Full Judgment Text
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PETITIONER:
CONTROLLER OF ESTATE DUTY GUJARAT-I, AHMEDABAD
Vs.
RESPONDENT:
MRUDULA NARESHCHANDRA
DATE OF JUDGMENT09/05/1986
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
PATHAK, R.S.
CITATION:
1986 AIR 1821 1986 SCR (3) 45
1986 SCC Supl. 357 1986 SCALE (1)1387
ACT:
ESTATE DUTY ACT 1953/ESTATE RULES 1953: Section 36/Rule
7(c)-Firm-Death of partner-Entire interest of deceased in
firm including goodwill passes on death-To be valued-
Includible in estate of deceased for levy of estate duty.
HEADNOTE:
One N. Kanti Lal had 28% share in a partnership firm.
The Partnership Deed, by cl. (10) provided that the firm
shall not stand dissolved on death of any of the partners
and the partner dying shall have no right whatever in the
goodwill of the firm. On his death, the respondent-
accountable person filed necessary return under the Estate
Duty Act, 1953 without including the value of the share of
the deceased in the goodwill of the firm. The Assistant
Controller of Estate Duty, however, held that the share of
the deceased in the goodwill of the firm was liable to be
included in the principal value of his property and added
the same to the value of the interest which the deceased had
in the partnership assets. The Appellate Controller of
Estate Duty confirmed the aforesaid order in appeal.
The accountable person preferred appeal before the
Appellate Tribunal contending: (1) that the deceased had no
interest in the assets of the firm and hence his share in
the goodwill did not pass at all; (2) that in view of cl.
(10) of the Partnership Deed the share of the deceased
partner in the goodwill did not pass and as such was not
liable to the charge of estate duty; and (3) that when a
partnership was a going concern, there could not be any
separate valuation of the goodwill which went with the
running business. The Tribunal rejected all the contentions
and held that in spite of cl. (10) of the partnership
agreement, the value of the goodwill to the extent of the
share of the deceased passed on his death and it was liable
to be charged to estate duty.
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On reference by the Tribunal, the High Court held: (i)
that the interest of the deceased in the firm was property
within the meaning of the provisions of the Estate Duty Act;
and (ii) that the value of the interest of the deceased in
the partnership firm would not include the goodwill of the
partnership firm.
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This Court, on the question: ’Whether the value of the
interest of the deceased in a partnership firm would include
the goodwill of the partnership firm and liable to estate
duty’, allowing the Appeal of the Revenue,
^
HELD: 1. In a partnership there is a community of
interest in which all the partners take in the property of
the firm. But that does not mean that during the subsistence
of the partnership a particular partner has any proprietary
interest in the assets of the firm. Every partner of the
firm has a right to get his share of profits till the firm
subsists, and he has also a right to see that all the assets
of the partnership are applied to and used for the purpose
of the partnership business. 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 s. 2(15) of the Estate Duty
Act, 1953. [53 D-F]
2. The goodwill of the firm is an asset in which the
dying partner has a share. It passes on the death of the
dying partner and the beneficiary of such passing would be
one who by virtue of the partnership agreement would be
entitled to the value of that asset. The fact that such
interest might devolve not on the legal representatives but
on a different group or category of persons or that from the
goodwill the legal representatives might be excluded, would
not make any difference for the purpose of assessment of
estate duty. The entirety of the interest of the deceased
partner that would pass, which necessarily included
goodwill, would be includible in the estate. The valuation
of such entire interest has to be determined as provided
under s. 36 of the Estate Duty Act, 1953 read with Rule 7(2)
of the Estate Duty Rules, 1953. [61 E-G]
3. 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. The goodwill of the firm
after the death of the dying partner does not get diminished
or extinguished. Whoever has the benefit of that firm has
the benefit of the value of that goodwill. Therefore, if by
any
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arrangement, for instance, clause (10) of the partnership
agreement in the instant case, heirs do not get any share in
the good will, the surviving partners who will have the
benefit of the partnership will certainly have that benefit.
