1994 (8) TMI 68 - AT - Income Tax

Accumulated Profits Advance Tax Assessing Officer Commercial Profit Partnership Deed Previous Year Principal Value Of Estate Property Passing On Death Tax Liability Undistributed Profits

Issues Involved:
1. Applicability of Section 13(b) of the Partnership Act.
2. Inclusion of profits in the estate of the deceased.
3. Goodwill of the firm and its valuation.
4. Valuation of leasehold interest.
5. Inclusion of tax refunds and interest in the estate.
6. Exemption under section 33(1)(n)(nn) of the Income-tax Act.
7. Levy of interest under section 53(3) of the Estate Duty Act.

Issue-wise Analysis:

1. Applicability of Section 13(b) of the Partnership Act:
The first issue was whether the partnership deed dated 16-9-1981 spelled out the individual shares of the partners in the profits or losses of the firm and if Section 13(b) of the Partnership Act was applicable. The Tribunal held that Clause 7 of the partnership deed prescribed the manner in which profits and losses were to be dealt with, including accumulation and distribution of profits based on mutual agreement among partners. Therefore, the provisions of Section 13(b) of the Partnership Act, which stipulates equal sharing in the absence of a contract, were not applicable. Consequently, the computation of the deceased's interest in the firm's profits or assets at 1/5th of their value was not supported.

2. Inclusion of Profits in the Estate of the Deceased:
The next issue was whether the profits from the beginning of the year up to the date of the deceased's death were includible in the estate. The Tribunal noted that profits do not accrue daily and can only be ascertained when accounts are taken as of a specific date. Given that there were transactions between the date of death and the closing of the firm's accounts, the Tribunal held that there was no accrual of profit as of the date of death, and thus, the inclusion of such profits was deleted.

3. Goodwill of the Firm and Its Valuation:
Regarding the firm's goodwill, the Tribunal rejected the contention that the firm had no goodwill due to its dependency on a single customer (USSR) and the lack of branded products. Citing the Supreme Court's decision in Mrudula Nareshchandra's case, the Tribunal held that the deceased had a marketable interest in the firm's assets, including goodwill. The Tribunal directed the Assessing Officer to compute the goodwill by considering book profits, allowing tax deductions, adopting a 20% rate of expectation on capital employed, allowing Rs. 10,000 per month for managerial remuneration, and using a one-year purchase multiplier instead of three.

4. Valuation of Leasehold Interest:
The Tribunal upheld the valuation of the leasehold interest at Rs. 8,58,714, rejecting the contention that the lease was precarious. The building stood on leasehold land belonging to Cochin Port Trust, and the lease was valid until 2006.

5. Inclusion of Tax Refunds and Interest in the Estate:
The Tribunal addressed the inclusion of tax refunds and interest under section 214 of the Income-tax Act in the estate. Following the Allahabad High Court's decision in Maharani Raj Laxmi Devi's case, the Tribunal held that refunds payable after the deceased's death could not be considered property available at the time of death and thus excluded Rs. 25,41,170 from the estate's value.

6. Exemption under Section 33(1)(n)(nn) of the Income-tax Act:
The Tribunal declined to interfere with the first appellate authority's decision not to grant exemption under section 33(1)(n)(nn) for the residential flat at Bombay, as there was no evidence that the flat was used for the deceased's residence.

7. Levy of Interest under Section 53(3) of the Estate Duty Act:
The Tribunal upheld the levy of interest under section 53(3) of the Estate Duty Act, noting that the Accountable Person had requested an extension of time to file the return, which was granted subject to payment of interest. The Tribunal directed that the quantum of interest be redetermined based on the duty payable pursuant to the Tribunal's order.

Conclusion:
The appeal was partly allowed, with specific directions provided for the computation of goodwill, exclusion of certain profits and tax refunds, and adjustments to managerial remuneration and interest rates. The Tribunal's detailed analysis addressed each issue comprehensively, ensuring that the legal principles and relevant facts were thoroughly considered.

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