GIBSON,
J.:—This
appeal
is
concerned
with
the
1962
income
tax
year
of
the
appellant.
The
appellant
seeks
to
deduct
in
computing
its
income
for
1962
the
sum
of
$209,600
being
the
sum
allocated
by
the
appellant
of
the
purchase
price
paid
by
the
appellant
for
the
Roselawn
Dairy
Division
of
EK.
T.
Stephens
Investments
Ltd.
pursuant
to
a
contract
dated
May
23,
1962
between
the
appellant
and
EK.
T.
Stephens
Investments
Ltd.,
which
purchase
was
closed
on
July
4,
1962.
The
sum
of
$209,600
is
part
of
the
sum
of
$344,000
which
is
referred
to
in
para.
1(d)
of
the
said
contract
which
reads
as
follows:
“(d)
Lists
of
customers,
records,
information
and
data
relating
to
customers
as
set
forth
in
route
books,
drivers’
record
books
and
the
like
and
goodwill—Price
$344,000.00.”
In
other
words
the
appellant
seeks
to
charge
$209,600
as
an
expense
for
the
year
1962,
and
the
balance
of
$134,400
only
of
the
said
sum
of
$344,000
as
goodwill,
which
it
concedes
is
a
capital
cost.
Pursuant
to
the
said
contract,
the
appellant
completely
bought
out
the
Roselawn
Dairy
Division
of
the
vendor
and
obtained
a
restrictive
covenant
from
the
vendor
and
certain
of
its
officers
not
to
go
into
the
same
business
for
a
certain
length
of
time
in
a
certain
area,
as
is
more
particularly
set
out
hereunder.
The
other
assets
of
the
business
purchased
at
the
same
time
were
categorized
in
the
contract
under
three
other
headings
namely,
(a)
Plant
Equipment,
Cans,
Cases
and
Bottles
(the
contract
describes
the
same
in
detail)
Price
$100,000
;
(b)
Automotive
Equipment
(the
contract
describes
the
same
in
detail)
Price
$100,000;
and
(ce)
Store
and
Merchandising
Equipment
(the
contract
describes
the
same
in
detail)
Price
$25,000.
The
said
restrictive
covenant
is
contained
in
para.
9
of
the
contract
and
reads
as
follows:
“9.
The
Vendor
and
the
Executives
and
Roselawn
Farms
Limited
each
expressly
covenant
and
agree
with
the
Purchaser
that
for
a
period
of
three
years
from
the
time
of
closing
each
of
them
will
not
(without
the
consent
in
writing
of
the
Purchaser
in
the
case
of
the
Vendor,
and
in
the
case
of
the
Executives
or
either
of
them
other
than
as
an
executive
or
employee
of
the
Purchaser
or
a
subsidiary
company
of
the
Purchaser)
directly
or
indirectly,
engage
in
or
be
interested
in
any
milk,
cream
or
dairy
products
business
or
business
similar
to
that
comprising
the
Roselawn
Dairy
Division
in
the
Municipality
of
Metropolitan
Toronto,
or
within
50
miles
of
the
boundaries
thereof,
and
will
not
during
such
period
and
within
such
area
authorize
the
use
of
the
name
Roselawn’
in
connection
with
any
business
of
the
type
aforementioned.
The
Vendor
and
the
Executives
and
Roselawn
Farms
Limited
hereby,
as
from
the
time
of
closing
the
transaction
herein
contemplated,
assign,
transfer
and
set
over
unto
the
Purchaser
all
such
rights
and
interests
as
they
may
have
in
and
to
the
name
Roselawn
’
for
use
in
connection
with,
or
as
part
of,
the
name
of
the
business
purchased
hereunder
by
the
Purchaser.”
Mr.
I’.
L.
Hart,
president
and
general
manager
of
the
appellant
company
negotiated
the
purchase
of
this
business
and
gave
evidence
on
this
appeal.
He
said
that
he
was
only
interested
in
the
customers’
lists
and
route
cards
and
the
right
to
hire
the
salesmen
drivers
of
Roselawn
Dairy
Division
to
carry
on
with
his
company
after
the
purchase.
He
said
the
appellant
company
had
heretofore
computed
that
it
cost
it
$10
to
have
their
own
salesmen
canvass
and
obtain
a
retail
customer
of
milk,
and
$30
for
a
wholesale
customer.
He
submitted
that
since
these
costs
were
permitted
for
the
purposes
of
the
Income
Tax
Act
as
an
expense
of
doing
business,
that
it
was
reasonable
for
the
appellant
to
apply
this
$10
and
$30
formula
to
the
contract
of
acquisition
of
customers
of
Roselawn
Dairy
Division,
and
in
doing
so
the
said
sum
of
$209,600
was
computed,
which
sum,
as
stated,
the
appellant
submits
should
be
allowed
as
an
expense
for
1962.
