TMI Blog1986 (5) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... ter called "the Act "). One Nareshchandra Kantilal died on September 13, 1962. He was partner in the firm of Messrs. G. Bhagwatiprasad Co. having 28% share in the partnership. The partnership was evidenced by the document of partnership which is dated June 6, 1957. On the death of the deceased, the accountable person filed necessary return under the Act. The Assistant Controller of Estate Duty while valuing the estate of the deceased came to the conclusion that the share of the deceased in the goodwill of the firm in which he was a partner was liable to be included in the principal value of his property. This inclusion was resisted by the accountable person on the ground that the question of adding the value of the share of the deceased in the goodwill of the firm did not arise in view of clause (10) of the partnership deed. Clause(10)was as follows: " The firm shall not stand dissolved on the death of any of the partners and the partner dying shall have no right whatever in the goodwill of the firm. " The accountable person contended on the basis of this clause that on the death of the deceased, his heirs had no right in the goodwill of the firm, and, as such, the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case, the interest of the deceased in the firm of Messrs. G. Bhagwatiprasad Co. of Ahmedabad was property within the meaning of the provisions of the Estate Duty Act, 1953 ? (2) If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case and having regard to the terms of the partnership deed dated June 6, 1957, the value of the interest of the deceased in the said partnership would include the goodwill of the partnership firm? (3) Whether, on the facts and in the circumstances of the case, the value of the goodwill, if any, would be exempt under the provisions of section 26(1) of the Act ? " The last question was not pressed before the High Court. The High Court, therefore, did not give any answer to that question. The first question the High Court answered in favour of the Revenue and in the affirmative and the second question was answered in the negative. As the first question was in favour of the Revenue and there was no appeal by the accountable person, this appeal is concerned only with the second question, namely, " whether the value of the interest of the deceased in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goodwill of the firm, the benefit arising to the other partners on the cesser of interest in the goodwill, on the death of the partner, could not be measured in terms of section 40. The High Court, therefore, was of the view that such a benefit was not liable to estate duty under section 7 of the Act. The High Court was, therefore, of the view that the facts of this case were not covered by either section 5 or section 7 and answered question No. 2 in the negative. In order to appreciate this controversy, it is necessary to refer first to section 2(15) of the Estate Duty Act. Section 2(15) deals with " property It provides as follows: " `property' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method. " There are two Explanations with which we are not presently concerned. Section 2(16) deals with " property passing on the death " and is as follows : it 'property passing on the death' includes property passing either immediately on the death or after any interval, either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason of the death of the deceased, the depreciation shall be taken into account in fixing the price. Sections 37, 38 and 39 are provisions with which the present controversy is not directly concerned. Section 40 deals with the valuation of benefits from interests ceasing on death. This is relevant and is as follows: "The value of the benefit accruing or arising from cesser of an interest ceasing on the death of the deceased shall (a) if the interest extended to the whole income of the property, be the principal value of that property; and (b) if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended." The other provisions of the Act need not be considered for the present controversy. Section 14 of the Indian Partnership Act, 1932, recognises that, subject to contract between the partners, the property of the firm would include all the property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by the firm or for the purpose of, or in the course of business of, the firm and inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of laced or plain net manufacturers under a deed of partnership which included covenants (among others) to the following effect : Neither of the sons was, without the consent of the father, to be directly or indirectly engaged in any trade or business except on account and for the benefit of the partnership; both the sons were bound to give so much time and attention to the business as the proper conduct of its affairs required ; the father was not bound to give more time or attention to the business than he should think fit; if the father should die, his share was to accrue to the sons in equal shares subject only to their paying out to his representatives the value of his share and interest at his death as ascertained by an account to be made as on the day of his death with all proper valuations, but without any valuation of or allowance for goodwill, which goodwill was to accrue to the sons in equal shares. The father died, and the value of his share and interest at his death were ascertained by an account taken as directed by the deed of partnership without any valuation of, or allowance for, goodwill. The share and interest so ascertained amounted to a large sum and est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n's case [1912] 1 KB 539 (KB), the interest of the deceased passed to his legal representatives immediately after his death because his share was to accrue to his partnership who were his sons subject only to their paying to his legal