Sabyasachi Mukharji, J. - (1.) In this case we are concerned with the assessments under the Wealth-tax Act, 1957, for the assessment years 1957-58, 1958-59 and 1959-60, the corresponding valuation dates being the 31st December, 1956, 31st December, 1957, and 31st December, 1958, respectively. The assessee is a company. The net wealth of the assessee-company had been determined by the Wealth-tax Officer for all these years under Section 7(2)(a) of the Wealth-tax Act, 1957, on the global basis by deducting from the total value of the assets as appearing on the balance-sheets as on the relevant dates the total liabilities as on the corresponding dates. In the account of the first year with which we are concerned in this reference the Wealth-tax Officer found that the company had written off the goodwill shown at a figure of about Rs. 6 lakhs in the earlier years almost the entire sum leaving a token balance of Re, 1 only. Goodwill had always been shown on the assets side of the balance-sheet previously. Therefore, the Wealth-tax Officer disagreed with the claim made by the assessee-company that suddenly the value of the goodwill could be reduced to Re. 1. In the premises, the Wealth-tax Officer's reasoning as recorded for the year 1957-58 is as follows: "The company has written off a goodwill of Rs. 5,44,999 from the appropriation account of this year and the goodwill now stands at Re. 1. The idea of writing off the goodwill appears to be to reduce the reserve and thus to pay lesser wealth-tax. It is claimed on behalf of the company that goodwill being a wasting asset and since prohibition and gradual restriction on trading are being imposed and a separate company under the same name has been established in Pakistan, the goodwill of the company has no value. The profits for the year ended December 31, 1956, are Rs. 4 lakhs. The goodwill of Rs. 5 lakhs as it existed cannot be considered excessive looking to the standard of the company. I, therefore, take the value of the goodwill at Rs. 5 lakhs as though the amount was not written off from the profit and loss appropriation account. The write-off in my opinion appears to be only with a view to pay less taxes."
(2.) For the following subsequent years the Wealth-tax Officer followed more or less the same reasoning and pointed out that the net income earned by the company were Rs. 7 lakhs and odd for the year 1957 and Rs. 5.96 lakhs and odd for the year 1958. From the aforesaid orders of the Wealth-tax Officer the assessee went up in appeal before the Appellate Assistant Commissioner for all the three years in question. The Appellate Assistant Commissioner accepted the assessee's contention. The Appellate Assistant Commissioner held as follows : "The appellant considers that the Wealth-tax Officer in adding to the net wealth of the appellant Rs. 5,44,999 being the goodwill written off to the appropriation account (sic). I do agree with the appellant that this amount should not have been added in the total wealth of the appellant, simply because goodwill is an intangible and fictitious asset. Its value cannot be determined. No doubt, the appellant used to show in his balance-sheet this goodwill, but due to the prohibition policy of the Government of India and gradual restriction placed on their trading as well as due to the separation of their Pakistan branch if the appellant considers that the goodwill has practically ceased to exist so much so that the appellant has written off this amount from its balance-sheet, it cannot be said that any goodwill as an asset still remains there."
(3.) The same reason was again followed for the subsequent two years. Against the order of the Appellate Assistant Commissioner the revenue went up in appeal before the Tribunal. It appears from the Tribunal's order that the assessee-company was incorporated on or about the 19th January, 1920. The original business was carried on only at Bombay. Later on branches of the business were established at other places in India. A sum of Rs. 5,44,999 was credited in its books as the value of the goodwill at the company's inception and such value was carried forward from year to year. On the 1st of August, 1957, the chairman of the board of directors stated in his report that the value of the goodwill should be reduced to Re. 1. The reason given in the said report was "it is possible that by so doing the company may be saved paying the new wealth-tax thereon, amounting to Rs. 2,775 annually". It was submitted on behalf of the revenue before the Tribunal that the value of the goodwill had been written off in the present case to evade payment of wealth-tax and as such the Appellate Assistant Commissioner had gone wrong in accepting the assessee's contention. The Tribunal was unable to accept that position. The Tribunal was of the view that the report of the chairman of the board of directors did not suggest that even though the goodwill remained a valuable asset for the company, it was being written off merely to evade tax. On the contrary, upon the facts as found, the Tribunal came to the conclusion that the company while writing off the goodwill was fully conscious of the fact that no such goodwill remained under the changed circumstances and if in spite of this reality the company had continued to retain goodwill as one of its assets, it would only have meant payment of wealth-tax without actually having such valuable asset. The Tribunal noted that: "When the goodwill was created in the year 1920, the assessee-company had certainly bright days ahead of it. Subsequently, at the time when it was actually written off the prospects were bleak ; prohibition and restrictions in trade staring against the assessee's interest. ' Now if under such circumstances, the assessee chose to write off the value of the good-will, it can only be held that such was a natural conduct. It was merely to avoid tax and not to evade tax.";