Mr:
Hart
says
that
the
relationship
of
the
milkman
with
the
customer
is
the
only
goodwill
he
considered
the
appellant
bought.
He
says
in
essence
that
what
the
appellant
paid
$209,600
for
was
an
opportunity
to
do
business
in
the
locations
and
with
the
people
that
Roselawn
Dairy
Division
had
been
doing
business
and
to
have
the
right
to
the
contractual
relationship
with
the
former
milk
drivers:of
Roselawn
Dairy.
Mr.
Hart
also
stated
that
the
appellant
had
heretofore
purchased
other
dairy
businesses
on
the
same
basis,
and
was
in
the
stage
of
negotiating
other
similar
purchases
of
businesses
which
may
be
completed
in
the
future.
-Mr.
W.
D.
Bruce,
secretary-treasurer
of
the
appellant
company,
gave
evidence
of
how
the
sum
$344,000
was
dealt
with
in
the
accounts
of
the
appellant
company.
He
said
the
whole
of
the
$344,000
on
the'closing
of
the
transaction
in
July
1962
was
debited
to
the
goodwill
capital
account.
Then,
after
the
auditors
of
the
appellant
had
examined
the
appellant’s
books
in
prépara-
tion
of
the
y
ear-end
statement
for
the
year
1962,
there
was
an
adjusting
and
amending
entry
made
in
the
journal
on
March
3,
1963,
as
a
result
of
which
there
was
written-off
to
expense
for
the
year
1962
the
said
sum
of
$209,600.
The
wording
of
this
journal
entry
in
part
reads:
“To
write
off
the
cost
of
customer
lists
acquired
from
Roselawn
Dairy
Division
.
.
.
.
$209,600.”
Mr.
Bruce
said
that
the
formula
of
$10
per
retail
stop
and
$30
per
wholesale
stop,
above
referred
to
in
discussing
the
evidence
of
Mr.
Hart,
was
the
formula
used
in
arriving
at
the
figure
of
write
off
of
$209,600.
Mr.
Bruce
said
the
sum
of
$134,400
was
left
as
a
capital
asset
account,
representing
goodwill.
He
said
in
his
opinion
he
would
add
one
other
advantage
obtained
by
the
appellant
from
Roselawn
Dairy
Division
as
constituting
part
of
the
goodwill
acquired,
and
that
was
the
obtaining
of
the
said
above
recited
restrictive
covenant
of
the
vendor
and
certain
of
its
officers
not
to
engage
in
this
business
as
referred
to
in
the
said
recited
covenant.
Mr.
Bruce
also
conceded
that
a
fifty-fifty
division
of
the
sum
of
$344,000
between
the
capital
item
goodwill
and
the
write
off
as
expense
for
the
reasons
given,
might
have
been
more
reasonable.
On
cross-examination
it
was
determined
from
these
witnesses
that
the
sum
of
$344,000
was
a
negotiated
figure
and
was
the
figure
obtained
by
multiplying
$261
by
1319.
The
1319
figure
represented
daily
cans
of
milk.
Daily
cans
of
milk
times
a
dollar
figure
apparently
is
a
formula
used
in
this
industry
in
negotiating
the
purchase
of
a
business
in
this
industry.
It
was
the
submission
of
the
appellant
that
it
paid
the
said
sum
of
$209,600
as
a
recurring
expense
and
not
as
a
once
and
for
all
payment;
that
it
purchased
transitory
assets,
that
is
assets
which
were
not
of
an
enduring
nature
and
therefore
not
capital
assets.
(In
this
connection
the
appellant
submitted
in
evidence
that
it
had
lost
by
the
end
of
1964
about
42%
of
the
number
of
customers
named
on
the
customers’
lists
obtained
from
Roselawn
Dairy
Division).
In
brief,
the
appellant
submitted
that
in
essence
these
customers’
lists,
the
route
cards
and
the
contractual
right
to
obtain
the
driver
milkman’s
services
who
had
contact
with
the
customers
of
Roselawn
Dairy
Division,
constituted
a
purchase
of
an
outlet
for
the
appellant’s
product
or
an
opportunity
to
do
business,
a
purchase
of
a
kind
that
the
appellant
had
done
before
and
proposes
to
do
again
in
the
future
and
as
such
the
sum
expended
for
such
purchase
was
a
proper
deduction
from
income
within
the
principles
enunciated
in
B.P.
Australia
Limited
v.
Commissioner
of
Taxation,
[1965]
3
All.
E.R.
209.