representatives, the value of their share as on the date of death ascertained by proper valuation. This decision, in our opinion, must be understood in the light of the facts of that case though there is a ring of similarity with the facts of the present case. Though clause (10) of the present agreement is different on the aspect of section 7 of the Act, this decision certainly supports the Revenue's contentions. In Perpetual Executors and Trustees Association of Australia Ltd. v. Commissioner of Taxes of the Commonwealth of Australia [1954] AC 114; 25 ITR (ED) 47, the Privy Council had to deal with a case where the principal asset of a testator was his interest in a partnership pursuant to a deed of partnership which, inter alia, conferred option on the surviving partners to purchase the testator's share in the capital on his death and further provided that " in computing the amount of purchase money payable on account of exercise of any option, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot say that goodwill vanishes, then the share of the partner exists. If that is so, then the title to that property cannot be in the vacuum. The High Court at page 309 of the report has observed that interest of a dying partner automatically comes to an end on his death. The High Court further stated that if an interest in any property came to an end at a particular point of time, nothing survived which could be inherited by the heirs. We are unable to accept this position. The moment the life comes to an end, " the razor's edge of time and existence which divides the past from the future, and is, and yet, instantaneously is not, " at that time property passes or is deemed to pass. The goodwill of the firm after the death of the dying partner does not get diminished or extinguished. Whoever has the benefit of that firm has the benefit of the value of that goodwill. Therefore, if by any arrangement, for instance, clause (10) of the partnership agreement in the instant case, the heirs do not get any share in the goodwill, the surviving partners who will have the benefit of the partnership will certainly have that benefit. The High Court was right in observing at page 312 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of this case. We are unable to accept this position. Difficulties in making apportionment do not make a taxable item non-taxable. See in this connection, the observations of this court in CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC). Reliance was placed on behalf of the accountable person on a decision of the judicial Committee in Attorney-General of Ceylon v. Ar. Arunachalam Chettiar [1958] 34 ITR (ED) 20 (PC). The facts of that case and the clauses with which the judicial Committee was concerned there were entirely different. There, the son had merely a right to be maintained by the karta out of the common fund to an extent in the karta's absolute discretion and there was no basis of valuation which in relation to such an " interest, " would conform to the scheme prescribed under section 17(6) of the Ordinance with which the judicial Committee was concerned. A Full Bench of the Madras High Court in the case of Alladi Kuppuswami v. CED [1970] 76 ITR 500, had to construe the effect of Hindu Women's Rights to Property Act, 1937, and to consider the nature of the right of the widow, in the property. It was found that at the death of the widow, there was no ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm at the time of his death came to devolve on the surviving partners and their share in the goodwill was augmented to the extent of the share of the deceased as per clause 14 of the partnership deed in that case and the Madras High Court held that section 5 of the Act applied. Section 5, we have noted, is applicable in the instant case in the sense that property passed on the death of the deceased partner and, if that is so, section 40 would not have any application in the valuation. On this aspect, the Madras High Court was unable to agree with the Gujarat High Court's decision under appeal. The Madras High Court relied on the decision of this court in Khushal Khemgar Shah v. Mrs. Khorshed Banu [1970] 3 SCR 689. Our attention was also drawn to a decision of the Madras High Court in the case of Smt. Surumbayi Ammal v. CED [1976] 103 ITR 358. . But the question under controversy was different in that case and no useful purpose would be served by examining that case in detail. The Full Bench of the Punjab and Haryana High Court in the case of State v. Prem Nath [1977] 106 ITR 446, held that the goodwill of a firm was an asset of the firm, the share of the deceased partner in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to continue the partnership business, the deceased partner's share passed to his surviving partners subject to their making payment to the legal representatives of the deceased partner of the amount of the value of his share in accordance with the provisions of the deed of partnership. partner does not have a defined share in the goodwill of the firm and the estate duty authorities could not regard it as a separate property by itself apart from the other assets and liabilities of the firm and include its value in the estate of a deceased partner under section 5. The Bombay High Court could not agree with the view of the Gujarat High Court under appeal. In the case of CED v. Kanta Devi Taneja [1981] 132 ITR 437, the Gauhati High Court held that passing of property was not a mere change of source or title but change of beneficial possession or enjoyment. The interest of a partner in a partnership firm was property within the meaning of section 2(15) of the Estate Duty Act, 1953, and such interest extended to the share of the partnership including goodwill. Therefore, on the death of a partner, his interest in the entire unit of the firm including goodwill passes, irrespective o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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