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Controller of Estate Duty Vs. Ravi Abraham. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Reported in(1984)8ITD611(Coch.)
AppellantController of Estate Duty
RespondentRavi Abraham.
Excerpt:
.....that if a partner died, the remaining partners shall have the option to purchase the share of the deceased partner as at the date of his death in the capital assets of the partnership, on the terms mentioned in clause 12 of the deed. as already stated, under clause 12, only the share of profits till the end of the preceding financial year need be paid for purchasing the right of a retiring partner. reading clauses 12 and 14 together, it is clear that if, in the present case, the surviving partners had purchased the share of the deceased from his legal representatives, they need have paid only for the share of the profits of the deceased up to the end of the preceding financial year.the contention of the accountable person was that in view of the above provisions the deceased can be.....
Judgment:
Per Shri K. B. Menon, Judicial Member - These are appeals by the department and the accountable person against the order of the Appellate Controller in the matter of the estate duty assessment of the estate of Shri Kurien Abraham, who died on 12-12-1978. The estate included the one-sixth share of Shri Kurien Abraham in the firm of Kurien Abraham. The share interest of the deceased was valued by the accountable person at Rs. 18,893 but it was valued by the Assistant Controller at Rs. 1,94,065 as per the annexure to the assessment order.

The share of the deceased in the various assets of the firm was separately valued in the annexure. Some of these items figured in the appeal filed by the accountable person before the Appellate Controller.

In the present appeals, we are concerned only with the valuation of two items.

2. The Assistant Controller had included a sum of Rs. 53,060 as the share of profit of the deceased till the date of death. The Appellate Controller held that the share of profit up to the date of death could not be treated as passing on the death of the deceased. The department questions the correctness of this finding in the appeal filed by them.

3. The Assistant Controller estimated the value of the share of the deceased in future profits of Rs. 98,638. This was confirmed by the Appellate Controller, who rejected the contention of the accountable person that the right to share future profits is not includible in the total value of the estate. The correctness of the finding is questioned by the accountable person in the appeal filed by him.

4. Appeal by the department : The ground taken by the department is that the Appellate Controller erred in holding that the share of profits of the firm from the end of the last preceding financial year up to the date of death is not to be included in the principal value of the estate passing on the death of the deceased.

5. The firm was constituted by a deed of partnership dated 12-3-1976.

The deceased Kurien Abraham was the first part to the deed. Shri A.Kurien, Shri A. Jacob and Shri Ravi Abraham, who are the sons of Shri Kurien Abraham, were the other three partners. While Shri Kurien Abraham and Shri Ravi Abraham were entitled to one-sixth share each, Shri A. Kurien and Shri A. Jacob were entitled to one-third share each, Clause 14 of the deed provided that the partnership shall not be dissolved in the event of death or retirement of any partner. With regard to retirement, clause 12 provided that if any partner wanted to retire from the firm, he may do so by selling his share to the other partners for a price equivalent to the retiring partners capital and interest thereon up to the date of transfer together with the proportionate share of the reserve funds, his entitlement to profits being only up to the end of the last preceding financial year. Clause 14 provided that if a partner died, the remaining partners shall have the option to purchase the share of the deceased partner as at the date of his death in the capital assets of the partnership, on the terms mentioned in clause 12 of the deed. As already stated, under clause 12, only the share of profits till the end of the preceding financial year need be paid for purchasing the right of a retiring partner. Reading clauses 12 and 14 together, it is clear that if, in the present case, the surviving partners had purchased the share of the deceased from his legal representatives, they need have paid only for the share of the profits of the deceased up to the end of the preceding financial year.

The contention of the accountable person was that in view of the above provisions the deceased can be deemed to have been entitled only to his share of profits up to the end of the preceding financial year, namely, 31-3-1977, that he was not entitled any to share in the profits of the firm for the period from 1-4-1978 till 12-12-1978, being the date of death, and that the share of profits for this period cannot, therefore, be held to have passed on the death of the deceased. This contentions was accepted by the Appellate Controller and the department is now questioning the correctness of the same.

6. The argument of the learned departmental representative, in short, was that clauses 12 and 14 are not attracted to the present case and that, as a matter of fact, the surviving partners estimated the share of the profit of the deceased till his date of death and credited his account with the amount. It was, therefore, claimed by the learned departmental representative that the amount should be deemed to pass on his death.