The
respondent
on
the
other
hand
says
that
the
contract
of
purchase
of
Roselawn
Dairy
Division
was
the
purchase
of
a
business
as
a
going
concern
;
that
the
fact
that
the
appellant
has
bought
out
other
businesses
as
going
concerns
and
proposes
to
do
so
in
the
future
does
not
turn
these
payments
into
income
payments
but
instead
they
were
all
capital
payments
and
the
payments
for
any
similar
purchases
in
the
future
will
also
be
capital
payments.
The
respondent
says
that
what
the
purchaser
paid
$344,000
for
was
goodwill
and
the
formula
that
the
appellant
used
in
arriving
at
that
figure
was
by
multiplying
$261
by
1,319
daily
cans
of
milk
;
and
that
the
formula
worked
out
by
the
appellant
of
$10
per
retail
stop
and
$30
per
wholesale
stop
some
time
after
this
purchase
of
the
business
is
of
no
validity
and
is
merely
an
ex
post
facto
rationalization
of
what
the
appellant
says
it
did
in
purchasing
this
business.
In
my
opinion
it
is
beyond
peradventure
that
what
the
appellant
purchased
by
this
contract
above
referred
to
was
the
business
of
Roselawn
Dairy
Division
as
a
going
concern
;
and
in
doing
so,
it
purchased
goodwill
as
an
asset
in
this
case.
It
is
therefore
necessary
to
consider
the
purchased
goodwill
in
this
transaction.
It
must
be
assumed
that
the
appellant-purchaser
acted
on
the
premise
that
X
per
cent
would
be
a
satisfactory
return
on
the
investment
it
was
going
to
make
in
purchasing
this
business.
Having
started
with
such
a
premise,
then
the
appellantpurchaser
must
have
made
a
judgment
on
how
much
it
could
afford
to
pay
the
vendors
of
this
business
as
it
then
existed
and
still
earn
the
said
X
per
cent
on
its
investment.
Exhibit
A-4
introduced
in
evidence
by
the
appellant
shows
some
of
the
basis
of
its
assumptions
and
business
judgment
in
purchasing
this
business.
This
is
an
inter-office
communication
between
the
said
Mr.
F.
L.
Hart,
president
and
general
manager
of
the
appellant,
Dominion
Dairies
Limited,
addressed
to
a
Dr.
C.
R.
Roberts
at
the
New
York
Office
of
the
holding
company
of
the
appellant.
The
relevant
excerpts
from
this
letter
are
as
follows:
“Roselawn
Farms
Dairy
is
owned
by
the
KE.
T.
Stephens
Investment
Company.
The
family
own
large
acreage
in
the
north
end
of
the
City
of
Toronto
in
fact
they
are
almost.
surrounded
by
a
housing
development
and
they
operate
21
routes
from
a
branch
on
the
farm.
They
use
two
trailers
to
haul
merchandise
up
to
the
branch
at
3
o
’clock
in
the
morning,
and
from
which
they
load
their
retail
routes.
These
north
routes
average
2,700
pts
(5
days).
I
have
suggested
to
John
Stephens,
the
son,
who
operates
the
dairy,
that
I
thought
the
Company
would
be
willing
to
negotiate
on
a
basis,
such
as
1,400
cans
of
milk
per
day
at
$350
per
can
which
would
total
$490,000.
The
garage
property
at
Geary
Avenue
for
$75,000,
the
equipment
and
machinery
in
the
processing
plant
for
$50,000
(some
of
which
would
be
used
by
us
and
some
of
which
we
would
sell
to
the
junk
man)
and
$87,000
for
the
motor
equipment.
There
are
about
87
pieces
automotive
including
the
tractors
and
trailers.
The
Stephens
family
to
keep
the
Dufferin
Street
processing
plant
and
after
we
gut
it
of
everything
salvageable
in
the
way
of
equipment
they
can
sell
it
or
demolish
it.
What
I
am
suggesting
comes
to
$702,000,
John
originally
wanted
$1,000,000
for
the
entire
operation.
He
has
$100,000
in
a
cash
bond
which
would
revert
to
the
family,
being
no
further
need
for
it,
and
if
the
building
is
worth
$82,000,
the
difference
between
my
price
and
his
is
about
$116,000.
It
appears
that
on
the
basis
of
the
conservative
figures
worked
out
by
Quinn
and
Murray,
we
can
make
about
$175,000
a
year
after
taxes
by
this
consolidation.
In
other
words
it
would
pay
off
in
four
years.
I
have
an
idea
that
because
of
the
fact
that
we
are
buying
assets
rather
than
shares,
this
would
be
a
pretty
good
deal.
It
would
serve
to
strengthen
our
hold
on
the
retail
business
in
the
western
end
of
the
City,
and
we
would
acquire
21
routes
up
at
Richmond
Hill,
in
a
territory
for
which
we
have
no
license.
It
puts
us
into
a
Loblaw
store
at
Richmond
Hill
with
Sani
Seal
milk
which
we
cannot
service
at
present.
