1. In this reference made to this court by the Tribunal under section 64(1) of the Estate Duty Act the following question has been referred for our opinion :
'Whether on the facts and in the circumstances of the case, the Tribunal was right in directing the inclusion of only the value of 1/4th of the goodwill and the tenancy rights in the principal value of the estate that passed on to the heirs on the death of Nemchand Laherchand ?'
2. The facts giving rise to the question lie in a very narrow compass. One Nemchand Laherchand was carrying on business in the name and style of Kirtilal & Co., as its sole proprietor till November 9, 1950. On November 10, 1950 he converted his proprietary business into a partnership business by admitting his son, Kirtilal, as a partner with share of 6 annas in the profits and losses. He retained for himself 10 annas share. Later on by a deed dated November 10, 1956, the shares of the two partners were reshuffled. Nemchand's share was reduced from 10 annas to 4 annas and his son's share was raised from 6 annas to 12 annas. Such alteration in the profit-sharing proportion was to take effect from November 3, 1956. Nemchand Laherchand died on February 16, 1963.
3. On March 28, 1964, Kirtilal as an accountable person filed the return under the Estate Duty Act in respect of estate that passed on to the heirs on the death of his father, Nemchand. The assistant Controller of Estate Duty held that on two occasions, one at the time when Kirtilal was admitted into partnership and the other on November 10, 1956, when the profit-sharing proportion was altered, the deceased had relinquished his right 6/16th proportion of the goodwill in favour of his son without adequate consideration and such relinquishment resulted in disposition as contemplated by Explanation 2 to clause (15) of section 2 of the Act. He was of the view that the right to share profit in the business had been transferred by the father to his son for adequate consideration but the right to share goodwill and tenancy right had been transferred by the father to his son voluntarily and without consideration. He was, therefore, of the view that on each of those occasions there was a gift to the extent of 6 annas by the father to the son in the value of goodwill and tenancy right of business. The accountable person contended that though the relinquishment on each of the occasions may be regarded as gifts, both the gifts were long prior to two years before the death of the deceased and hence they did not form part of the dutiable estate of the deceased; in other words, this contention was based on section 9 of the Act. The Assistant Controller of Estate Duty, however, took the view that the case fell under section 10 of the Act, inasmuch as, according to him, since the deceased was a partner till his death, the deceased was in possession and enjoyment of the subject-matter of gifts and he not having been entirely excluded from the possession and enjoyment of the subject-matter of the gifts, the gifts were hit by section 10 of the Act. He, accordingly, included the two sums of Rs. 41,250 being the value of two gifts effected by the deceased in favour of his son in the goodwill and tenancy rights of the business. Aggrieved by the order of the Assistant Controller of Estate Duty, Kirtilal, accountable person, preferred an appeal to the Appellate Controller of Estate Duty, who agreed with the Assistant Controller of Estate Duty that the share in the share in the partnership business carried with it two elements : one was to share the profits and other was to share the value of the goodwill and tenancy rights, but he took the view that mere admission of a partner to a right in the share of the firm did not ipso facto carry with it a right to share in the goodwill of the firm unless it was expressly provided for in the document since neither in the partnership deed dated September 16, 1950, nor in the latter agreement dated November 10, 1956, Kirtilal was specifically given a share in the goodwill of the firm, Kirtilal did not acquire any right in the goodwill and tenancy rights and as such there no rights at all in favour of the son. He accordingly took the view that the entire goodwill and tenancy rights vested in Nemchand till his death and on his death the goodwill and tenancy rights passed on to the heirs and, therefore, the entire value of the goodwill was required to be included in the dutiable estate and merely 3/4ths as was done by the Assistant Controller. Theaccountable person filed second appeal to the Tribunal. The Tribunal took the view that ordinarily when the son was taken in as a partner in the erstwhile proprietary business he became entitled to proportionate share in the goodwill and tenancy rights in proportion to the share in profits that was allotted to him and since the son had not been expressly excluded from the use and enjoyment of the benefit of the goodwill and tenancy rights under the terms of the two documents, the son became entitled to share the benefit of the goodwill and the tenancy rights in proportion to the share he had. In other words, on this aspect it reverse the view of the Appellate Controller of Estate Duty. However, since the term 'gift' had not been defined in the Estate Duty Act and since the expression 'consideration' had also not been defined, both these expressions