TMI Blog1973 (6) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... e death of the deceased, the petitioner of this reference, who is 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 valve of the share of the deceased in the goodwill of the firm did not arise in view of the stipulations contained in clause (10) of the partnership deed. The clause (10) is in the following terms: " The firm shall not stand dissolved on death of any of the partners and the partner dying shall have no right whatsoever in the goodwill of the firm. " Relying upon this clause, the accountable person contended that since, on the death of the deceased, his heirs had no right in the goodwill of the firm, the value of the said goodwill did not pass under the provisions of the Act and was, therefore, not liable to any estate duty. The Assistant Controller, however, negatived the above contention of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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? 2. If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, 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 ? " Out of these three questions, the last one, which is question No. 3, was not pressed by Shri Patel appearing on behalf of the accountable person. The same, therefore, is not required to be considered in this reference. The question whether an interest which a partner possesses in the goodwill of a firm passes on his death is involved even in Estate Duty Reference No. 11/71 and, therefore, Shri Pathak, the learned advocate of the accountable person in that reference, was allowed to intervene and to canvass his views on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Section 29 of the Partnership Act shows that he can also transfer his interest in the firm either absolutely or partially. Further, he has also the right to get the value of his share in the net assets of the firm after the accounts are settled on dissolution. All these rights of a partner show that he has got a marketable interest in all the capital assets of the firm including the goodwill asset even during the subsistence of the partnership. This interest is property within the meaning of section 2(15) of the Act, which is in the following terms : " 2. (15) '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 attached to this definition of the word " property " but, for the purpose of the point under consideration, reference to these Explanations is not necessary. The above-quoted definition of the word " property " shows that " any interest " in a property, movable or immovable, is treated by the Act as property itself an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. " These observations recognise the proposition that since a partnership firm has no legal existence, the property of the firm vests in all the partners and in that sense every partner has an interest in the partnership properties. So far as Shri Pathak's contention that a partner's interest in the assets of the firm is extinguished on his death and new rights are created in favour of his legal representatives is concerned, we see absolutely no justification for the same. It is difficult to comprehend on the basis of what provisions of law it can be contended that the interest of a partner in the assets of the partnership firm is extinguished on his death. What really happens is that, unless there is any contract to the contrary, the said interest exists and only because it exists, it is inherited by his legal representatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s credit immediately prior to his death and to this he has added his share of goodwill as mentioned above, but all that can be said is that this was only one method of valuing the interest of a deceased partner in the firm. " It is thus clear that the value of the goodwill, if any, is taken into account not as a separate or individual asset but for the purpose of considering the value of the totality of the interest which the deceased possessed in all the partnership assets. We, therefore, see no point in this contention of Shri Patel. The main contention of Shri Patel with regard to the second question was that in view of clause (10) of the partnership agreement, it cannot be said that, the share of the deceased in the firm's goodwill has passed to anyone on his death. The contention was that, on account of the operation of clause (10) of the agreement, the moment the deceased died, his right to claim any share in the goodwill came to an end and, therefore, that right has not passed to his legal representatives. It was pointed out that after his death the whole of the goodwill remained with the surviving partners and continued to remain the asset of the subsisting firm. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the method of taking accounts ; but so far as the provisions of the Act are concerned, they have nothing to do with this method of accounting, because the property, which the deceased owned in the form of his interest in the goodwill, did pass on his death in favour of the legal representatives of the deceased. Shri Kaji's alternative contention was that even if it is found that this property did not pass to the legal representatives of the deceased on account of the operation of clause (10) of the agreement, it has surely passed on to the surviving partners, inasmuch as their share of interest in the goodwill is augmented to the extent of the share of the deceased. Thus, according to Shri Kaji, the case is governed by section 5 of the Act. Shri Kaji further contended that the case also falls within the purview of section 7 of the Act, because, if it is believed that the interest of the deceased in the goodwill of the partnership stood extinguished on his death on account of the operation of clause (10) of the agreement, there has been a cesser of interest as contemplated by section 7. He further pointed out that, as a result of this cesser, benefit accrued in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The expression " property passing on death " is explained in clause (16) of section 2 of the Act as under : " (16) 'property passing on the death' includes property passing either immediately on the death or after any interval, either certainly or contingently, and either originally or by way of substitutive limitation, and 'on the death' includes 'at a period ascertainable only by reference