Therefore, as a result of the death of the dying partner,
there is cesser of interest as well as accrual or arising of
benefit of the said cesser. [62 F; 57 B-D]
4. Difficulties in making apportionment do not make a
taxable item non-taxable.[58 C]
Perpetual Executors and Trustees Association of
Australia Ltd. v. Commissioner of Taxes, 1954 A.C. 114 = 25
I.T.R. (ED) 47, Attorney- General v. Boden and Another, 1912
(I) K.B. 539, Addanki Narayanappa & Anr. v. Bhashara
Krishnappa and 13 ors., A.I.R. 1966 S.C. 1330=[1966] 3 SCR
400, Commission of Income-tax, Madras v. Best and Co.
(Private) Ltd., 60 I.T.R.11 and Khushal Khemgar Shah v. Mrs.
Khorshed Banu, [1970] 3 SCR 689 relied upon.
Controller of Estate Duty, Madras v. Ibrahim Gulam
Hussain Currimbhoy, 100 I.T.R. 320, State v. Prem Nath, 106
ITR 446, Controller of Estate Duty, Bombay City I v.
Fakirchand Fatchchand Sachdev, 134 ITR 268, Controller of
Estate Duty v. Kanta Devi Taneja, 132 ITR 437 and Controller
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of Estate Duty, West Bengal v. Annaraj Mehta and Deoraj
Mehta, 119 ITR 544, approved.
Attorney-General of Ceylon v. AR. Arunachalam Chettiar
and Others, 34 ITR 20 E.D., Alladi Kuppuswami v. Controller
of Estate Duty, Madras, 76 ITR 500 and Smt. Surumbayi Ammal
v.Controller of Estate Duty, Madras, 103 ITR 358,
distinguished.
Controller of Estate Duty v. Smt. Ram Sumarni Devi, 147
ITR 233 and P. Abdul Sattar v. Controller of Estate Duty,
150 ITR 206, overruled.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1349(NT)
of 1974.
From the Judgment and Order dated 20th June, 1973 of
the Gujarat High Court in Estate Duty Ref. No. 3 of 1970.
S.C. Manchanda, K.P. Bhatnagar and Miss A. Subhashini
for the Appellant.
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S.T. Desai and S.C. Patel for the Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. This is an appeal by
certificate granted by the High Court of Gujarat by its
order dated 2nd May, 1974 from the judgment and order dated
28th June, 1973 in Estate Duty Reference No. 3 of 1970 under
section 65(1) of the Estate Duty Act, 1953 (hereinafter
called the ’Act’).
One Nareshchandra Kantilal died on 13th September,
1962. He was a partner in the firm of Messrs G.
Bhagwatiprasad & Co. having 28% share in the partnership.
The partnership was by the document of partnership which is
dated 6th June, 1957. On the death of the deceased, 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 value
of the share of the deceased in the goodwill of the firm did
not arise in view of clause (10) of the partnership deed.
Clause (10) was as follows:
"The firm shall not stand dissolved on death of
any of the partners and the partner dying shall
have no right whatever in the goodwill of the
firm".
The accountable person contended on the basis of this
clause that on the death of the deceased, his heirs had no
right in the goodwill of the firm, and as such 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 said
contention. He valued the goodwill at Rs.2,16,900. The share
of the deceased in the goodwill was worked out from this
value at Rs.60,732. The Assistant Controller also worked out
the value of the interest which the deceased had in the
partnership assets and added to the above referred amount of
Rs.60,732 as the value of his share in the goodwill.
The accountable person, being aggrieved, preferred an
appeal before the Appellate Controller of Estate Duty,
Bombay. He by and
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large confirmed the order of the Assistant Controller and
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made only a slight reduction in the value of the goodwill.
The accountable person thereafter went up in appeal before
the Appellate Tribunal. She raised before the Tribunal two
principal contentions, namely, (1) that the deceased had no
interest in the assets of the firm and hence his share in
the goodwill did not pass at all, and (2) as, according to
the partnership agreement, the partnership was to continue
on the death of any of the partners and as it was further
stipulated that the deceased would have no interest in the
goodwill of the firm on his death, his share in the goodwill
did not pass and as such was not liable to the charge of
estate duty. The Tribunal rejected both these contentions.
It was contended on behalf of the accountable person
before the Tribunal that when a partnership was a going
concern there could not be any separate valuation of the
goodwill which went with the running business. The Tribunal
noted that there was no question of valuing the goodwill
separately because what was to be valued was the totality of
interest of a partner in partnership assets including the
value of the goodwill. The Tribunal eventually decided the
matter relying upon the decision of the Privy Council in
Perpetual Executors and Trustees Association of Australia
Ltd. v. Commissioner of Taxes, 1954 A.C. 114 = 25 I.T.R.