according to the Tribunal were required to be understood in their normal connotation; the expression 'gift' in the sense in which that was defined by the Transfer of Property Act and the expression 'consideration' as was understood in the context. The Tribunal further held that the physical labour that was to be contributed by the son to the business, both on the first occasion when he was taken as a partner and also on the occasion when the profit-sharing proportions were reshuffled, constituted sufficient consideration not only for the son getting a share in the profits but also for getting a share in the goodwill and tenancy rights, and, according to the Tribunal, since the share in the goodwill and tenancy rights had been obtained by the son for adequate consideration, namely, in lieu of his working in the business as a working partner, there was no gift of any portion of the goodwill and the tenancy rights by the deceased father to his son on any of the occasions. The Tribunal, therefore, held that since there was no gift of any share in the goodwill or the tenancy rights by the father to the son on either of the occasions, there was no question of invoking the provisions of section 10 of the Act. The Tribunal, therefore, took the view that since at the time of death of the deceased, the deceased father had a share of 4 annas in the goodwill and tenancy rights, which were the assets of the partnership, only that much interest in the said assets passed on to the hears upon the death of Nemchand. The Tribunal accordingly reduce the value of the goodwill to be included in the value of the dutiable asset estate. At the instance of the Controller of Estate Duty the question set out at the commencement of the judgment has been referred to us by the Tribunal.
4. Mr. Joshi for the revenue invited our attention to 2 or 3 material provisions having a bearing on the question referred to us. In the first place, he drew our attention to section 2(15) which defined the expression 'property' and Explanation 2 thereto, which run as follows :
'2. In this Act, unless the context otherwise requires, -.......
(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........ Explanation 2. - The extinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression 'property' shall include the benefit conferred by the extinguishment of the debt or right'.
5. Section 10 on which principally reliance was placed by Joshi runs thus :
'10. Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extend that bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise.......'
6. He also referred to section 27(1), which deals with dispositions in favour of relatives, and that provision runs thus :
'27. (1) Any disposition made by the deceased in favour of a relative of his shall be treated for the purposes of this Act as a gift unless -
(a) the disposition was made on the part of the deceased for full consideration in money or money's worth paid to him for his own use or benefit; or
(b) the deceased was concerned in a fiduciary capacity imposed on him otherwise than by a disposition made by him and in such a capacity only;
and references to a gift in this Act shall be construed accordingly.......'
7. Having regard to the aforesaid provisions Joshi contended that in the instant case admittedly Nemchand was carrying on business in the name and style of Kirtilal & Co., as its sole proprietor for several years prior to November 10, 1950, and as such it can be safely presumed that it had acquired some goodwill. On November 10, 1950, he converted that business into a partnership by admitting his son, Kirtilal, as a partner and gave him 6 annas share in the profits and losses, retaining for himself 10 annas share. He argued that when the proprietary business was converted into partnership and the son was taken as a partner in the business by giving 6 annas share in the profit and loss, the father must be taken to have relinquished a portion of his rights in the goodwill to the extent of 6 annas to the son and admittedly no consideration in cash passed from the son to the father. Such relinquishment would amount to disposition of property in favour of a relative without adequate consideration and as such father continued to remain a partner in the business and continued to possess and enjoy the goodwill and tenancy rights of the business, the provisions of section 10 of the Act would be attracted. According to Joshi, since it could not be said that the donor had entirely excluded himself from possession and enjoyment in the goodwill and the benefit of tenancy rights, the 6 annas interest in the goodwill and the tenancy rights so transferred to the son would be hit by the provisions of section 10 by the Act. He further contended that similarly on the occasion of reshuffling of profit-sharing proportion, which took place on November 10, 1956, the father could be said to have relinquished his right to goodwill and tenancy rights of the business to extent of further 6 annas in favour of the son, inasmuch as, as a result of alteration in the profit-sharing proportion, the father's share was reduced from 10 annas to 4 annas and the son's was increased from 6 annas to 12 annas and even this relinquishment will have to be regarded as transfer without consideration as amounting to gift, to which the provisions of section 10 would apply.
