1986 (5) TMI 31 - SC - Indian Laws

Whether the value of the interest of the deceased in the said partnership would include the goodwill of the partnership firm? Held that - The share of the deceased in the partnership did not evaporate or disappear. It went together with the other assets and should be valued in the manner contemplated under rule 7(c) of the Estate Duty Rules as indicated in the judgment of the High Court of Calcutta in CED v. Annaraj Mehta and Deoraj Mehta 1979 (3) TMI 47 - CALCUTTA High Court Thus the question must therefore be answered in the affirmative and in favour of the Revenue. The appeal is therefore allowed.

Summary

Issues Involved:
1. Whether the deceased's interest in the firm was property under the Estate Duty Act, 1953.
2. Whether the value of the deceased's interest in the partnership included the goodwill of the firm.
3. Whether the value of the goodwill, if any, was exempt under section 26(1) of the Act.

Issue-wise Detailed Analysis:

1. Whether the deceased's interest in the firm was property under the Estate Duty Act, 1953:

The Supreme Court examined whether the deceased's interest in the firm of Messrs. G. Bhagwatiprasad & Co. was considered property under the Estate Duty Act, 1953. The High Court had answered this question in the affirmative, supporting the Revenue's stance. The deceased had a marketable interest in all the capital assets of the firm, including goodwill, during the partnership's subsistence. This interest was deemed property within the meaning of section 2(15) of the Act. The Supreme Court upheld that the deceased's interest in the firm was indeed property under the Act.

2. Whether the value of the deceased's interest in the partnership included the goodwill of the firm:

The core issue was whether the deceased's interest in the partnership included the goodwill, given clause (10) of the partnership deed, which stated that the firm would not dissolve upon a partner's death and the deceased partner would have no right to the goodwill. The High Court had answered this question in the negative, but the Supreme Court disagreed. The Court noted that goodwill is an intangible asset that exists among partners up to the death of a partner. Upon death, the deceased's share in the goodwill does not vanish but passes to the surviving partners, thus benefiting them. The Supreme Court held that the share of the deceased in the goodwill of the firm passed on his death and was liable to estate duty. The valuation of such an asset should be done as per section 36 of the Act, which requires estimating the price it would fetch if sold in the open market at the time of the deceased's death.

3. Whether the value of the goodwill, if any, was exempt under section 26(1) of the Act:

This question was not pressed before the High Court and therefore was not addressed. Consequently, the Supreme Court did not delve into this issue.

Additional Analysis:

The Supreme Court referred to various precedents, including the decisions in Perpetual Executors and Trustees Association of Australia Ltd. v. Commissioner of Taxes and Attorney-General v. Boden, to support its conclusion that the goodwill of the firm was an asset that passed on the death of a partner. The Court emphasized that difficulties in valuing an asset do not render it non-taxable, as established in CIT v. Best and Co. P. Ltd. The Court also referenced the Indian Partnership Act, 1932, which recognizes goodwill as part of the firm's property.

The Supreme Court ultimately concluded that the deceased's share in the partnership, including the goodwill, did not evaporate upon death. It should be valued along with other assets of the firm as per rule 7(c) of the Estate Duty Rules. The second question was answered in the affirmative, favoring the Revenue. The appeal was allowed, and the Tribunal was directed to pass consequential orders in accordance with the law and this decision.

Conclusion:

The Supreme Court allowed the appeal, holding that the deceased's interest in the partnership, including goodwill, passed on his death and was subject to estate duty. The valuation of such interest should be done according to the principles laid out in the Estate Duty Act and relevant rules.