7. On the other hand, the learned representative for the accountable person reiterated the argument advanced before the Appellate Controller.

8. We have considered the matter. As already stated, clause 12 of the partnership deed relates to the retirement of a partner and it provides that for purchasing his share, only his share of the profits up to the end of the preceding financial year will be taken into consideration.

Clause 14 relates to death or insolvent and it reads thus : "14. If during the continuance of the partnership any partner shall die or become insolvent then the remaining partners shall have the option (to be exercised by notice in writing to the legal representatives of the deceased partner or to the receiver of his estate as the case may be within a month after the death or insolvency) to purchase the share of the other partner as at the date of his death or insolvency in the capital and assets of the partnership on the terms mentioned in clause 12 of the deed. The partnership shall not be dissolved in the event of the death or retirement of any of the partner, but shall continue to be carried on by the remaining partners." It is clear that if the surviving partners had exercised the option as per clause 14 and had purchased the share of the deceased partner, then clause 12 would have been attracted in determining the purchase price.

In that case, the legal representative would have been entitled to claim only the purchase price for the share of profits up to the end of the last preceding financial year. But in the present case, the rights have no been worked out in accordance with clause 14. This may be because the surviving partners themselves happen to be the legal representatives. It was stated at the time of the hearing that there were no other legal representatives. Whatever the reason may be, the surviving partners did not chose to formally record anywhere that the rights have been worked out in terms of clause 14. On the other hand, the current account of the deceased in the firm was credited on 31-12-1978 with a sum of Rs. 36,782.06, which is described as the profit for the period up to 12-12-1978. In the Income-tax assessment of the firm for the assessment year 1979-80, for which the accounting period ended on 31-3-1979, the profits for the period from 1-4-1978 to 11-12-1978 were allocated between the four partners including the deceased. A sum of Rs. 39,021 was allocated as the one-sixth share of profit of the deceased for the period from 1-4-1978 to 11-12-1978. The profit for the subsequent period from 12-12-1978 to 31-3-1979 was allocated between the surviving partners. If the surviving partners had chosen to work out their rights as per clause 14 of the partnership deed, no share of profit should have been allocated to the deceased for the period from 1-4-1978 to 11-12-1978. Similarly, they should have pressed for the allocation of the entire profits to the surviving partners for the income-tax assessment, which was also not been done.

It is, therefore, clear that the surviving partners, who happened to be the legal representative, had not invoked the provisions of clause 14 of the partnership deed. On the other hand, they have allocated to the deceased, his share of profit up to the date of his death. The Appellate Controller has, therefore, erred in holding that the deceased had no share in the profits for the period from 1-4-1978 to 11-12-1978 and that his share did not pass on his death.

9. During the course of the argument, the learned representative for the accountable person, had relied upon the decision in the case of Surajmall Gouti v. CED [1979] 119 ITR 182 (Cal.) in which a general proposition has been laid down that the individual assets of the firm should not be valued in determining the share of the deceased in the partnership. The contention in this form had not been raised in the grounds of appeal. The accountable person has not filed any cross-objection objection to the method of valuation of the share. On the other hand, in the appeal filed by him, he has only questioned the correctness of inclusion of another item in the valuation. This ruling is not, therefore, relevant. The learned representative also relied upon the ruling of the Bombay High Court in the case of CED v.Fakirchand Fatehchand Sachdev [1982] 134 ITR 268 for the position that the value of the share of the deceased should be worked out in accordance with the provisions of the partnership deed. This position has not been contested by the department.

10. In view of the finding recorded earlier, the appeal by the department has to succeed. But the share of profit cannot be taken at Rs. 53,060 as determined by the Assistant Controller. As stated earlier, the amount credited in the account of the deceased is Rs. 36,782.06 while his share of profit as assessed in the income-tax assessment of the firm is Rs. 39,021. The latter figure has to be accepted as the correct one. We, therefore, hold that Rs. 39,021 is to be added to the principle value of the estate in place of Rs. 53,060 deleted by the Appellate Controller.