to the death'. " This definition of the expression is inclusive and not an exhaustive one and makes an attempt to comprehend within its compass every type of passing, be it either immediate, remote, certain or contingent. The definition, however, makes it clear that the passing of property should have reference to the death of the deceased. It, therefore, follows that the point of time when death occurs is material for considering whether a particular property has passed. One test for considering whether the property in question has passed is to find out an answer to the question whether the property, which belonged to a person, happened to belong to a different person as a result of some death. If the answer is in the affirmative we can safely conclude that the property has " passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended. " It is obvious that this section postulates that the interest which has ceased on death should be capable of extending either to the whole of the income of the property or to less than the whole thereof. Having thus referred to the relevant provisions of the Act, we shall now proceed to consider whether the share of interest, which the deceased had in the goodwill of the firm, either passes under section 5 or is deemed to have passed under section 7 of the Act. We shall first take up for our consideration the question whether section 5 applies to the facts of the case. As already noted above, a mere event of passing of property from one hand to the other is sufficient to attract the provisions of section 5. The use of the word " passes " signifies the movement of the property from one hand to the other by some legally recognised method of devolution. This passage or the movement of the property from one hand to the other should be the result of death of the person concerned. Therefore, in the case of a person, whose right or interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whole interest of the deceased in all the properties of the firm, including its goodwill, to the heirs. In other words, the contention of the revenue was that on the death of the deceased his interest in the goodwill of the firm along with his interest in the rest of the assets of the firm did pass to his heirs, and the only effect which clause (10) of the partnership agreement had was to prevent the heirs of the deceased from taking into account the value of the firm's goodwill at the time of assessing the value of the firm's total assets for the purpose of liquidating the share of the deceased. In support of this contention, Shri Kaji, who appeared on behalf of the revenue, heavily relied upon the Privy Council decisions in Attorney-General v. Boden and Perpetual Executors and Trustees Association of Australia Ltd. v. Commissioner of Taxes. We find that the interpretation of clause (10) of the agreement canvassed by Shri Kaji is not acceptable. If a reference is made to this clause, it will be found that, according to it, the interest of a dying partner automatically comes to an end on his death. Thus, if an interest in a property comes to an end at a particular point of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in our case, we should interpret this clause (10) in the same manner in which their Lordships of the Privy Council have done in the case of Perpetual Executors Association. The Tribunal has taken the view which Shri Kaji wants us to take in this case, but on clear scrutiny of the terms of the agreement with regard to the goodwill as found in the Privy Council's case, we find that the said agreement bears no resemblance with the agreement evidenced by clause (10) of the partnership deed in the case before us. It should be noticed that while in the instant case the interest of the deceased in the goodwill of the firm instantly ceases to exist on the death of the deceased, in the Perpetual Executor's case, the said interest subsisted till the surviving co-partners preferred to exercise their option to purchase the capital of the deceased partner. There was, therefore, in the Privy Council case, a gap of time between the death of the deceased and exercise of option which resulted in the devolution of interest of the deceased, on his legal representatives. It is a well-known principle that title to an estate never remains in abeyance and, therefore, till the surviving partners in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the death of the deceased partner was found assessable to duty. Therefore, the question is whether the facts of that case are the same as the facts found in the case under our consideration. On scrutiny of the terms of the partnership agreement in Boden's case, we find that even there the interest of the deceased directly passed to his legal representatives immediately after his death, because his share was to accrue to his partners, who were his sons, subject only to their paying out to his legal representatives the value of his share, as on the date of his death ascertained by a proper valuation without taking into account any valuation of, or allowance for, goodwill. It, therefore, follows that his partners' sons were given a sort of option, because the share of the deceased was to accrue to them only if they were willing to pay to the legal representatives the valuation of the share of the deceased as ascertained according to the stipulations. If the partners of the deceased in Boden's case had preferred not to exercise this option by paying the legal representatives of the deceased the value of the share of the deceased, the interest of the deceased would have surely pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay that he has any specific interest in any individual item of the assets of the firm. If that be so, contended Shri Patel, the deceased cannot be said to be possessing any interest in the goodwill which could " cease " on his death. According to Shri Patel, even the second requirement of accrual or arising of benefit is not fulfilled in this case, because the surviving partners already possessed interest in the goodwill even before the death of the deceased. If these contentions of Shri Patel are accepted, section 7 would obviously have no application to the facts of the case. But we find that none of these contentions is acceptable. It is undoubtedly true that a partner's interest in the assets of a subsisting partnership is of a very peculiar