Excess profits tax treatment of goodwill, protective shareholdings and managing agency commission follows distinct capital and annual accrual rules.

For excess profits tax computation, goodwill is treated as a business asset and included in capital employed at its true market value on the date of transfer, with only any excess price excluded. Shares purchased to protect a managing agency, rather than as trading stock, remain investments and are not part of capital employed because they do not directly and actively contribute to business profits. Managing agency commission is governed by the special annual basis in rule 9 of the First Schedule, so the commission is brought to tax in the corresponding chargeable accounting period when earned.

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Issues: (i) Whether the amount paid for acquisition of goodwill was includible in the average capital employed in the business; (ii) whether the amount paid for purchase of the 6,000 shares was includible in the average capital employed in the business; (iii) whether the managing agency commission relating to each chargeable accounting period fell to be assessed in the next chargeable accounting period.

Issue (i): Whether the amount paid for acquisition of goodwill was includible in the average capital employed in the business.

Analysis: Goodwill is an asset of the business. For excess profits tax purposes, the capital employed has to include the true market value of goodwill as on the date of transfer. If the amount paid exceeds that value, only the excess is excluded from capital computation.

Conclusion: The amount representing the goodwill, subject to adjustment to its correct market value, was includible in the capital employed. The issue was decided against the assessee and in favour of Revenue.

Issue (ii): Whether the amount paid for purchase of the 6,000 shares was includible in the average capital employed in the business.

Analysis: The scheme of the Act distinguishes profits of a business from income from investments. The same meaning of "investments" governs the relevant provisions of the First and Second Schedules. Shares acquired not as part of the business of dealing in shares, but for protecting the managing agency, remained investments and did not constitute capital employed in the business. Such holdings did not directly and actively contribute to the profits of the managing agency business.

Conclusion: The sum paid for the shares was not includible in the capital employed. The issue was decided against the assessee and in favour of Revenue.

Issue (iii): Whether the managing agency commission relating to each chargeable accounting period fell to be assessed in the next chargeable accounting period.

Analysis: Rule 9 of the First Schedule is a special provision for managing agency commission. The managing agency contract is to be treated as an annual contract for excess profits tax purposes. Where the relevant accounting year of the managed company, the assessee and the chargeable accounting period coincide, there is no basis for apportionment on any different footing, and the commission falls to be related to the period in which it is earned under that annual arrangement.

Conclusion: The commission for each year was correctly brought to tax in the corresponding chargeable accounting period. The issue was decided against the assessee and in favour of Revenue.

Final Conclusion: The reference was answered wholly in favour of Revenue on all three questions, and the Tribunal's view was sustained in full.

Ratio Decidendi: For excess profits tax computation, goodwill is includible at its true market value as capital employed, shares held merely as protective investments are excluded from capital employed, and managing agency commission is governed by the special annual basis in rule 9 of the First Schedule.

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