Controller of Estate Duty Gujarat,
Ahmedabad Vs. Mrudula Nareshchandra [1986] INSC 118 (9 May 1986)
MUKHARJI, SABYASACHI (J) 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.
46 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.
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
47 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 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.
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.
48 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 49 large confirmed the order of the Assistant Controller and 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?" 50 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
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 51 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" .
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 52 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 53 (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, 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 54 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 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.
55 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 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 56 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
57 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 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 58 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 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.
Our attention was also drawn to a decision of
the Madras High 60 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 there from 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 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 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 62 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 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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