11. Appeal by the accountable person : The Assistant Controller included a sum of Rs. 98,638 as the value of the share of the right to share the profits. It is also indicated by the Assistant Controller that the figure was worked out by the authorised representative of the accountable person. The correctness of the figure is not in dispute.

The contention of the accountable person before the Appellate Controller was that the amount is not includible in the total value of the estate. This was rejected by the Appellate Controller.

12. It was first contended by the learned representative for the accountable person relying upon the decision of the Andhra Pradesh High Court in the case of CGT v. Chalasani Subbayya [1983] 144 ITR 295 that the right to future profits is not property. This is a decision arising under the Gift-tax Act, 1958, and the question was whether by the retirement of a partner, there is a gift by him of the future profits in favour of the continuing partners. As rightly pointed out by the learned departmental representative, although the Assistant Controller used the expression right to share the profits, it is clear that what he has brought to duly is the right in the goodwill. This has been clarified by the Appellate Controller. With regard to goodwill, the law is well settled that it is property and that the interest of a partner in the goodwill of the partnership can pass on his death subject to the provisions in the partnership deed.

13. The main contention of the learned representative for the accountable person was that if what is sought to be taxed is the interest of the deceased in the goodwill, even then, in the present case, the share of the deceased in the goodwill does not pass, in view of the provisions contained in clauses 12 and 14 of the partnership deed. It was contended that the deceased should be deemed to have gifted away his share in the goodwill to the remaining partners even at the time of the commencement of the partnership. In support of this position, the learned representative relied upon the decision of the Bombay High Court in Fakirchand Fatehchand Sachdevs case (supra). As against this, it was contended by the learned departmental representative that the share of a deceased partner in the goodwill of the firm is a property which passes on his death. In support of the contention, reliance was placed upon the decision of the Allahabad High Court in the case of Smt. Vindoor Bai v. CED [1981] 132 ITR 421 and that of the Gauhati High Court in CED v. Kanta Devi Taneja [1981] 132 ITR 437.

14. We may mention at this stage that the question has been considered recently by the Kerala High Court with reference to the decided cases in the unreported decision of P. T. Abdul Sattar v. CED [IT Reference No. 153 of 1979, dated 30-8-1983]. It is, however, to be noted that the decision of the Kerala High Court and the decisions referred to therein relate to cases where the partnership deed expressly provided that a deceased or retiring partner shall not be entitled to any share in the goodwill of the firm. In the case before the Kerala High Court the deed provided. "... deceased or returning partner shall not be entitled to any goodwill of the firm".

15. To appreciate the decision of the Kerala High Court referred to above, it would be useful if reference is first made to the conflicting decisions of the Gujarat High Court in the case of Smt. Mrudula Nareshchandra v. CED [1975] 100 ITR 297 and that of the Bombay High Court in the case of Fakirchand Fatechand Sachdev (supra).

16. In the case of Smt. Mrudula Nareshchandra (supra) clause 10 of the partnership deed provided that the firm shall not stand dissolved on death of any of the partners and the partner dying shall have no right whatsoever in the goodwill of the firm. It was held by the Gujarat High Court that a partner has a marketable interest in all the capital assets of the firm including the goodwill asset even during the subsistence of the partnership and that this interest is property within the meaning of section 2(15) of the Estate Duty Act, 1953 (the Act) - vide page 301. It was then held that the interest of a partner in the partnership firm is property which can pass on the death of the partner and which can become liable to the payment of estate duty under the provisions of the Act -vide page 301. It was also held that it is clear from the provisions of the Act that for the purpose of the levy of duty under section 5 of the Act, it is not relevant to whom the property passes - vide page 306. It was then held that if the heirs of the deceased inherited the interest of the goodwill along with the interest in the rest of the partnership assets, there will be no difficulty in holding that the provisions of the Act are attracted - vide page 308. Thereafter, on an interpretation of clause 10 of the partnership deed, it was held that the interest of the dying partner in the goodwill automatically comes to an end on his death. Consequently, it was held that the share of the goodwill can pass neither to the legal representative nor to the surviving partners. It was held that the right lost its continuity, identity and mobility on the death of the partner and that it did no pass to anybody - vide page 312.