type. There cannot be any dispute about the proposition that, during the subsistence of a partnership, no partner can claim any specific share in any particular property of the firm as his own, and, as is held by the Supreme Court in Commissioner of Gift-tax v. P. Gheevarghese, Travancore Timbers and Products , it is wholly incomprehensible to pick out one of the assets of a subsisting partnership and to treat it as a subject-matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as a result of his cesser, any benefit accrued or arose to the surviving partners. On this question, one contention of Shri Patel was that, if any one item of partnership property cannot be separately treated for ascertaining the quantum of interest of one or some of the partners of the firm, it is not possible to conclude that any benefit accrued or arose to the surviving partners as a result of the cesser of interest of the deceased. He also pointed out that the surviving partners had already an interest in the goodwill of the firm and that interest survived even after the death of the deceased. This contention is not acceptable because on a closer scrutiny of the facts of the case we find that, for all practical purposes, clause (10) of the partnership agreement results in excluding the goodwill assets of the firm from being taken into account for the purpose of liquidating the share of the deceased in the net assets of the firm. On account of this exclusion only the remaining assets of the firm are burdened with the firms's liability with the result that its goodwill asset remained untouched and vested wholly in the surviving partners. Thus, the whole value of the goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a duty in cash on the happening of a particular taxable event. That event, so far as the Estate Duty Act is concerned, is the actual or deemed passing of property on the death of a person. Again, every taxing statute contemplates the levy of a tax or duty on the valuation which is arrived at on the principles enunciated in the statute itself. It is, therefore, apparent that if valuation principles stated in the statute cannot be worked out with precision, it would follow, as a necessary corollary, that the property, which is required to be valued, is not the one which is intended to be subject to tax or duty contemplated by the statute. This principle is tersely stated by Lord Wilberforce in his address in Gartside v. Inland Revenue Commissioners in the following terms : " We are concerned here with a taxing Act, and if one thing is necessary about taxes it is that the amount of them should be ascertained with precision. " This view is further fortified if we analyse the working of sections 7 and 40. Section 7 deems an interest to pass if the same ceases on death. The section thus makes the property exigible to duty if there is a cesser of interest on death. But the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance of all or any of the testator's son, John Travis Gartside, his son's wife, or children, if any. The trustees were given an absolute discretion to apply any or all of the income of the fund as they thought fit and the income not distributed was to be added to the capital of the fund. They had also power to make advancements to any child of the son out of the trust fund. After the testator's death, his above referred son married and twin sons were born to him. For 20 years the trustees accumulated the income and distributed none of it. On January 2, 1962, when the twin sons were aged 17, the trustees exercised their power of advancement. The testator's son died on May 8, 1963. At that time the value of the trust fund in each of the two deeds of advancements was about pound 23,500. The revenue claimed estate duty on these two funds of pound 23,500. The trustees resisted this claim and took out a summons to determine whether on the death of the testator's son, the estate duty did or did not become payable on the property then representing the investments made by virtue of the two deeds of advancements. The court held that, although the discretionary objects and " accumulation ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing from the 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. " On a bare perusal of these provisions of the English Law, it is clear that they are in almost the same language in which sections 7 and 40 of our Act are couched. On the question whether " interest " contemplated by section 2(1)(b) of the English Act must be one which could be measured in section 7(7) of that Act, Lord Reid has observed as under : " The first thing that strikes one is that these provisions must have been intended to be co-terminous. Section 2(1)(b) (read in conjunction with section (1) only makes the cesser of an interest the cause of liability for estate duty to the extent to which a benefit accrues or arises' by the cesser. And section 7(7) directs how the 'benefit accruing or arising from the cesser' shall be valued. On any ordinary principle or method of construction I would inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st to give rise to a charge for duty, it must be possible to say of the interest that it extended to the whole income, or to a definite part of the income. This notion of definite extension is, in my opinion, vital to the understanding and working of section 2(1)(b) and consequently of section 43 of the Act of 1940. " Much the same view is taken by the Privy Council in Attorney-General of Ceylon v. Arunachalam Chettiar , where similar provisions of the Estate Duty Ordinance No. 8 of 1919 of Ceylon were considered. It is held in that case that for section 8(1)(b) of the Ceylon Ordinance to be applicable there must be not only a cesser of interest in property but also a benefit arising by such cesser, and, therefore, the benefit, as provided by section 17(6) of the Ordinance, must be capable of valuation by reference to the income of the property which the deceased had enjoyed. Both of these cases have been cited with approval by a Full Bench of the Madras High Court in Alladi Kuppuswami . After considering the relevant provisions of the Act, Veeraswami C.J. has made the following observations which are pertinent to this point : " It would be proper, and necessary, in our op ..... X X X X Extracts X X X X X X X X Extracts X X X X
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