We
figure
we
can
place
all
of
his
wholesale
on
our
present
Sani
Seal
routes
if
we
spread
over
all,
or
at
the
worst
we
might
need
two
or
three
trucks
with
a
realignment
of
routes.
On
the
retail
it
looks
as
if
we
might
be
able
to
consolidate
so
that
we
would
eliminate
10
or
12
routes.
There
is
only
one
figure
that
I
am
less
than
sure
of,
and
that
is
the
$87,000
for
the
trucks,
I
want
Verne
Quinn
to
take
a
look
at
them
and
we
may
revise
our
figure
downwards
by
up
to
20%.
As
far
as
the
garage
property
at
Geary
Street
is
concerned,
I
believe
this
property
could
be
sold
in
the
neighborhood
of
the
$75,000
figure,
but
I
would
like
to
think
in
terms
of
using
it
as
an
equipment
depot,
a
machine
shop
for
the
repair
of
equipment
and
the
main
service
garage
for
the
Toronto
area.
Keeping
only
a
service
crew
here
at
Walmer
to
handle
batteries,
tire
changes
and
minor
repairs.
The
Geary
building
has
high
ceilings
and
our
boys
think
we
can
do
a
real
job
at
this
location.
This
garage
bit,
of
course,
is
subject
to
a
great
deal
of
further
discussion.
"
Subsequent
to
the
preparation
and
sending
of
this
memorandum,
after
negotiation
with
the
vendor,
Mr.
Hart
was
able
to
purchase
this
business
on
the
basis
of
the
formula
above
referred
to,
namely,
$261
x
1319
daily
cans
which
work
out
to
$344,000,
instead
of
$350
per
can,
as
referred
to
in
the
above
quoted
memorandum.
This
sum
of
$344,000
as
above
noted,
was,
after
the
close
of
this
purchase
and
sale
in
July
1962,
entered
in
the
books
of
the
appellant
company
as
a
capital
cost
of
the
asset
goodwill.
To
characterize
this
purchased
goodwill,
a
consideration
of
some
of
the
legal
principles
concerning
the
same,
is
helpful.
It
should
be
noted,
for
example,
that
goodwill
cannot
be
purchased
as
a
separate
item
of
a
business.
It
is
intimately
connected
with
and
inseparable
from
the
other
assets
and
liabilities
of
a
business
which
is
purchased
as
a
going
concern.
It
modifies
or
adjusts
such
assets
and
liabilities.
(See
Lord
Macnaghten
in
C.I.R.
v.
Muller
&
Co’s.
Margarine,
Limited,
[1901]
A.C.
217
at
pp.
223
et
seq.
where
he
said:
‘
‘
I
now
come
to
the
second
point.
I
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
aequired,
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.
Then
comes
the
question,
Can
it
be
said
that
goodwill
has
a
local
situation
within
the
meaning
of
the
Act?
I
am
disposed
to
agree
with
an
observation
thrown
out
in
the
course
of
the
argument,
that
it
is
not
easy
to
form
a
conception
of
property
having
no
local
situation.
What
is
goodwill?
It
is
a
thing
very
easy
to
describe,
very
difficult
to
define.
It
is
the
benefit
and
advantage
of
the
good
name,
reputation,
and
connection
of
a
business.
It
is
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
goodwill
of
a
business
must
emanate
from
a
particular
centre
or
source.
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
and
in
different
businesses
in
the
same
trade.
One
element
may
preponderate
here
and
another
element
there.
To
analyze
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
purposes
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.’’
And
see
also
Lord
Davey
in
the
same
case
at
page
227
where
he
said
:
“The
position
taken
up
by
the
Attorney-General
was
a
singular
one,
and
somewhat
embarrassing
to
persons
who
have
to
stamp
their
contracts.
He
admitted
that,
so
far
as
the
goodwill
was
attached
to
the
business
premises
and
thereby
enhanced
their
value,
he
did
not
claim
that
an
ad
valorem
stamp
should
be
affixed
in
respect
of
that
value.
But
I
am
not
aware
that
you
can
split
up
goodwill
into
its
elements
in
that
way,
and
I
see
great
difficulty
in
doing
so.
The
term
goodwill
is
nothing
more
than
a
summary
of
the
rights
accruing
to
the
respondents
from
their
purchase
of
the
business
and
property
employed
in
it.
.
.
.”)
It
also
does
not
affect
the
characterization
or
allocation
of
the
capital
cost
of
purchased
goodwill
because
in
any
particular
case
the
purchaser
did
not
get
all
the
benefit
from
the
goodwill
he
though
he
was
going
to
get,
or
that
the
purchaser
subsequently
lost
some
of
the
benefit
of
goodwill
by
losing
customers
(as
happened
to
the
appellant
in
this
case).
(See
Thurlow,
J.
in
Schacter
v.
