1. The following questions have been referred under Section 64(1) of the Estate Duty Act, 1953, at the instance of the Controller of Estate Duty, Poona:
(1) Whether on the facts and circumstances of the case, it could be rightly held that only 1/3rd share of the goodwill and riot the full value of the goodwill passed on the death of the deceased for the purposes of Estate Duty Act, 1953?
(2) Whether on the facts and circumstances of the case, it could be rightly held that there was no gift directly or indirectly of the goodwill of the business by the deceased to his son and grandson?
2. The facts on which these questions arise are: One Ibrahim Kasam Amliwala who died on February 1, 1958 was the sole proprietor of the business which was carried on under the name and style of Messrs Ibrahim Kasam till 1937. He entered into a partnership with his son Ismail Ibrahim which is evidenced by the partnership deed dated July 7, 1937. Under the terms of this deed the net profit or loss of the business after payment of all expenses was to be divided between the partners equally. Each partner was to 'afford every assistance in his power is carrying on the business of the firm for their mutual advantage'. By a partnership deed dated May 11, 1950 the grandson of Ibrahim Kasam, that is, the son of the other partner Ismail Ibrahim was taken as a working partner and a new partnership came to be formed consisting of these three persons. The new partner was Mohomed Ismail. Clause 5 of the partnership deed dated May 11, 1950 expressly provided that the third partner would be a working partner. After the death of Ibrahim, in proceedings for assessment of estate duty, the Assistant Controller of Estate Duty took the view that the share in the goodwill of the firm relinquished by the deceased in favour of his relations, namely, the! son and the grand-son was to be treated as disposition in favour of the relation without adequate consideration and brought to tax. The share so relinquished was, according to the Assistant Controller, two-thirds. The value of the goodwill of the firm was determined at Rs. 2,01,000. The share of the deceased in the goodwill at the time of his death was taken to be one-third, that is, worth Rs. 67,000, which was brought to tax under Section 5 of the Estate Duty Act, whereas the remaining two-third valued at Rs. 1,34,000; was brought to tax under Section 10 of the Estate Duty Act.
3. The accountable person, that is, Ismail Ibrahim filed an appeal which was decided by the Appellate Controller of Estate Duty. The Appellate Controller took the view that neither the partnership deed of 1937 nor of 1950 mentioned that the newly admitted partner was given a share in the goodwill of the business and that the mere admission of a partner to a right to share the profits of the business does not automatically carry with it a right to share the goodwill of the business unless it is expressly provided in the partnership deed or other agreement between the partners. Thus according to the Appellate Controller, as the partnership deed was silent about the goodwill, it must be presumed that the deceased continued to be the sole owner of the goodwill even after the admission of his son and grand-son as partners. The entire goodwill was, therefore, directed to be computed under Section 5 of the Estate Duty Act and the application of Section 10 was held to be misconceived.
4. The Income-tax Appellate Tribunal in the appeal filed by the accountable person took the view that the partnership deed of 1937 provided that the assets and liabilities which were transferred to the firm 'shall be owned and managed by the firm' and that a similar clause was also incorporated in the deed dated May 11, 1950. These clauses, according to the Tribunal showed that the assets and liabilities were owned by the firm which was constituted by three partners each of whom had one-third share. Thus the Tribunal took the view that only one-third share of the goodwill passed on the death of Ibrahim and directed that the value thereof alone should form part of the estate of the deceased. The Controller of Estate Duty not being satisfied with, this decision of the Tribunal had asked for the questions reproduced earlier to be referred to this Court.
5. We shall first deal with question No. 2 referred to us. Mr. Joshi on behalf of the Revenue has contended that initially when the deceased took his son as a partner, the goodwill of the firm which had vested in the deceased exclusively must be deemed to have been gifted to the extent of half of the value of the goodwill in favour of his son and that when again for the second time the partnership was reconstituted and the grand-son was taken as a partner, there must be assumed to have been made a further gift of the goodwill in favour of the grand-son who came to own one-third share in the assets of the partnership.
6. Now, there can be no dispute that goodwill of a partnership firm is an asset and property of that firm. Section 14 of the Partnership Act provides as follows:
Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Thus Section 14 of the Partnership Act treats goodwill of the business as the property of a partnership firm. When the partnership commenced in the instant case, the goodwill of the business carried on by Ibrahim exclusively became the property of the partnership.
