the material valuation date. On a reference to the High Court, it was held that although the assessee's rights vested in the estate immediately on the issuance of notification under section 4 of the West Bengal Estates Acquisition Act, under the provisions of that act, there .vas no legal right then in the assessee to compensation, which right would arise only on the final publication of the compensation assessment roll as was rightly held by the Appellate Tribunal. The High Court further observed that in the definition of "assets" in the. Wealth-Tax Act, the words "property of every description" are qualified by the words "movable or immovable", and, consequently, properties which do not ordinarily answer the test of immovability or immovability, such as intangible rights or incorporeal rights will not be assets within the meaning of the Wealth-Tax Act and that where agricultural land has been taken away and has vested in the State under the, Act, but where the final compensation assessment roll has not been prepared and published and the compensation officer has not calculated the amount, if any, at all payable to the assessee, then this inchoate right is not yet a legal right which can be regarded as an "asset" within the meaning of section 2(e) of the Wealth-tax Act. Not being an asset, the mechanism of valuation provided in section 7 of the Wealth-tax Act will not apply.

The Court also observed that as no time limit has been fixed for the payment of the compensation and it might happen that after making the deductions referred to in the Act, no compensation at all may be found to be payable to the assessee and that if wealth tax is imposed on the so-called right to compensation, then the assessee will keep on paying the tax year after year and might ultimately find that he cannot have any compensation at all when the computation and calculators are made under sections 16 and 17 of the West estates Acquisition Act. Accordingly, the Court concluded that these considerations were repugnant to the basic concept of a taxing law.

19. With utmost respect I do no subscribe to the view taken the learned Judges in this case for firstly, they have not given due effect to the word and phrase which term and expression are of much larger scope and import includes property of evert description secondly, I have already shown, that goodwill is intangible property and an intangible property is also considered to be movable property.

20. Accordingly, I would answer the question in the negative and hold that on the facts and circumstances of the case, the learned Tribunal was not justified in holding that the goodwill is not an asset within the meaning of Section 2(e) of the Wealth Tax Act.

HAIDER ALI SHAH, J. -- I agree.

M.B.A. / C-19/ K Question answered in negative.

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