M.N.R.,
[1962]
Ex.
C.R.
417
at
pp.
424
et.seq.;
[1962]
C.T.C.
437
at
p.
444
where
he
said:
‘‘Nor
in
my
view
is
the
matter
affected
by
the
fact
that
goodwill
in
the
case
of
an
accountant
and
particularly
one
who
practices
alone
is
largely
personal
to
the
particular
practitioner
and
scarcely
capable
of
being
sold
with
any
assurance
that
the
purchaser
will
obtain
any
benefit
from
it.
No
doubt
one
who
pays
for
so
tenuous
an
advantage
takes
a
risk
but
there
is
nothing
uncommon
about
professional
men
acquiring
the
undertakings
of
established
practitioners
with
whatever
goodwill
can
be
retained
in
the
transfer
and
I
know
of
no
reason
why
if
they
see
fit,
as
appears
to
have
occurred
in
this
case,
they
cannot
in
such
a
transaction
agree
upon
a
consideration
for
such
goodwill.
The
fact
that
in
the
result
no
goodwill
may
be
acquired
or
that
the
benefits
of
the
purchase
may
soon
disappear
appears
to
me
to
be
irrelevant
for
the
present
purpose
for
in
the
test
referred
to
in
the
cases
cited
what
matters
is
the
nature
of
the
advantage
sought
rather
than
the
benefit
actually
obtained.”’
The
reason
that
it
is
desirable
for
the
purchaser
to
obtain
a
restrictive
covenant
from
the
vendor
of
a
business
not
to
engage
in
the
same
business
for
such
and
such
a
length
of
time
in
such
and
such
an
area
(as
the
appellant
did
in
this
case)
is
that
such
a
purchaser,
when
he
pays
substantial
monies
to
such
a
vendor
for
the
goodwill
asset
of
the
business,
wishes
to
make
sure
he
gets
the
full
benefit
of
the
goodwill
he
paid
for,
since
he
may
not
if
he
has
not
obtained
such
a
restrictive
covenant.
(See
Cotton,
L.J.
in
Leggott
v.
Barrett
(1880),
15
Ch.
D.
306
at
p.
315
where
he
said:
.
Goodwill,
possibly,
in
some
of
the
later
cases,
has
been
a
little
extended,
but
undoubtedly
the
cases
have
established
that
the
sale
of
goodwill
does
prevent
a
man
from
representing
that
he
is
carrying
on
the
old
business
or
that
he
is
the
successor
of
it,
and
in
that
way
trying
to
get
the
customers
of
the
partnership.
But
in
C
hurt
on
v.
Douglas
I
Joh.
174]
the
judgment
of
the
Vice-Chancellor
quite
concurs,
I
think,
with
the
previous
decisions,
in
assuming
that
the
Defendant
might,
if
he
thought
fit,
have
carried
on
business
with
the
customers
of
the
old
firm,
provided
that
he
did
not
represent
to
them
that
his
was
the
old
business,
or
that
he
was
the
successor
in
business
of
the
old
firm.
Therefore,
to
say
that
the
Defendant
should
not
be
at
liberty
to
deal
with
any
customer
whom
he
did
not
solicit
to
deal
with
him,
is
to
give
a
forced
interpretation
to
the
words
used.
In
my
opinion
that
is
not
the
fair
meaning
of
a
sale
of
goodwill.”
And
see
also
Lord
Herschell
in
Trego
v.
Hunt,
[1896]
A.C.
7
at
pp.
11
et
seq.
where
he
said:
“The
question
whether
a
person
who
had
sold
the
goodwill
of
his
business
was
entitled
afterwards
to
canvass
the
cus-
tomers
of
that
business
came
first
before
the
Courts
for
decision
in
the
case
of
Labouchere
v.
Dawson
[L.R.
13
Eq.
322].
Lord
Romilly,
M.R.
answered
in
the
negative.
He
was
of
opinion
that
the
principles
of
equity
must
prevail,
and
that
persons
who
are
not
at
liberty
to
depreciate
the
thing
which
they
have
sold.
He
considered
that
the
defendant
was
not
entitled
personally,
or
by
letter,
or
by
his
agent
or
traveller,
to
go
to
any
one
who
was
a
customer
of
the
firm
and
to
solicit
him
not
to
continue
business
with
the
old
firm
but
to
transfer
it
to
him;
that
this
was
not
a
fair
and
reasonable
thing
to
do
after
he
had
sold
the
goodwill.
He
accordingly
granted
an
injunction
to
restrain
the
defendant,
his
partners,
servants,
or
agents
from
applying
to
any
person
who
was
a
customer
of
the
old
firm
prior
to
the
date
of
the
sale,
privately,
by
letter,
personally,
or
by
a
traveller,
asking
such
customers
to
continue
to
deal
with
the
defendant
or
not
to
deal
with
the
plaintiffs.
