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TMI Blog1994 (8) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm shall be determined at the end of the accounting year and shall be divided between the partners and beneficiary only as hereinafter provided : (a) An amount not exceeding 10% of the profits of the firm for the year shall be distributed among the partners and beneficiary every year, on such basis as may be agreed from year to year. (b) In view of the nature of the present business, the balance of profits, remaining after distribution as above, shall be accumulated to absorb losses of the firm and for other contingencies till such time as the partners decide otherwise, so however that at least 50% of the accumulated profits of a year after setting off any brought forward loss shall be distributed among the partners and the beneficiary in any event before the expiry of three years from the date of accumulation and the balance 50% of the accumulated profits before the expiry of six years from the date of accumulation. The partners do not have any specified or equal share in the accumulated profits and the partners shall decide the amount to be credited or debited as the case may be, to any one or to each partner at any time, giving weightage to the circumstances of the case. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased. In the subsequent year, namely, year ended 4-11-1983, in a distribution of Rs. 1,20,000 the deceased got a share of Rs. 30,000. However, after the death of the deceased, a sum of Rs. 15 lakhs was distributed and the deceased was only given a sum of Rs. 9,000. Hence, he held that the profits were not distributed properly. He also noticed that the deceased was allowed to withdraw more than Rs. 10 lakhs during these periods resulting a debit balance of Rs. 17,93,351 at the time of his death. Therefore, he concluded that the surviving partners indulged in some kind of planning so as to avoid tax liability. Hence, he chose to adopt 1/5th share of undistributed profits as the share of the deceased in the interest of the firm. 2. Similarly he took into account 1/5th share in the profits of the firm for the year ended on 24-10-84 on the ground that the time lag between the passing away of the deceased and the closing of the firm's account was short and that almost all the transactions of the firm were over as on the date of the death of the deceased. The Assistant Controller of Estate Duty further held that even though the deceased was only a lessee of a building in which the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goodwill. He justified the multiplier at 3 and saw no reason to interfere with the interest at the normal rate of 10% of the average capital employed and the quantum of managerial remuneration allowed by the Assessing Officer in evaluating the goodwill. He upheld the inclusion of the firm's refund and also the interest thereon under section 214 of the IT Act. He upheld the inclusion of refund of Rs. 6,33,366 which was granted to the assessee on 14-2-1984 in relation to the assessment year 1983-84. He gave relief to the assessee in respect of the valuation of the flat by directing the Assessing Officer to substitute the value at Rs. 35,000 as against Rs. 4,50,000 based on wealth-tax records. He deleted the addition made by the Assessing Officer in respect of the assets found in the balance-sheet by revaluing the same on estimate basis. He justified the charging of interest under section 53(3) of the Estate Duty Act amounting to Rs. 1,74,797. Thus the appeal of the Accountable Person was partly allowed. 4. Not satisfied with the relief granted by the Appellate Controller of Estate Duty, the Accountable Person is on appeal. We have heard rival submissions and perused the records, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the partners. If there is a contract among the partners as to the manner or method or the basis or the principle to be followed for the distribution of profits, then, in our considered opinion section 13(b) cannot be invoked. Clause 7(b) of the partnership deed dated 16-9-1981 enjoins the partners to accumulate the profits in excess of what has been distributed. It is also provided that such accumulated profits must absorb the losses sustained, before the end of three years from the date of accumulation. Thus the accumulated profits to the extent of 50% is liable for distribution among the partners and here again the manner in which they will share the profits will be on the basis of the agreement between them at that point of time when the question of distribution arises. Thus, the agreement among the partners regarding the profit-sharing arrangement will be the basis for distribution of 50% of accumulated profits. The remaining balance of 50% of the accumulated profits, after adjusting for any loss sustained in the meanwhile, is to be distributed among the partners before the expiry of six years from the date of such accumulation. Here again, the basis of distribution will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m in a distribution that took place after the death of Shri V.G. Saraf, should alone enter the principal value of the estate and but not the amount as determined by the Assistant Controller of Estate Duty. Elaborating his arguments, Shri Nair contended that as a partner the deceased has only a "right to be considered to a share" in the profits or the assets of the firm. The mere "right to be considered to a share" cannot be termed as property within the meaning of the term property and therefore there was no passing of property on the death of Shri V.G. Saraf. He relied on the decision of the House of Lords in Gartside v. IRC [1968] 70 ITR 663. He also submitted that as far as the profits of the year in which the death took place is concerned, unless an account was taken of the assets and liabilities as on the date of the death, it cannot be said that profit had accrued to the deceased as at the date of death. Therefore, the authorities erred in including the profit of the year on a pro rata basis up to the date of death. There can never be a pro rata accrual of profit and for this proposition he relied on the decision of the Kerala High Court in the case of CIT v. Sree Narayana Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners would share the current profits and the exact proportion at which the partners would share the accumulated profits in two spells are matters left to be decided by the partners themselves at the time of distribution. Thus the share of the deceased in the accumulated profits & embedded in a number of contingencies such as emergence of future losses the time-element in the mechanism for distribution after the end of the first three years and after the end of next three years from the date of accumulation and the uncertainties attached to the quantification of sharing ratio etc., have all to be taken into account in determining the share of the deceased in the accumulated profits of the firm as on the date of death. The contention of Shri Abraham that under clause 7(e) of the Partnership deed, as senior partner, the deceased had a say on the quantum of share to be given and therefore he could appropriate the lion's share of the profit overlooks the fact that only in case of dispute among the partners that clause was to be invoked and not otherwise. Having regard to these factors and making allowance for the contingencies attaching the right of the deceased in the profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured. No branded article was exported and the entire exports depended upon the sweet whims and fancies of the U.S.S.R. and also the Government policies. Hence, there is no goodwill. Further clause 10 of the partnership deed was specific that no partner had specific share in the goodwill which continued to vest with the firm till all the properties of the firm are sold and realised. 