G.P. Singh, C.J.
1.This is a reference under Section 64(1) of the E.D. Act, 1953. The question of law referred by the Tribunal is as follows :
' Whether, on the facts and in the circumstances of the case, there was jurisdiction to hold that the retirement of the deceased lady from the partnership of M/s. Bhagwandas Shobhalal Jain amounted to relinquishment or abandonment of her share in the goodwill of the firm and thereby in subjecting to duty her share of goodwill amounting to Rs. 2,15,000 ?'
2. The reference relates to the assessment of estate duty on the estate passing on the death of Smt. Rajrani Bahu who died on 27th November, 1968. The deceased was a partner in the firm, M/s, Bhagwandas Shobhalal Jain. The deceased had 1/8th share in that firm. The deceased retired from the firm nearly a month before her death on 21st October, 1968. At the time of retirement the deceased was not paid any amount on account of her interest in the goodwill of the firm. The Asst. Controller held that the value of her share in the goodwill which he estimated at Rs, 2,25,000 ought to be included in the estate passing on her death. The Appellate Controller deleted this addition. In further appeal, the Tribunal came to the conclusion that the goodwill of a firm is an asset which can be gifted and, therefore, it should be held that the deceased gifted her share of goodwill to the firm. On this reasoning the Tribunal restored the order of the Asst. Controller.
3. Section 5 of the E.D. Act, which is the charging section, imposes the duty upon the principal value of all property which passes on the death. ' Property ' is defined by Section 2(15) to include 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 to include any property converted from one species into another by any method. Explanation 2 to the definition of ' property ' widens the definition. The Explanation says : ' The extinguishment at the expense of the deceasedof 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 'prpperty' shall include the benefit conferred by the extinguishment of the debt or right'. Section 9 of the Act, in so far as relevant, enacts that property taken under a disposition made by the deceased purporting to operate as an immediate gift inter vivos whether by way of transfer, delivery, declaration of trust, settlement upon persons in succession, or otherwise, which shall not have been bona fide made two years or more before the death of the deceased shall be deemed to pass on the death. Section 27 provides that 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 the disposition was made on the part of the deceased for full consideration of money or money's worth paid to him for his own use or benefit.
4. The question to be answered in this reference requires a consideration of the following three points : (1) whether goodwill is property in which a retiring partner is entitled to a share, (2) whether relinquishment of this right by a retiring partner amounts to disposition, and (3) whether this disposition was a gift falling under Section 9.
5. As regards the first point whether goodwill is property, the answer must be in the affirmative in view of the ruling of the Supreme Court in K.K. Shah v. Mrs. Khorshed Banu : 3SCR689 . It was held in this case that goodwill of a firm is an asset and that on the death of a partner the interest of the partner in this asset or property passes to his legal representatives and not to the surviving partner. It was further held that this proposition holds good even though under the terms of the partnership the firm is not dissolved on the death of a partner, unless there is a specific term in the deed of partnership that the death of a partner will operate to extinguish his proprietary right in the assets of the firm.
6. As regards the further point whether a retiring partner is entitled to share in the goodwill or in other words is entitled to receive the value of his share in the goodwill at the time of retirement the answer appears to be that except when there is an otherwise provision in the deed of partnership, a partner at the time of his retirement is entitled to get the value of his share in the goodwill just as he is entitled to get the value of his share in the other assets of the firm. The retirement of a partner so far as he is concerned is a dissolution of the, firm. He may even insist to receive his appropriate share of the assets including the goodwill by an order for sale. The court will, however, be reluctant to order a sale except in exceptional circumstances and will direct a payment based uponthe value of the retiring partner's share at the date of retirement: (see Lindley on Partnership, 14th Edn., p. 227).
7. The next point to be considered is whether when the deceased did not receive her share in the goodwill at the time of retirement, did this result in a disposition in favour of the other partners We have already referred to the second Explanation to Section 2(15) which uses the word ' disposition ' in a wide sense. The meaning of the word ' disposition ' was considered by the Supreme Court in CED v. Kantilal Trikamlal : 105ITR92(SC) . In that case it was held that if the deceased took a lesser share than his entitlement in a partition, there was a disposition in favour of relatives to the extent of the difference between the value of the deceased's share and what he actually received. The Supreme Court observed that, according to the normal meaning, disposition embraces ' the parting with, alienation or giving up property--a destruction of property'. It was also observed that the second Explanation to Section 2(15) gave an extended meaning to the word ' disposition ' which can be said to be made up of ' simple jural facts that modify and extinguish jural relations and create in their place new rights, whereby one gives or gives up and another gains'. It was also explained by the Supreme Court that the word ' right' as used in the second Explanation is a word of the widest import. When the deceased did not take any share in the value of the goodwill, at the time of retirement, to which she was entitled, it has to be held that there was extinguishment at her expense of a right in favour of the other partners and this amounted to a disposition in their favour within the meaning of the second Explanation to Section 2(15). It is not in dispute that the other partners of the firm were relatives as defined in Section 27(1) and as no consideration had been paid for this disposition, the same amounted to a gift. As the gift was made within two years from the date of the death, Section 9 applied to the gift and the property covered by the gift has to be deemed to have passed on the death of the deceased. In other words, the value of the share of the deceased in the goodwill of the partnership must be taken to be property passing on the death of the deceased.
8. The learned counsel for the assessee referred us to the case of CED v. S. Kuppuswami : 131ITR709(Mad) . The facts in this case were that the deceased was a partner in a firm having 22% share. He retired from that firm. From the next day the firm was reconstituted by taking his two sons as partners and admitting a minor son to the benefits of the partnership. The share of the deceased in the firm was equally divided amongst his three sons. On these facts it was held that there was no disposition by the deceased in favour of the sons. The facts in this case are different. It was found that the retirement of the deceased from the firmand the subsequent admission of his sons to the firm were independent transactions. The question whether there was a disposition in favour of the partners when the deceased did not take the value of his share at the time of retirement was not considered in this case. Another case on which the learned counsel relied is CED v. Vasantrai B. Mehta : 133ITR411(Bom) . Here again, the facts were different. The deceased made a relinquishment of his share in favour of his major son and minor son. It was observed that the deceased had received full consideration and so Clause (a) of Section 27(1) was attracted. It was further observed that the deceased could not be said to have had any specified share in the goodwill of the firm during the subsistence of the partnership which he could relinquish. We do not think that these observations can be applied to a case when a partner retires and at the time of retirement he relinquishes his share in the goodwill in favour of the remaining partners. The learned standing counsel referred us to a decision of the Punjab and Haryana High Court in State v. Prem Nath . It was held in this case that goodwill of a firm is an asset of the firm and the share of the deceased partner in the goodwill devolves, for purposes of estate duty, upon his death, on the legal representatives notwithstanding any clause in the deed of partnership that the death of a partner shall not dissolve the firm and that the surviving partners are entitled to carry on the business. The same view was taken by the Allahabad High Court in CED v. Smt. Laxmi Bai : 126ITR73(All) , and by the Gauhati High Court in CED v. Kanta Devi Taneja . These cases have our respectful concurrence. The learned counsel for the assessee also brought to our notice a decision of the Gujarat High Court in Smt, Mrudula Nareshchandra v. CED : 100ITR297(Guj) . This case is distinguishable because there was a clear provision in the partnership agreement that the heirs of the deceased partner will have no right in the goodwill.
9. For the reasons given above, our answer to the question referred isas follows :
' The value of the deceased's share in the goodwill of the firm was property passing on her death liable to estate duty. '
10. There will be no order as to costs of this reference.