(ED) 47. The Tribunal held that in spite of clause (10) of
the partnership agreement, the value of the goodwill to the
extent of the share of the deceased passed on the death of
Nareshchandra Kantilal and it was liable to be charged
estate duty.
Three questions of law were referred to the High Court.
These were:
"1. Whether, on the facts and in the circumstances
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?"
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The last question was not pressed before the High
Court. The High Court, therefore, did not give any answer.
The first question, the High Court, answered in favour of
the revenue and in the affirmative and the second question
was answered in the negative. As the first question was in
favour of the revenue and there was no appeal by the
accountable person this appeal is concerned only with the
second question namely ’whether the value of the interest of
the deceased in the said partnership would include the
goodwill of the partnership firm’. The High Court answered
the question in the negative and in favour of the
accountable person as mentioned hereinbefore.
The High Court noted that the primary object of every
taxing statute was to recover a tax or duty in cash on the
happening of a particular taxable event. This event under
the Act, is the actual or deemed passing of property on the
death of a person. Every taxing statute, according to the
High Court, contemplated the levy of a tax or duty on the
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valuation date which has to be arrived at on the principles
stated in the statute itself. If the valuation principles
stipulated in the Act could not be worked out with any
precision in respect of any property it would follow as a
necessary corollary that that property was not one which was
intended to be subject to tax or duty contemplated by the
statute. This basic principle, according to the High Court,
should be applied while construing sections 7 and 40 of the
Act.
Section 7 of the Act, according to the High Court would
apply only if two conditions were satisfied, namely (1) that
there was a cesser of interest in the property on the death
of a person, and (2) an accrual or arising of benefit to
another as a result of the said cesser. In order to assess
the tax liability the value of the benefit had to be worked
out and section 40 of the Act provides the basis for the
valuation. Section 40 clearly postulates that the property
in which interest had ceased must be capable of yielding
income. If the ’benefit’ arising under section 7 on the
cesser of an ’interest’ could not be measured under section
40, the cesser of such interest, according to the High Court
did not attract payment of estate duty under section 7 of
the Act.
A partner in a firm has a marketable interest in all
the capital assets of the firm including the goodwill even
during the subsistence of the partnership. Interest in
goodwill was property within the meaning of section 2(15) of
the Act, according to the High Court. But the goodwill of a
firm, in the opinion of the High Court, standing by itself
could not earn any income. In a case where it was specially
stipulated
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that on the death of any of the partners, the partnership
shall not stand dissolved and that the heirs of the deceased
partner shall have no right whatsoever to claim any share in
the goodwill of the firm, the benefit arising to the other
partners on the cesser of interest in the goodwill, on the
death of the partner could not be measured in terms of
section 40. The High Court, therefore, was of the view that
such a benefit was not liable to estate duty under section 7
of the Act.
The High Court was, therefore, of the view that the
facts of this case were not covered by either section 5 or
section 7 and answered the question No. 2 in the negative.
In order to appreciate this controversy, it is
necessary to refer first to section 2(15) of the Estate Duty
Act. Section 2(15) deals with ’property’. It provides as
follows:
" ’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 with which we are not
presently concerned.
Section 2(16) deals with ’property passing on the
death’ and is as follows:
" ’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" .
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The imposition of estate duty is by sub-section (1) of
section 5. It stipulates that in case of every person dying
after the commencement of this Act, there shall, save as
hereinafter expressly provided, be levied and paid upon the
principal value ascertained as provided in the Act, all
property, settled or not settled including agricultural
land......., which passes on the death of such person, a
duty called ’estate duty’ at the rates fixed in accordance
with section 35.
Section 6 of the Act deals with property which is
deemed to pass
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and provides that property which the deceased was at the
time of his death competent to dispose of shall be deemed to
pass on his death.
Section 7(1) deals with interest ceasing on death and
is as folllows:
"(1) Subject to the provisions of this section,
property in which the deceased or any other person
had an interest ceasing on the death of the
deceased shall be deemed to pass on the deceased’s
death to the extent to which a benefit accrues or
arises by the cesser of such interest, including,
in particular, a coparcenary interest in the joint
family property of a Hindu family governed by the
Mitakshara, Marumakattayam or Allyasantana law.