’
’
And
see
also
Teetzer,
J.
in
Foster
v.
Mitchell
(1911-12),
3
O.W.N.
495
at
pp.
428
et
seq.
where
he
said:
‘
‘
As
stated
in
Lindley
on
Partnership,
at
p.
476,
the
expression
‘goodwill’,
when
applied
to
a
business,
‘is
generally
used
to
denote
the
benefit
arising
from
connection
and
reputation,
and
its
value
is
what
can
be
got
for
the
chance
of
being
able
to
keep
that
connection
and
improve
it.’
Or,
as
put
by
Lord
Macnaghten
in
Inland
Revenue
Commissioners
v.
Muller,
[19011
A.C.
217,
at
pp.
223-4:
‘It
is
the
benefit
and
advantage
of
the
good
name,
reputation,
and
connection
of
the
business;
it
is
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.’
See
also
Trego
v.
Hunt,
[1896]
A.C.
7;
and
Hill
v.
Fearis,
[1905]
1:Ch.
466.
The
proposition
that
the
terms
of
the
partnership
agreement
in
this
case
were
sufficiently
comprehensive
to
include
the
taking
over
of
the
defendant’s
goodwill
without
that
item
of
his
business
being
specifically
mentioned,
is
abundantly
supported
by
Jennings
v.
Jennings,
[1898]
1
Ch.
378,
where,
in
a
compromise
agreement
settling
a
partnership
action,
A.
was
to
retain
the
‘assets’,
and
it
was
held
that,
though
not
specifically
mentioned,
the
goodwill
of
the
business
was
included;
and
by
In
re
Leas
Hotel
Co.,
Salter
v.
Leas,
[1902]
1
Ch.
332,
where
it
was
held
that
the
word
‘property’
was
sufficient
to
include
goodwill
in
the
business
though
not
specifically
mentioned.
See
also
In
re
David
and
Matthews,
[1899]
1
Ch.
378.”)
It
is
a
fact
also
that
when
a
purchaser
of
a
business
as
a
going
concern
purchases
the
goodwill
of
such
a
business
as
one
of
the
assets,
he
does
not
do
so
on
any
precise
scientific
basis.
There
are
accounting
and
merchandising
rules
and
guides
he
may
employ
so
as
to
enable
him
to
exercise
the
best
business
judgment
possible.
Such
a
purchaser
hopes
to
obtain
the
custom
of
the
business
he
is
purchasing
and
in
every
other
way
obtain
all
the
economic
advantages
that
such
a
business
had.
In
this
he
may
estimate
correctly,
in
which
event
the
cost
of
such
purchased
goodwill
if
he
puts
it
on
the
balance
sheet
of
his
business
will
accurately
set
out
its
value
at
that
time.
But
more
often
than
not,
some
figure
greater
or
lesser
will
probably
be
the
correct
figure.
In
any
event,
over
a
period
of
time
such
purchased
goodwill
and
the
goodwill
generated
or
kept
by
the
purchaser
will
become
indistinguishable.
The
businessman’s
approach
in
purchasing
goodwill
as
an
asset
of
a
business
has
been
admirably
characterized
by
certain
author
accountants.
See,
for
example,
Professional
Accounting
by
John
Parker
and
David
Bonham,
published
by
Sir
Isaac
Pitman
(Canada)
Limited,
1965
at
pages
110
et
seq.
which
reads
as
follows:
connection
I
understand
the
word
to
include
whatever
adds
value
to
a
business
by
reason
of
situation,
name
and
reputation,
connection,
introduction
to
old
customers
and
agreed
absence
from
competition,
or
any
of
these
things,
and
there
may
be
others
which
do
not
occur
to
me.
(Lord
Lindley)
The
goodwill
shown
in
a
financial
statement
usually
arises
on
the
purchase
of
a
business
through
the
acquisition
of
its
net
assets,
or
through
the
acquisition
of
a
controlling
interest
in
its
shares.
When
consolidated
financial
statements
are
prepared,
the
excess
of
cost
of
the
investment
over
the
fair
value
of
the
subsidiary’s
net
assets
at
date
of
acquisition
is
usually
treated
as
goodwill.
In
accounting
theory,
purchased
goodwill
is
generally
considered
to
be
an
asset
that
has
a
value
at
date
of
acquisition
equivalent
to
its
cost.
Although
goodwill
may
be
built
up
by
advertising,
and
through
the
general
operational
activities
of
a
business,
these
costs
are
normally
charged
to
expense
when
incurred.
Except
in
the
case
of
partnerships,
the
accounting
recognition
of
goodwill
is
usually
restricted
to
that
acquired
by
purchase.
The
subsequent
accounting
treatment
of
purchased
goodwill
permits
showing
this
asset
in
the
balance
sheet
with
or
without
amortization.