17. In the case of Fakirchand Fatehchand Sachdev (supra) the Bombay High Court dissented from the view taken by the Gujarat High Court in the case of Smt. Mrudula Nareshchandra (supra). It was held by the Bombay High Court thus : On the death of a partner resulting in the dissolution of the firm, though the right which he had during the subsistence of the partnerships, ceases to exist and would not be property passing on his death, the right which he had on the dissolution of the firm continues to subsist and would be property passing on his death. In a case, where the death of a partner does not dissolve the partnership but the surviving partners have the right to carry on the business of the partnership, what would be the two sets of rights or both rights of the deceased as a partner, namely, his right during the subsistence of the partnership and the right which he would have on the dissolution of the firm. In a case of dissolution brought about by a partners death, the property would pass on to the legal representatives, i.e., to his heirs intestate if he has died intestate or if he has died testate to the persons to whom he has willed away. In a case, where a partnership is continued by the surviving partners by reasons of the provisions in the partnership deed the rights of the deceased would pass on his death to the surviving partners. In either case, there would be passing of property for the purpose of section 5.

18. The Madras High Court in CED v. Ibrahim Gulam Hussain Currimbhay [1975] 100 ITR 320, dissenting from the view of the Gujarat High Court in the case of Smt. Mrudula Nareshchandra (supra) held that where the legal representatives of a deceased partner are not entitled to goodwill, the share of the deceased in the goodwill will pass to the surviving partners. The same view was taken by the Punjab and Haryana High Court in the case of State v. Prem Nath [1977] 106 ITR 446 (FB).

19. The Kerala High Court in the case of P. T. Abdul Sattar (supra) after referring to the conflicting decisions mentioned above, held For reasons mentioned above, we are not inclined to hold that the view taken by the Gujarat High Court in the case of Smt. Mrudula Nareshchandra (supra) is erroneous. It was, however, observed by the Kerala High Court that a goodwill cannot be brought to tax in the particular case even on the basis of the summary of the findings of the Bombay High Court in the case of Fakirchand Fatehchand Sachdev (supra) as item (9) and (11). Finally it was held In view of the aforesaid discussion, we are of the view that there is no justification in the addition made to the value of the estate of the deceased in respect of the sum alleged to be attributable to the share of the deceased in the goodwill of the firm as such addition is unjustified having regard to the nature of the partnership deed and the effect of clauses 14 and 15 referred to above. It is, therefore, clear that the decision of the Kerala High Court was based on the provisions in the partnership deed and adopting the view of the Gujarat High Court in the case of Smt.

Mrudula Nareshchandra (supra).

20. In the light of the decision of the Kerala High Court the accountable person in the present case would have been entitled to succeed if there had been a provision in the partnership deed that a partner dying shall have no right whatsoever in the goodwill of the firm. But the provision in clause 14 of the partnership deed in the present case, which has been extracted in paragraph 8, is entirely different. As already stated earlier, clause 12 which provides for the payment of the amounts due to a retiring partner does not provide for reckoning his share in the goodwill. Clause14 provided that the partnership will not be dissolved in the event of the death of a partner. It is further provided that if during the continuance of the partnership any partner died, the remaining partners shall have the option to purchase the share of the deceased partner on the terms mentioned in clause 12. The option is to be exercised in writing to the legal representatives of the deceased partner or to the receiver of his estate, as the case may be, within a month of the death or insolvency.

It is, therefore, clear that on the death of a partner, his rights will first pass to his legal representatives. At this stage, the partnership deed does not say that the share in the goodwill will not pass to the legal representatives. The surviving partners may or may not exercise their option to purchase the share of the deceased partner from the legal representative. But if they decide to purchase, it is clear that they need not pay for the share of the goodwill but need pay only for the share in the capital investment, interest thereon together with the proportionate share of the reserve funds and the share of profits up to the last preceding financial year. The present case cannot, therefore, be equated to a case where the partnership deed provides that the legal representatives of a deceased partner will not be entitled to a share in the goodwill of the firm. By the terms of the deed in the present case, if the surviving partners do not exercise their option to purchase the share of the deceased partner from the legal representatives the share of the goodwill of the deceased partner will also have to be reckoned in setting the claims of the legal representatives. It is, therefore, a case where the rights of the deceased partner including his share of the goodwill had passed to the legal representatives.