The other sub-sections of the section deal with special
cases of different communities, the details of which need
not be considered.
The other relevant provisions which need be considered
deal with the value which is chargeable. Sub-section (1) of
section 36 of the Act stipulates that the principal value of
any property shall be estimated to be the price which, in
the opinion of the Controller, it would fetch if sold in
open market at the time of the deceased’s death. Sub-section
(2) of the section stipulates that in estimating the
principal value under this section the Controller shall fix
the price of the property according to the market price at
the time of the deceased’s death and shall not make any
reduction in the estimate on account of the estimate being
made on the assumption that the whole property is to be
placed on the market at one and the same time, provided that
where it is proved to the satisfaction of the Controller
that the value of the property has depreciated by reason of
the death of the deceased, the depreciation shall be taken
into account in fixing the price.
Sections 37, 38 and 39 are provisions with which the
present controversy is not directly concerned. Section 40
deals with the valuation of benefits from interests ceasing
on death. This is relevant and is as follows:
"The value of the benefit accruing or arising 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
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(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."
The other provisions of the Act need not be considered
for the present controversy.
Section 14 of The Indian Partnership Act 1932
recognises that subject to contract between the partners,
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the property of the firm would include all the property and
rights and interests in property originally brought into the
stock of the firm or acquired by purchase or otherwise, by
the firm or for the purpose or in the course of business of
the firm and includes the goodwill of the business. It
further provides that unless contrary intention appears
property and rights in the property acquired with money
belonging to the firm are deemed to have been acquired for
the firm. Section 15 of the said Act provides that the
property of the firm shall be held and used exclusively for
the purpose of the firm. In a partnership there is a
community of interest in which all the partners take in the
property of the firm. But that does not mean that during the
subsistence of the partnership a particular partner has any
proprietary interest in the assets of the firm. Every
partner of the firm has right to get his share of profits
till the firm subsists and he has also a right to see that
all the assets of the partnership are applied to and used
for the purpose of partnership business. Section 29 of the
said Act also shows that he can transfer his interest in the
firm either absolutely or partially. He has also the right
to get the value of his share in the net asset 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 as mentioned hereinbefore.
Our attention was drawn to the decision of the King’s
Bench Division in the case of Attorney-General v. Boden and
Another, [1912] (1) K.B. 539, in support of the contention
on behalf of the revenue.
There the Court was concerned with section 1 of the
Finance Act, 1894 of United Kingdom. By the said provision,
estate duty was, except as in the Act provided, payable upon
the principal value of all property which passes on the
death of every person dying after the
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date therein mentioned. By seation 2, sub-section (1),
property passing on the death of the deceased was deemed to
include.....(b) property in which the deceased had an
interest ceasing on the death of the deceased, to the extent
to which a benefit accrues or arises by the cesser of such
interest;......(c) property which would be required on the
death of the deceased to be included in an account under
section 38 of the Customs and Inland Revenue Act, 1881, as
amended by section 11 of the Customs and Inland Revenue Act,
1889. There, a father and his two sons carried on the
business of lace or plain net manufacturers under a deed of
partnership which included covenants (among others) to the
following effect:- Neither of the sons was, without the
consent of the father, to be directly or indirectly engaged
in any trade or business except on account and for the
benefit of the partnership; both the sons were bound to give
so much time and attention to the business as the proper
conduct of its affairs required; the father was not bound to
give more time or attention to the business then he should
think fit; if the father should die his share was to accrue
to the sons in equal shares subject only to their paying out
to his representatives the value of his share and interest
at his death as ascertained by an account to be made as on
the day of his death with all proper valuations, but without
any valuation of or allowance for goodwill, which goodwill
was to accrue to the sons in equal shares. The father died,
the value of his share and interest at his death was
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ascertained by an account taken as directed by the deed of
partnership without any valuation of or allowance for
goodwill. The share and interest so ascertained amounted to
a large sum, and estate duty was paid on that sum. The Crown
claimed estate duty on the value of the father’s share in
the goodwill on the ground that it was (1) property which
passed on the death of the father within section 1 of the
Finance Act, 1894, or (2) property in which the deceased had
an interest ceasing on his death in which a benefit accrued
or arose to the sons by the cesser of that interest within
section 2, sub-section 1(b) of the Act, or (3) property
passing under a settlement by deed whereby an interest for
life was reserved to the father, and therefore property
which would be required on the death of the father to be
included in an account under section 38 of the Customs and
Inland Revenue Act, 1881, as amended by section 11 of the
Customs and Inland Revenue Act, 1889, as further amended by
and within the provision of section 2, sub-section 1(c), of
the Finance Act, 1894, or (4) an interest provided by the
father in which a beneficial interest accrued or arose by
survivorship on his death within section 2, sub-section 1(d)
of the Act.