Goodwill
can
be
viewed
as
the
purchase
of
earning
power
in
excess
of
a
normal
return
on
the
investment.
As
long
as
operating
results
indicate
the
validity
of
this
view,
the
alternative
of
amortizing
or
not
amortizing
is
available.
If
goodwill
is
amortized,
the
charges
to
expense
should
be
systematic,
even
though
the
period
selected
is
often
arbitrary.
If
a
material
distortion
of
net
income
is
likely
to
result
from
amortization,
a
partial
write-down
of
goodwill
may
be
made
by
a
charge
to
retained
earnings.
When
goodwill
is
not
amortized
on
a
systematic
basis
and
when
operating
results
begin
to
indicate
a
limitation
in
its
usefulness,
the
cost
of
all
or
a
portion
of
goodwill
is
usually
written
off
to
retained
earnings.
This
wide
range
of
possible
accounting
treatments
supports
the
commonly
held
view
that
goodwill
is
the
most
‘intangible’
of
intangible
assets.’’
And
at
page
113:
“The
estimate
of
future
earnings
must
disregard
economies
associated
with
any
proposed
merger,
and
any
improvement
in
earnings
expected
to
result
from
changes
that
might
be
introduced
by
the
prospective
owner.
Since
the
goodwill
belongs
to
the
vendor,
the
main
reason
for
measuring
it
is
to
determine
an
amount
that
the
purchaser
should
be
willing
to
pay
for
this
asset.
In
theory,
the
purchaser
should
pay
for
goodwill
whatever
is
necessary
to
ensure
that
the
estimate
of
annual,
future
earnings
will
just
equal
a
normal
rate
of
return
on
the
total
investment.
The
emphasis,
therefore,
should
be
on
future,
maintainable
profits
reasonably
attributable
to
the
going
concern
which
has
been
built
up
by
the
present
owner.
In
order
to
test
for
the
presence
of
goodwill,
it
is
necessary
not
only
to
estimate
annual
future
earnings,
but
also
to
determine
the
fair
value
of
capital
employed.
Since
balance
sheet
valuations
reflect
asset
costs
adjusted
according
to
the
conventional
rules
of
accounting,
market
values,
instead
of
book
values,
should
be
used
for
determining
capital
employed.
(Goodwill
is
sometimes
recorded
in
the
accounts
as
the
difference
between
the
book
value
of
capital
employed
and
the
value
indicated
by
the
purchase
consideration.
This
practice
is
obviously
unsound,
and
its
use
can
only
result
in
a
mis-statement
of
goodwill.
)
’
’
See
also
An
Income
Approach
to
Accounting
Theory
(Readings
and
Questions)
by
Sidney
Davidson,
David
Green
J.,
Charles
T.
Horngren
and
George
H.
Sorter,
published
by
Prentice-Hall
Ine.,
Englewood,
N.J.,
U.S.A.,
1964
at
page
367:
“Before
beginning
the
discussion
of
this
particular
point,
however,
it
might
be
well
to
set
forth
the
writer’s
general
point
of
view
with
regard
to
goodwill.
First
of
all,
it
should
be
noted
that
the
general
concept
of
goodwill
has
changed
considerably
over
the
past
century.
Whereas
business
goodwill
was
formerly
considered
to
pertain
almost
exclusively
to
customer
relations,
the
concept
is
now
used
in
a
much
broader
sense,
in
that
it
encompasses
almost
any
intangible
factor
of
economic
value
to
an
enterprise.
In
general,
goodwill
is
looked
upon
as
the
economic
advantage
of
friendly
and
harmonious
relationships
enjoyed
by
a
business
firm
throughout
the
different
phases
of
its
operations.
This
advantage
evidences
itself
in
the
form
of
earnings
in
an
amount
greater
than
that
expected
in
a
typical
firm
in
the
industry
with
a
similar
capital
investment.
The
factors
underlying
goodwill
may
be
considered
to
effect
either
greater
total
revenues
or
decreased
unit
costs.
The
former
is
commonly
referred
to
as
consumer
or
customer
goodwill
;
the
latter
as
industrial
goodwill.
With
respect
to
the
problem
of
evaluating
the
goodwill
of
an
enterprise,
the
technique
generally
resorted
to
is
some
sort
of
capitalization
of
earnings.
The
more
acceptable
methods
of
making
the
calculation
assume
a
more
or
less
definite
term
of
existence,
for
the
excess
earning
capacity
of
the
business.
Some
effort
is
made
to
determine
what
a
normal’
rate
of
return
in
the
industry
might
be,
and
this
is
matched
against
the
estimated
future
earning
capacity
of
the
particular
enterprise.
The
difference
supposedly
represents
goodwill
earnings.
