TMI Blog2003 (7) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... 18-7-2003 - Judge(s) : S. SANKARASUBBAN., K. K. DENESAN. JUDGMENT The judgment of the court was delivered by S. Sankarasubban J. -The questions of law referred are as follows: "(i) Whether, on the demise of the deceased did any property in the form of a share of the deceased in the accumulated profits and goodwill in the firm of Saraf Trading Corporation pass in terms of section 5 of the Estate Duty Act? (ii) If any property passed, was the Tribunal justified in determining the same at 10 per cent, of the value or should the Tribunal have restricted it to Rs. 9,000? (iii) Whether the profits arising to the firm up to the date of the demise should be considered in determining the quantum of accumulated profits? (iv) Whether in determining the super profits for the purpose of valuing the goodwill a deduction has to be allowed for interest on capital at 20 per cent, as against 12 per cent, allowed by the assessing authority? (v) Whether in determining the value of goodwill a multiplier of one year or three years has to be adopted? (vi) Whether any refund determined after the demise of the deceased could be regarded as property passing on the death of the deceased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm was short and that almost all the transactions of the firm must have been over as on the date of the death of the deceased. The Assistant Controller further held that even though the deceased was only a lessee of a building in which the business was carried on by the firm, the property commanded a market value and so he included the leasehold property for the purpose of estate duty assessment at l/5th of its value. He also overruled the objection of the accountable person that the firm had no goodwill. In arriving at the value of the goodwill, he gave marginal reduction for managerial remuneration, etc. and computed the interest of the deceased at 1/5th of the value of the goodwill. In such computation, he included the amount, of duty drawback, cash assistance, etc., which were received by the firm during the course of the business. Thus, 1/5th of the value of the goodwill was added as the share of the deceased. The Appellate Controller upheld the finding of the Assistant Controller of Estate Duty that the interest of the deceased in the firm was to be computed at 1/5th of the undistributed profits upto the date of death and the profit earned during the year up to the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The profits or losses of the firm shall be determined at the end of the accounting year and shall be divided between the partners and the beneficiary only as hereinafter provided: (a) An amount not exceeding 10 per cent, 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 per cent, 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. 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. An outgoing or retiring partner shall have no share in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer". Here we find that the profit has been declared and it was shown as Rs. 9,000. Hence, according to us, section 13(b) of the Partnership Act will not apply. The Tribunal was not correct in fixing the share at 10 per cent. The share of the deceased partner was Rs. 9,000 and that has to be taken into account. The next question that has to be considered is as to how the profit is to be taken for the accounting year 1984. Saraf died on October 18,1984. At the time of his death, the accounting year was not over. The assessing authority as well as the appellate authority held that the profit for the entire year will pass on the death of Saraf. But as rightly pointed out by the Tribunal, at the time of death of the person, the profits have not been declared. Hence, it cannot be said that any profit is accrued. Hence, we agree with the Tribunal. The next question to be considered is with regard to the goodwill. So far as the goodwill is concerned, the Tribunal held that the deceased was entitled to share in the goodwill and held that it was property which passed to the legal heirs. The Tribunal has given certain guidelines for calculating the goodwill; they are (1) to take on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l), it was held as follows: "Under the Estate Duty Act, each and every right which passes on death has to be valued. The evaluation has to be done on the basis of the assumption that there is a willing purchaser for the right or property. In this evaluation, it would not be proper to find out whether the right or article left by itself is capable of earning money. It is the settled practice to value goodwill for estate duty and the methods adopted are not unreal or imaginary". It further held as follows: "In this country, the method of evaluating goodwill is to find out the net average profit after deducting interest on the capital outlay and the appropriate cost of service, in case it has not been charged against the net profits. After having determined this, a reasonable return on the capital employed is calculated, and the excess amount of profits is taken to be the super profits. This amount is multiplied by a certain number of years, and the resultant figure is taken to be the value of the goodwill. There does not appear to be any hard and fast rule regarding the multiple to be applied for evaluating the goodwill of a firm. It all depends on the nature of the business and the ..... 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