21. The position in the present case seems to be similar to the positions obtaining in two English cases referred to by the Gujarat High Court in the case of Smt. Mrudula Nareshchandra (supra). The first case is Perpetual Executors & Trustees Association of Australia Ltd. v.Commissioner of Taxes [1954] 25 ITR 47 (PC). In that case, the partnership deed contained a provision whereby, on the death of a partner, the partnership continued between the survivors and option given to purchase the capital of the deceased at the price to be computed according to a formula, but it was expressly provided that in computing the purchase price nothing was to be added or taken into account for goodwill. Comparing this provision with the provisions in the partnership deed in the case of Smt. Mrudula Nareshchandra (supra), the Gujarat High Court observed : "... It should be noticed that while in the instant case (Mrudula Nareshchandra) the interest of the deceased in the goodwill of the firm instantly ceases to exist on the death of the deceases, in the Perpetual Executors & Trustees Association of Australia Ltd.s case (supra), the said interest subsisted till the surviving co-partners preferred to exercise their option to purchase the capital of the deceased partner. There was, therefore, in the Privy Council case, a gap of the time between the death of the deceased and the exercise of option which resulted in the devolution of the interest of the deceased, on his legal representatives. It is a well-known principles that title to an estate never remains in abeyance and, therefore, till the surviving partners in the Privy Council case actually exercised their option to purchase the capital of the deceased partner in accordance with the formula prescribed in the partnership agreement, the estate of the deceased partner, which included his interest in the goodwill, devolved on his heirs. If such a devolution is once found to have come into existence the fact that the legal representatives of the deceased partner were not entitled to take the value of the goodwill into account at the time when the surviving partners exercised their option under the agreement, would obviously be irrelevant, and, therefore, the observations of the Privy Council were completely justified with reference to the facts of that case." (p. 310) 22. In the case of Attorney-General v. Boden [1912] 1 KB 539 the share of a partner, on his death, accrued to his sons, who were also partners subject to their paying out his legal representatives, the value of his share at the date of death ascertained by proper valuation without any consideration of or allowance for goodwill. It was observed by the Gujarat High Court that in this case, the interest of the deceased partner directly passed to his legal representatives immediately after his death and that his share was to accrue to the partners, who were his sons, only if they paid out the legal representatives. It is pointed out that if the partners had preferred not to exercise the option by paying the legal representatives of the deceased the value of the share of the deceased, the interest of the deceased would have passed to his legal representatives. The Gujarat High Court, therefore, expressed the opinion that goodwill was also rightly assessed to estate duty in that case.

23. The decision in the case of Perpetual Executors & Trustees Association of Australia Ltd. (supra) was referred to and followed by the Bombay High Court also in the case of Fakirchand Fatehchand Sachdev (supra) at page 293 of the decision. As already stated, the ratio of the two decisions mentioned above, which has been accepted by the Gujarat High Court in the case of Smt. Mrudula Nareshchandra (supra), fully applies to the present case. We, therefore, hold that the Commissioner (Appeals) was justified in holding that the goodwill is liable to be included in working out the interest of the deceased in the firm.

24. The learned representative for the accountable person had also contended that in the light of the decision in the case of Surajmall Gouti (supra), it is not open to the Assistant Controller to revalue a particular item of the assets of the firm. As already pointed out, in the present case, the entire assets have been revalued and only two of the items are now an appeal before us. Even with regard to the two items, the dispute was only whether they passed on the death of the deceased. The matter has become final with regard to the method adopted by the Assistant Controller and also with regard to his valuation of the remaining items.

As mentioned earlier, the Kerala High Court in the case of P. T. Abdul Sattar (supra) had mentioned that, on the basis of finding Nos. 9 and 11 of the Bombay High Court in the case of Fakirchand Fatehchand Sachdev (supra) goodwill cannot be brought to duty. We are inclined to believe that the observations of the Bombay High Court are with reference to cases where one item of the asset like the goodwill alone is taken and sought to be brought to tax. This is not the position in the present case, where all the assets of the firm had been valued and brought to estate duty. In view of the findings above, the appeal by the accountable person has to fail.

25. In the result, the appeal by the department is allowed and the appeal by the accountable person is dismissed.


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