Goodwill valuation should reflect trading reputation and average trading profits, not speculative mining returns, in estate duty assessment.

Goodwill for estate duty was held to depend on trading reputation and earning capacity, not on speculative mining operations. On the facts, the business involved mica mining and sale, with no special product, a limited lease period, and uncertain future mining profits; accordingly, only trading profits were relevant to valuation, and the exclusion of manufacturing profits was justified. The Tribunal's practical method of taking trading profits at one-third of total profits and valuing goodwill at one year's purchase of average profits was found reasonable and consistent with accepted goodwill valuation principles. The Tribunal's approach was upheld.

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Issues: (i) Whether the goodwill of the firm had to be valued only with reference to trading profits, and not on the basis of both manufacturing and trading profits; (ii) Whether the Tribunal was justified in fixing trading profits at one-third of total profits and valuing goodwill at one year's purchase of average profits.

Issue (i): Whether the goodwill of the firm had to be valued only with reference to trading profits, and not on the basis of both manufacturing and trading profits.

Analysis: The business was mica mining and sale of mica. Goodwill was held to depend on trading reputation, and not on speculative mining operations. The nature of the business, the absence of any special mica product, the limited lease period, and the uncertain future of mining profits supported exclusion of manufacturing profits from the goodwill valuation.

Conclusion: The goodwill was to be valued only with reference to trading profits. This issue was answered in favour of the accountable person.

Issue (ii): Whether the Tribunal was justified in fixing trading profits at one-third of total profits and valuing goodwill at one year's purchase of average profits.

Analysis: A rough and ready method for valuing goodwill permits adoption of a multiple of annual profits based on past averages. The Tribunal's approach of taking trading profits at one-third of total profits and valuing goodwill at one year's purchase of average profits was found to be reasonable and consistent with accepted valuation principles.

Conclusion: The Tribunal's valuation method was upheld. This issue was answered in favour of the assessee.

Final Conclusion: The reference was answered by upholding the Tribunal's approach on both valuation questions, with the result that the disputed goodwill valuation was reduced and the estate was assessed accordingly.

Ratio Decidendi: In valuing goodwill for estate duty, the valuation must reflect the trading reputation and earning capacity of the business, and a reasonable multiple of average trading profits may be adopted as a practical method of assessment.

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