7. The effect of Clause 5 of the first partnership deed dated July 7, 1937, when it provides that the net profit or loss of business shall be divided between the partners equally and further that the assets and liabilities of the firm shall be owned and managed by the firm is that each of the two partners had an equal share in the assets of the firm. Therefore, Ismail became owner of half share in the goodwill of the firm. Similarly, as a result of the partnership agreement dated May 11, 1950, each one of the three partners became owner of one-third share in the value of the goodwill of the firm. There is no doubt, therefore, that the share of Ibrahim came to be reduced initially to half and then to one-third.
8. The only question which, therefore, requires to be considered is whether there was a gift of any asset to the son and the grand-son so as to attract the provisions of Section 10 of the Estate Duty Act.
9. The only provision which was called in aid on behalf of the Revenue is Section 10 of the Estate Duty Act. In so far as is material, the main provision in Section 10 reads as follows:
Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extent that bond 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:
The argument appears to be that when Ibrahim entered into partnership first with his son and then when both of them entered into a partnership with Mohomed Ismail, the share in the goodwill was not retained by the partners to the entire exclusion of the donor Ibrahim or of any benefit to him. For the applicability of Section 10 of the Estates Duty Act, the relinquishment of the share in the goodwill in favour of the son and the grand-son must first be shown to be a gift, that is to say, that relinquishment must be shown to be without any consideration. Unless it is shown that an element of gift was involved, it will not be possible to invoke the provisions of Section 10 of the Estate Duty Act. We have referred earlier to the material clauses in both the agreements relating to partnership. Those clauses will indicate that so far as the son Ismail was concerned, he was to take part in the management of the affairs of the partnership and so far as the grandson was concerned, he was to be a working partner, which meant that he had to work actively on behalf of the firm and for the benefit of the firm. Where such were the terms of the partnership deeds which required the new partners to devote their time and energy to the partnership business and the partnership business was to be carried on by the partners in consultation with each other, it must be held that there was sufficient consideration for initially taking the son and later the grand-son as a partner. It cannot, therefore, be said that there was any transfer of any asset or property in favour of the other partners in the form of share in the goodwill without any consideration.
10. We are supported in the view which we have taken by a decision of a division Bench of this Court consisting of Kantawala C.J. and Tulzapurkar J. (as he then was) in The Controller of Estate Duty, Bombay City v. Shri Kantilal Nemchand (1977) Estate Duty Reference No. 1 of 1967. The facts in that case were more or less identical. One Nemchand, who was carrying on business in the name and style of Kirtilal & Co. as its sole proprietor till January 9, 1950, converted his proprietory business into a partnership business by admitting his son Kirtilal as a partner with a share of six annas in the profits and losses. Nemchand retained for himself 10 annas share. The shares of the two partners were reshuffled by a deed dated November 10, 1956 and the son's share was raised to 12 annas and Nemchand's share was reduced to four annas. The question was whether the relinquishment of the share by Nemchand in favour of his son initially and then when the shares were reshuffled amounted to a transfer without consideration to which the provisions of Section 10 applied. In both the documents in that case, there was an express term which ran thus:
The partnership business shall be carried on by both the partners in mutual consultation with each other.
The division Bench took the view that 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 and 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 initially six annas share and later on increasing that share to 12 annas. Thus the contention of the Revenue that the transactions amounted to gift without consideration was rejected and the value of one-fourth of the goodwill and tenancy rights of the business was alone held to be includible in the principal value of the estate that passed on the death of Nemchand.
11. The aspects of consideration in a contract of partnership was also considered by another division Bench of this Court, of which one of us (Desai J.) was a member, in The Commissioner of Gift-tax, Bombay City II v. Smt. Lalita B. Shah (1975) Gift-Tax Reference No. 3of 1966. In that decision the division Bench has observed as follows:
By an agreement of partnership there is conferment of mutual rights and the undertaking of reciprocal obligations which would constitute for each of the parties the respective consideration for its share in the profits and assets. It would be impermissible in this view of the matter to consider the transmission or transfer of the goodwill de hors the formation of the partnership. It is to be considered as part and' parcel of the same transaction....
12. Thus in the instant case, since in terms of the first partnership deed the son was to take an active part in the management of the affairs of the partnership and in terms of the second deed of partnership Mohomed Ismail was to work as a working partner, there was good consideration for the relinquishment of the share in the goodwill of the firm by the deceased. Consequently it must be held that there was no gift directly or indirectly of the goodwill of the business by the deceased to his son and grand-son. The consequence is that at the time of the death of the deceased, his share in the goodwill was only one-third and the value of that one-third share of the goodwill would alone pass on his death.
13. The first question is, therefore, answered in the affirmative and against the Revenue and the second question is answered in the negative and against the Revenue. The Revenue to pay the costs of the assessee.