8. It is obvious that the question whether the provisions of section 10 are attracted or not must principally depend upon the first question whether the relinquishment of 6 annas 'share in the goodwill and tenancy rights in the first instance and further relinquishment of 6 annas' share in the goodwill and tenancy rights on the occasion of reshuffling or profit-sharing proportion amount to gifts or not; in other words, unless these relinquishment amount to gifts in the sense that these were without adequate consideration, the further question as to whether the donor had or had not entirely excluded himself from possession and enjoyment of goodwill and tenancy rights would not arise. Joshi also fairly conceded that before his submission could be accepted in its entirety the revenue must establish that there was a gift in favour of the son by the deceased father on each of the two occasions. Now, it is not disputed that the expression 'consideration' or 'adequate consideration' has not been defined in the Estate Duty Act and those expressions will have to be understood in their normal connotation. It is true that the deceased had taken his relative, viz., his son, as a partner in his business when he converted his proprietary business into a partnership business and upon taking him as a partner he was given a share of 6 annas in the partnership including the goodwill and tenancy rights thereof. But the question is : Whether this was done without any adequate consideration Both in the deed of partnership as well as in the deed dated November 10, 1956, there is an express term, which runs thus :
'The partnership business shall be carried on by both the partners in mutual consultation with each other.'
9. In other words, both initially as well as on the occasion when the profit-sharing proportion was reshuffled, the intended that for whatever share granted to the son, the son will have to work in the business as a working partner, which business was carried on by the father as the sole proprietor till November 9, 1950; in other words, the son was under an obligation to devote his time and energy for the partnership business and such business was carried on by both the partners in consultation with each other. Devoting time, energy and attention by the son to the partnership business will have to be regarded as sufficient consideration for taking the son as a partner and giving him initial 6 annas share and later on increasing that share to 12 annas. As facts stand, the father ultimately died in 1963. It, therefore, does appear that on account of old age of the father he wanted his son mainly to attend and manage all the businesses and wanted him to devote all his time and energy to the business. It was for this purpose that the son was taken as a partner and was given certain share initially and later on increased, it cannot be said that the transfer of share in the profit and loss of the business including the share in the goodwill and tenancy rights was without adequate consideration. The Tribunal has recorded a finding in that behalf in the following words :
'The physical labour contributed by the son to the business amounted to a consideration for his getting the share in profits and also a share in the goodwill. That is, in our opinion, sufficient consideration. Since the acquisition of a share in the goodwill was for a consideration which was the physical labour contributed by the working partner there ws no gift of any portion of the goodwill by the deceased to his son.'
10. It was sought to be argued by Joshi that the physical labour to be contributed by the son might afford adequate consideration for giving 6 annas share initially, but at least when the profit-sharing proportion was reshuffled on November 10, 1956, for additional share of 6 annas granted to the son there was no adequate consideration and as such at least that relinquishment by the deceased in favour of his son should be regarded as a gift to which the provisions of section 10 would apply. It is not possible to accept even this contention. As we have stated above, presumably on the account of advancing age the father wanted his son to take over the business, retaining small responsibilities with himself. It would be reasonable to assume that an additional share was granted to the son in view of the son accepting additional responsibilities of the business. In any case, in view of the finding which has been recorded by the Tribunal, which is applicable to both the occasions, it would be difficult for the revenue to urge that the transaction amounted to the gift without adequate consideration.
11. In view of the above discussion, it seems to us clear that the further question as to whether the transaction would be effected by section 10 of the Act would not arise and, in our view, the Tribunal was right in coming to the conclusion that the only value that was includible in the principal value of the estate that passed on the death of Nemchand was the value of 1/4th of the goodwill and tenancy rights of the business. The question is, therefore, answered in the affirmative and in favour of the assessee.
12. The revenue will pay the costs of the reference to the assesasee.