In
this
connection,
it
should
be
noted
that
future
earnings
are
estimated
on
the
basis
of
a
projection
of
past
earnings,
adjusted
to
reflect
a
typical
profit
trend.
It
is
generally
recognized,
however,
that
the
amount
actually
paid
for
goodwill
in
practice
is
seldom
arrived
at
by
a
theoretically
sound
calculation.
But
regardless
of
the
actual
procedure
used
in
determining
the
purchase
price
of
goodwill,
the
payment
represents
some
sort
of
estimate
of
the
present
value
of
future
superprofits’
to
be
earned
by
the
business.
The
problem
of
whether
or
not
purchased
goodwill
should
be
written
off
must
necessarily
be
considered
with
regard
to
the
varying
circumstances
under
which
it
may
appear.
For
example,
the
treatment
called
for
where
the
amount
appearing
as
goodwill
on
the
balance
sheet
represents
nothing
more
than
the
cost
of
an
unfortunate
investment
in
super-profits
which
failed
to
materialize
would
not
be
the
same
as
that
which
would
be
indicated
where
the
goodwill
is
grossly
undervalued
on
the
books.
Between
the
two
extremes
there
can
be
many
intermediate
situations.’
See
also
Accounting—An
Analysis
of
its
Problems
(Volume
One/Revised
Edition)
by
Maurice
Moonitz
and
Louis
H.
Jordan
published
by
Holt,
Rinehart
and
Winston
Inc.,
1963
at
pages
505-06:
.
,
.
It
is
commonplace
in
business
affairs
that
businesses
are
bought
and
sold
at
amounts
widely
divergent
from
book
values,
even
where
the
records
have
been
kept
by
excellent
bookkeeping
procedures
and
the
financial
statements
examined
by
the
most
competent
auditors
available.
.
.
.
The
net
effect
of
these
factors,
in
the
case
of
the
successful
business,
is
to
understate
the
actual
value
of
its
proprietorship
;
in
the
case
of
the
unsuccessful
business,
the
limitations
within
which
the
accountant
works
serves
to
result
in
overstatement
of
the
value
of
the
enterprise
taken
as
a
whole.
Goodwill
can
therefore
be
described,
to
use
Canning’s
excellent
phrasing,
as
the
‘master
valuation
account,’
and
may
assume
either
a
debit
or
a
credit
aspect,
depending
upon
whether
the
concern
has
a
successful
career
ahead
of.
it,
or
a
dismal
future.
I
John
B.
Canning,
The
Economics
of
Accountancy
(New
York:
The
Ronald
Press,
1929),
page
42.]
As
a
master
valuation
account,
goodwill
then
adjusts
or
modifies
virtually
all
the
recognized
assets
and
liabilities.
It
is
therefore
inaccurate,
properly
speaking,
to
refer
to
it
as
an
asset,
in
the
sense
that
cash,
receivables,
inventories,
and
fixed
assets
are
referred
to
as
assets.
This
distinctive
characteristic
of
goodwill
is
widely
recognized
in
the
prevalent
conception
that
goodwill
cannot
ordinarily
be
sold
separately,
as
can
the
true
assets,
apart
from
the
business
as
a
whole.
Since
the
amount
of
goodwill
represents
an
unallocated
(and,
perhaps,
unallocable)
adjustment
of
all
assets
and
debts,
it
becomes
patently
impossible
to
‘acquire’
the
goodwill
without
acquiring
the
items
it
modifies
or
adjusts.-
For
the
sake
of
simplicity
in
expression,
however,
we
shall
follow
the
usual
practice
of
referring
to
goodwill
as
an
asset.’’
These
legal
authorities
and
accounting
treatises,
when
read
in
the
light
of
the
facts
of
this
case,
clearly
explain
not
only
what
the
appellant
did
in
purchasing
this
business
but
also
its
motivation
in
purchasing.
In
the
result
therefore,
in
this
case,
having
regard
to
the
negotiations
that
took
place
between
the
appellant
and
the
owners
of
Roselawn
Dairy
Division
resulting
in
the
purchase
of
that
business
as
a
going
concern,
and
considering
the
whole
of
the
evidence
and
the
applicable
law,
I
am
of
opinion
that
what
the
appellant
paid
the
whole
of
the
sum
of
$344,000
for
was
purchased
goodwill,
a
capital
asset,
and
that
it
is
not
possible
in
law
in
this
case
to
treat
any
part
of
this
sum
in
the
manner
in
which
the
appellant
seeks
to
do
as
expense
during
the
year
1962.
(The
ratio
of
the
decision
of
B.P.
Australia
Limited
v.
Com-
miss
ioner
of
Taxation,
in
my
opinion,
is
not
applicable
to
the
facts
of
this
case.)
The
appeal
is
therefore
dismissed
with
costs.
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