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The Court deciding on the evidence that the goodwill of
the business was of small value held that, having regard to
the obligation of the sons under the partnership deed, the
share and interest of the father in the goodwill of the
busines passed on the death of the father to the sons by
reason only of a bona fide purchase for full consideration
in money’s worth paid to the father for his own use and
benefit, within the meaning of section 3, sub-section(1) of
the Act. It was further held that the share and interest of
the father in the goodwill of the business was not (1)
property which passed on the death of the father within the
meaning of section 1 of the Act, nor (2) an interest for
life reserved to the father within the meaning of section
38, subsection 2(c) of the Customs and Inland Revenue Act,
1881, as amended by section 11 of the Customs and Inland
Revenue Act, 1889. It was further held that it was a benefit
accruing or arising to the sons by the cesser of an interest
which the father had in property and which ceased on his
death within section 2 sub-section 1(b) of the Act.
The High Court, on the analysis of this case which was
placed before it, came to the conclusion that clause 10 of
the present partnership deed with which we are concerned is
entirely different. In the partnership agreement in Boden’s
case, the interest of the deceased passed to his legal
representatives immediately after his death because his
share was to accrue to his partnership who were his sons
subject only to their paying to his legal representatives
the value of their share as on the date of death ascertained
by proper valuation. This decision, in our opinion, must be
understood in the light of the facts of that case and though
there is a ring of similarity with the facts of the present
case. Though clause 10 of the present agreement is different
on the aspect of section 7 of the Act, this decision
certainly supports the revenue’s contentions.
In Perpetual Executors and Trustees Association of
Australia Ltd. v. Commissioner of Taxes of the Commonwealth
of Australia (supra) (E.D) the Privy Council had to deal
with a case where the principal asset of a testator was his
interest in a partnership pursuant to a deed of partnership
which, inter alia, conferred option on the surviving
partners to purchase the testator’s share in the capital on
his death and further provide that "in computing the amount
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of purchase money payable on account of the exercise of any
option, no sum shall be added or taken into account for the
goodwill." It was held by the Privy Council that the whole
of the testator’s interest including goodwill was assessable
to duty. In so far as the Boden’s case decided that the
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goodwill did not pass was dissented from. But the moot
question is, what happens to the share of the partner in the
goodwill of the firm.
Clause 10 of the partnership deed in the instant case
states as indicated before that the firm shall not stand
dissolved on the death of any of the partners. Therefore
death of any of the partners will not dissolve the
partnership firm and so long as partnership firm exists,
goodwill as an intangible asset will belong to all the
partners. What the clause says that on the death of the
partner, the partner dying shall have no right whatsoever in
the goodwill of the firm. It is clear, there-fore, that
goodwill exists up to the death among the partners. If it
does, then the property in the goodwill will also exist in
the partners. After his death, the partner shall have no
right. It means to convey that as a result of inheritance,
the heirs of the partners will not get any share but it
cannot evaporate nor can the parties by agreement defeat the
rights of the revenue. The very moment life ceases, the
right of the deceased in the asset ceases and at that moment
the property shall pass and/or shall be deemed to pass on.
Jawaharlal Nehru in ’The Discovery of India’ quotes
Aurobindo Ghose thus:
"Aurobindo Ghosh writes comewhere of the present
as ’the pure and virgin moment’ that razor’s edge
of time and existence which divides the past from
the future, and is, and yet, instantaneously is
not. The phrase is attractive and yet what does it
mean? The virgin moment emerging from the veil of
the future in all its naked purity, coming into
contact with us, and immediately becoming the
soiled and stale past. Is it we that soil it and
violate it? Or is the moment not so virgin after
all, for it is bound up with all the harlotry of
the past?" (1983 Impression p. 21)
So therefore in that razor’s edge of time and existence
which divides the past from the future, and is, and yet,
instantaneously is not, the property indubitably passes on,
to whom depends upon the facts and circumstances of a
particular case. If property exists, as it must as the
clause does not and indeed cannot say that goodwill
vanishes, then share of the partner exists. If that is so
then the title to that property cannot be in the vacuum.