11. Shri Abraham on the other hand contended that these are theoretical objections but the actual situation was that the firm continued to earn huge profits over the years and it had reasonable prospects of continuing with U.S.S.R. in future years also. The firm did not cease to trade with Russia subsequent to the death of the deceased. In such circumstances, it has to be held that the firm enjoyed goodwill. As for the objection of Shri Nair that in terms of the partnership deed no partner had any specific interest in goodwill until all the assets are sold off and realised, Shri Abraham relied on the decision of the Supreme Court in Mrudula Nareshchandra's case. 12. We have heard rival submissions. Clause 10 of the partnership deed adverted to by Shri Nair is no bar for holding that the goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjections raised by the Accountable Person on the components of the goodwill calculations. The first grievance of the assessee is that the Assessing Officer has taken the assessable profits for the past five years and averaged the same, instead of the profits as disclosed in the profit and loss account. Shri Nair vehemently contends that in an assessment there can be disallowances on technical grounds, additions on the basis of deeming provisions which are all irrelevant for quantification of the amount of goodwill of the firm and in this connection he relies on the decision of the Tribunal in the CTA No. 31 /Coch. 83. Shri Abraham supports the order of the Appellate Controller of Estate Duty. He relies on the Circular No. 219 dated May 30, 1977 and also the notification No. 301 dated 20-7-1977 under Rules 10(4) of the Gift-tax Rules, 1958. 14. We have gone through the Circular and Notification issued under the provisions of Gift-tax Act. They speak of the mode of valuation of goodwill in the case of a partner who has only a right to share the profits of a firm without the right to share the assets of the firm. Such a situation does not arise in the instant case. Further, goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer is directed to substitute the profit as per the books in the last five preceding years as the starting point of computation of goodwill. 15. The next objection is that incentives received by way of duty drawback, cash compensatory allowance etc. by the firm should not be considered for purpose of computation of goodwill. Shri Nair's contention is that these are not commercial profits but constitute the largesse on the part of the Government subject to fulfilment of certain conditions and therefore, it cannot be considered as a commercial profit in the ordinary sense of the term. The learned departmental representative relies on the provisions of section 28(b)(iii) of the Income-tax Act to support the computation. 16. Having heard rival submissions, we hold that the goodwill is based on the assumption that the existing facilities will continue to remain intact as there will be maintainable profits in future and the concern is a going-concern. Such being the assumption, it would be reasonable expectation that the firm will get cash compensatory allowance, drawback and incentives from the Government on its export business subject of course to the fulfilment of certain conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sense is a reward for risk taking. Hence, the general expectation rate should normally be more than the rate of interest. In this view of the matter, we allow 20% interest on the capital employed. 19. The next grievance of the assessee is the amount allowed for managerial remuneration at Rs. 6,500. The remuneration was allowed only for two of the partners @ Rs. 4,000 and Rs. 2,500 per month, respectively. Having regard to the fact that the assessee is an exporting concern and had to collect its merchandise at auctions and the opportunity cost of employing technical or qualified personnel in the place of the management, we allow the managerial remuneration @ Rs. 10,000 per month instead of Rs. 6,500 per month. 20. The last objection is against the multiplier of three years adopted by the authorities. We have heard rival submissions. In our view three years' purchase as multiplier is excessive. Firstly, the assessee does not own any tea garden growing and manufacturing tea. Thus, there is no provision for assured supply of tea that can be exported to the foreign country. Secondly, the entire exports took place only to one country on bilateral terms. Thus the firm was depending w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducting therefrom the liability. He has proceeded on the basis of capital and undistributed profits. In fact the advance tax paid would be a proper adjustment against the provision for taxation shown as a separate item on the liability side of the balance-sheet. However, since the capital and undistributed profits and the reserves were alone taken up for consideration, the question of treating the advance tax as an asset or not, does not arise for consideration. Thus, we reject the contention of the Accountable Person. 22. The next objection is against the inclusion of the refund and interest u/s 214 of the Income-tax Act in the estate of the deceased. Long after the death of the deceased the firm in which the deceased was a partner was granted interest and refund as follows :--- Asst. Year Date of Amount of issue & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; --------- Total 25,41,170 --------- This is the amount objected to by the Accountable Person. 23. We have heard rival submissions and perused the records. In CED v. Maharani Raj Laxmi Devi [1987] 168 ITR 389 (All.) notice was issued u/s 61 to the Accountable Person seeking to include in the principal value of the estate of the deceased an amount of Rs. 3,47,034 which became payable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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