The High Court at page 309 of the report has observed
that interest of a dying partner automatically comes to an
end on his death. The High Court further stated that if an
interest in any property came
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to an end at a particular point of time, nothing survived
which could be inherited by the heirs. We are unable to
accept this position. The moment the life comes to an end,
’the razor’ edge of time and existence which divides the
past from the future, and is, and yet, instantaneously is
not,’ at that time property passes or is deemed to pass. The
goodwill of the firm after the death of the dying partner
does not get diminished or extinguished. Whoever has the
benefit of that firm has the benefit of the value of that
goodwill. Therefore if by any arrangement, for instance,
clause (10) of the partnership agreement in the instant
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case, the heirs do not get any share in the goodwill, the
surviving partners who will have the benefit of the
partnership will certainly have that benefit. The High Court
was right in observing at page 312 of the report that
section 7 of the Act might apply to the facts of a given
case if it could be shown that there was a cesser of any
interest resulting in some form of benefit. Indeed in this
case whoever gets the partnership firm is the gainer.
Therefore, as a result of the death of the dying partner,
there is cesser of interest as well as accrual or arising of
benefit of the said cesser. It is well-settled that during
the subsistence of the partnership, no partner can claim any
specific share in any particular items of the partnership
assets.
A partner’s interest in running partnership is not
specific and is not confined to any specific item of
partnership property but that does not mean that the partner
has no interest in any individual asset of the firm. His
interest obviously extends to each and every item of firm’s
asset. See the observations in the case of Addanki
Narayanappa & Anr. v. Bhaskara Krishnappa and 13 Ors.,
A.I.R. 1966 S.C. 1300[1966] 3 S.C.R. 400. So the goodwill of
the firm was an asset in which dying partner had a share. It
passed from the death of the dying partner and the
beneficiary of such passing would be one who by virtue of
the partnership agreement would be entitled to the value of
that asset.
The question is how should such asset be valued? Under
the Act, the levy of the estate duty is on every asset that
will pass on the death of the deceased. Part V of the Act
deals with the valuation of assets that is chargeable to tax
under the Act. Sub-section (1) of section 36 provides that
the principal value of any property shall be estimated to be
the price which, in the opinion of the Controller, it would
fetch if sold in the open market at the time of the
deceased’s death. Subsection (2) of section 36 further
stipulates that in estimating the principal value under this
section the Controller shall fix the price of the property
according to the market price at the time of the deceased’s
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death and shall not make any reduction in the estimate on
account of the estimate being made on certain assumptions.
Section 40 deals with the valuation of benefits from
interests ceasing on death.
It has been canvassed before the High Court on behalf
of the accountable person and it found favour with the High
Court that clause (b) of section 40 of the Act which deals
with the valuation of benefit of interest arising on death
would be wholly inapplicable with the facts and
circumstances of this case. We are unable to accept this
position.
Difficulties in making apportionment does not make a
taxable item non-taxable. See in this connection the
observations of this Court in Commissioner of Income-tax,
Madras. v. Best and Co. (Private) Ltd., 60 I.T.R. 11.
Reliance was placed on behalf of the accountable person
on a decision of the Judicial Committee in Attorney-General
of Ceylon v. AR. Arunachalam Chettiar and Others, 34 I.T.R.
20 E.D. The facts of that case and the clauses with which
the Judicial Committee was concerned there were entirely
different. There the son had merely a right to be maintained
by the Karta out of the common fund to an extent in the
Karta’s absolute discretion and there was no basis of
valuation which in relation to such an ’interest’ would
conform to the scheme prescribed under section 17(6) of the
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Ordinance with which the Judicial Committee was concerned.
A full bench of the Madras High Court in the case of
Alladi Kuppuswami v. Controller of Estate Duty, Madras, 76
I.T.R. 500, had to construe the effect of a Hindu Women’s
Rights to Property Act, 1937 and to consider the nature of
the right of the widow in the property. It was found that at
the death of the widow, there was no cesser of any interest
she had in the joint family property and, in any case, her
interest being entirely undefined, it lapsed on her death
resulting in no change in the coparcenership as such and her
interest could not properly be regarded as an interest in
property within the meaning of section 7(1) of the Act. Our
attention was drawn to certain observations of Veeraswami,
C.J. at page 507 of the report wherein it was observed that
it was only property that passed in the sense of passing
hands by way of inheritance, or other form of devolution
which seemed to attract section 5. Likewise, for purposes of
section 6, it must be property which the deceased at the
time of his death was competent
59
to dispose of. So also, for the application of the first
part of section 7(1), it should be such interest in
property, as on its cesser the benefit that accrues or
arises should be referable to the whole or less than the
whole income of the property. The Chief Justice had observed
that the implication was that if that measure in terms of
income of the property was not apposite to the cesser of an
interest, it would not be an interest such as was
contemplated by section 7(1) of the Act. It is not necessary
to examine this proposition in any greater detail because in
our opinion under section 5 of the Act read with section 36,
valuation can be made in the instant case.
The Madras High Court in Controller of Estate Duty,
Madras v. Ibrahim Gulam Hussain Currimbhoy, 100 I.T.R. 320,
observed that the goodwill being an asset of the firm
belonged to the firm, i.e., to all the partners, and the
death of the deceased partner did not extinguish his share
in the goodwill but resulted in the augmentation of the
interest of the surviving partners in the goodwill in view
of clause 14 of the partnership deed in that case. Clause 14
was as follows:
"The retiring partner or the legal representatives
of the deceased partner shall not be entitled to
the goodwill of the business as the surviving or
continuing partners alone shall be entitled to the
goodwill and to continue to carry on the business
under the same name and style."
And hence there was a passing of the deceased’s share in the
goodwill even if there was no devolution of the deceased’s
interest in the goodwill on the legal representatives. The
interest in the goodwill which the deceased possessed and
could dispose of along with his entire interest in the firm
at the time of his death came to devolve on the surviving
partners and their share in the goodwill was augmented to
the extent of the share of the deceased as per clause 14 of
the partnership deed in that case and the Madras High Court
held that section 5, of the Act applied. Section 5, we have
noted, is applicable in the instant case in the sense that
property passed on the death of the deceased partner and if
that is so, section 40 would not have any application in the
valuation. On this aspect, the Madras High Court was unable
to agree with the Gujarat High Court’s decision under
appeal. The Madras High Court relied on the decision of this
Court in Khushal Khemgar Saha v. Mrs. Khorsed Banu, [1970]3
S.C.R. 689.
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Our attention was also drawn to a decision of the
Madras High
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Court in the case of Smt. Surumbayi Ammal v. Controller of
Estate Duty, Madras, 103 I.T.R. 358. But the question under
controversy was different in that case and no useful purpose
would be served by examining that case in detail.
The full bench of Punjab and Haryana High Court in the
case of State v. Prem Nath, 106 I.T.R. 446, held that the
goodwill of a firm was an asset of the firm, the share of
the deceased partner in which, along with his share in the
other assets of the firm, devolved for the purposes of
estate duty, on his death, upon his legal representatives
notwithstanding any clause in the deed of partnership to the
effect that the death of a partner should not disolve the
firm and that the surviving partners were entitled to carry
on the business on the death of the partner. The Punjab &
Haryana High Court noted that the decision under appeal of
the Gujarat High Court did not consider the question whether
the devolution of the goodwill on the surviving partners on
the death of the deceased partner was itself not sufficient
to constitute passing of the property within the meaning of
section 5 of the Act. It noted that this view of the Gujarat
High Court was contrary to the Privy Council’s decision
referred to hereinbefore and that of the Madras High Court’s
view noted earlier.
The Bombay High Court in the case of Controller of
Estate Duty, Bombay City-I v. Fakirchand Fatehchand Sachdev,
134 I.T.R. 268, came to the conclusion that the charging
provisions and the computation provisions in the Estate Duty
Act, 1953 constituted an integrated scheme, and if in a
given case it was not possible to compute the value of a
particular property passing on death, then that property did
not become exigible to the charge of estate duty. Where
certain property was deemed to pass under section 7(1) of
the Act, estate duty thereon would be chargeable under
section 5, but the value of the benefit accruing or arising
from the cesser of an interest ceasing on the death of the
deceased would have to be computed under section 40 and if
it could not be computed, then such a benefit was not liable
to the charge of estate duty. The goodwill of a firm was one
of the properties or assets of a firm. Merely because it was
an intangible asset, it did not stand on a diferent footing
from the tangible assets of the firm, but in making up the
final accounts it had to be taken together with the other
assets of the firm in arriving at the value of the total
assets and for deducting therefrom the liabilities as
provided by law and in paying to the partners their share in
the balance so arrived at. Where a partnership was dissolved
by the death of a partner, his share in the firm
61
passed on his death to his legal representatives. Where a
partnership A was not dissolved on the death of a partner
but the surviving partners became entitled to continue the
partnership business, the deceased partner’s share passed to
his surviving partners subject to their making payment to
the legal representatives of the deceased partner of the
amount of the value of his share in accordance with the
provisions of the deed of partnership. A partner did not
have a defined share in the goodwill of the firm and the
estate duty authorities could not regard it as a separate
property by itself apart from the other assets and
liabilities of the firm and include its value in the estate
of a deceased partner under section S. The Bombay High Court
could not agree with the view of the Gujarat High Court
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under appeal.
In the case of Controller of Estate Duty v. Kanta Devi
Taneja, 132 I.T.R. 437, the Gauhati High Court held that
passing of property was not a mere change of source or title
but change of beneficial possession or enjoyment. The
interest of a partner in a partnership firm was property
within the meaning of section 2(15) of the Estate Duty Act,
1953, and such interest extended to the share of the
partnership including goodwill. Therefore, on the death of a
partner, his interest in the entire unit of the firm
including goodwill passes, irrespective of the provisions of
the partnership deed as to its final devolution.
The Calcutta High Court in the case of Controller of
Estate Duty, West Bengal v. Annaraj Mehta and Deoraj Mehta,
119 I.T.R. 544 had occasion to consider this question and
held that what passed on the death of a partner was his
share in the firm, that is, his interest in the entire unit
of the firm. This had to include goodwill. The fact that
such interest might devolve not on the legal representatives
but on a different group or category of persons or that from
the goodwill of the legal representatives might be excluded
would not make any difference for the purpose of assessment
to estate duty. The entirety of the the interest of the
deceased partner that would pass, which necessarily included
goodwill, would be includible in the estate. The valuation
of such entire interest had to be determined as provided
under section 36 of the Estate Duty Act, 1953 read with rule
7(c) of the Estate Duty Rules, 1953. Goodwill as such could
not be valued, according to the Calcutta High Court, for
inclusion in the estate of the deceased for purposes of
estate duty. The High Court observed at page 552 of the
report as follows:
"We hold that the Tribunal’s finding that the
goodwill in
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the firm, Messrs. Ashok Foundary and Metal Works,
did not pass on the death of the deceased is
incorrect but the finding that the valuation of
the goodwill as such could not be included in the
estate of the deceased for the purpose of the
estate duty is correct. Goodwill being part of the
entire assets of the firm, the entire share of the
deceased therein has to be valued in accordance
with law and this value has to be included in the
estate for levy of estate duty."
The Allahabad High Court in the case of Controller of
Estate Duty v. Smt. Ram Sumarni Devi, 147 I.T.R. 233,
followed the decision under appeal and was of the view that
the goodwill could not be included in the value of the
property passing on the death of a partner.
In P.T. Abdul Sattar v. Controller of Estate Duty, 150
I.T.R. 207, the Kerala High Court came to the conclusion
that under clause 15 of the deed it had to construe,
provided that in the event of death or retirement of a
partner, such deceased or retiring partner would not be
entitled to any goodwill of the firm. A had died in 1969 and
the Asst. Controller held that the interest of A in the
goodwill of the firm passed on his death and this was upheld
by the Tribunal. It was held by the High Court that under
clause 15, the interest of A in the goodwill of the firm
automatically came to an end on his death. Property in the
goodwill did not, therefore, pass on his death. We are,
however, for the reasons we have indicated before, unable to
accept this conclusion.
In the aforesaid view of the matter, we are of the
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opinion 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 Controller of
Estate Duty, West Bengal v. Annaraj Mehta and Deoraj Mehta
(supra) .
The second question must, therefore, be answered in the
affirmative and in favour of the revenue. The appeal is,
therefore, allowed. In the facts and circumstances of the
case, parties will pay and bear their own costs.
Consequential orders in accordance with law and in
consonance of this decision should be passed by the Tribunal
upon notice, to all necessary parties.
A.P.J . Appeal allowed.
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