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Miss Gitaben Hasmukhlal Shah Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)14ITD77(Ahd.)
AppellantMiss Gitaben Hasmukhlal Shah
RespondentWealth-tax Officer
Excerpt:
1. the assessee is a partner in the firm of gujarat pharmaceutical & chemical works. in completing the wealth-tax assessments of the assessee for the assessment years 1976-77 and 1977-78, the wto included sums of rs. 1,96,115 and rs. 2,41,265, respectively, as the value of the interest of the assessee in the firm of gujarat pharmaceutical & chemical works. apart from including the interest as above, the wto had not included any goodwill relating to the firm as an asset in the assessments. the commissioner, looking into the records of the case, noticed the above. according to him, goodwill was an asset obviously to be included in the wealth-tax assessment and since the wto had not taken this into account possibly for the reason that it was self-generated, he regarded the order of.....
Judgment:
1. The assessee is a partner in the firm of Gujarat Pharmaceutical & Chemical Works. In completing the wealth-tax assessments of the assessee for the assessment years 1976-77 and 1977-78, the WTO included sums of Rs. 1,96,115 and Rs. 2,41,265, respectively, as the value of the interest of the assessee in the firm of Gujarat Pharmaceutical & Chemical Works. Apart from including the interest as above, the WTO had not included any goodwill relating to the firm as an asset in the assessments. The Commissioner, looking into the records of the case, noticed the above. According to him, goodwill was an asset obviously to be included in the wealth-tax assessment and since the WTO had not taken this into account possibly for the reason that it was self-generated, he regarded the order of the WTO as prejudicial to the revenue and erroneous. Giving, therefore, an opportunity to the assessee to show cause why the above alleged omission could not be corrected, the Commissioner passed a common order under Section 25(2) of the Wealth-tax Act, 1957 ('the Act') for both the years. According to him, goodwill being an asset and in this case not disclosed in the balance sheet its market value on the valuation date was required to be taken into consideration as per Clause (d) of Rule 2C of the Wealth-tax Rules, 1957 ('the Rules'). The Commissioner, therefore, cancelled the orders of the WTO directing him to remake the assessments on the basis of his directions. The present appeals before the Tribunal arise from the above order of the Commissioner.

2. The learned counsel for the assessee has pointed out that the assessee-firm is in existence at least for 30 years. There is no asset such as goodwill in the balance sheet. In working out the net wealth of the assessee, who is a partner in the firm, the WTO had included the value of the interest in the partnership firm. Apparently, he has proceeded under the Rules starting from Rule 2 of the Rules. These rules would, according to the learned counsel, certainly apply to the case because of the fiction that the net wealth of the firm is to be determined for ascertaining the interest. But at the same time Rule 2C does not apply to an asset which is not disclosed in the balance sheet, if it is not required to be shown in the balance sheet according to the normal accountancy practice or any specific legal requirement. Rule 2C deals only with those assets which might have to be disclosed in the balance sheet according to the method of accounting and the accountancy practice followed by the assessee but in fact are not disclosed. Under the well accepted principles of accountancy practice goodwill as a self-generated asset would never figure in the balance sheet. It would figure only when it is purchased even though in appropriate cases on a subsequent date it could be written off. Being, therefore, an asset not to be disclosed in the balance sheet according to the accountancy principles, the learned counsel has urged this cannot be treated at all as coming within the terms of the impugned rule. Goodwill, it is pointed out, can be included in the situation laid down in Clause (b) of Rule 2C-which is exhaustive of the situation where goodwill is includible. Recourse cannot, therefore, be had to the residuary Clause (d) for including self-generated goodwill. It is also pointed out that if the department's contention is accepted, it would result in a serious anomaly because under Clause (b) only market value has to be taken while the price or market value, whichever is lower, can otherwise be taken. It is also pointed out that with reference to Clause (c) of Rule 2C the CBDT had issued a circular relating to managing agency rights. The circular specifically points out that unless the rights are purchased they are not to be included. According to the learned counsel anologically the same situation should obtain for goodwill also when it is self-generated.

2A. In this connection, stressing the accountancy aspect of the question, the learned counsel has referred to several authorities on accountancy. Accountancy by Pickle's, Fourth edn., p. 2278 states that it is contrary to accountancy practice to write up goodwill. Spiger & Pegler in their book on Book Keeping & Accountancy, Seventeenth edn., p. 135 observe that it is not customary to raise an account for goodwill except when cash is paid for it. Reference is also made to Principles of Auditing by Depaula, Fourteenth edn., p. 130, Partnership Accounts by Meggi, First edn., pp. 39-48 and Chakravarthy's Advance Accounting, First edn., p. 284. The learned counsel has also referred to cases of Manibhai J. Patel v. WTO [1983] 6 ITD 326 (Ahd.) and Desu Venkata Subba Rao V. WTO [1983] 6 ITD 341 (Hyd.), respectively. In the Special Bench case in WTO v. Narendra Kumar Gupta [1983] 4 ITD 694 (Delhi) the issue of the unexploited rights in a feature film is considered. This also sheds some light on the assessee's case in her favour. According to the learned counsel, Rule 2C, a general proposition, applies only to cases of assets which are required to be disclosed by the system of accounting followed by the assessee in a particular case. Dealing with the question whether .the specific excludes the general, the learned counsel has pointed out that the totality of the situations reveals that the intention was only to bring in goodwill at the price which was paid for it and nothing more.

Referring to Clause (b) of Rule 2C, it is pointed out that the word 'purchase' is a qualification of the general asset, goodwill. Clause (d) speaks of any other asset." According to the learned counsel, this expression cannot include goodwill already referred to as an asset in Clause (b). Actually it is the nature of the asset which is important.

Reference is made to the decision of the Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428.

Stress in also laid on Clause (8) of the partnership deed dated 18-8-1975 which refers to the goodwill of the firm.

3. The learned counsel for the department has pointed out that factually there was no doubt about the firm having goodwill. The WTO in framing the assessments had not considered this item at all. If the value of the goodwill was required to be included in the assessments as an asset, certainly there was an error in the assessment and the Commissioner was justified in passing his order under Section 25(2).

The question was whether 'goodwill' was to be included as an asset at all. The provisions of Rule 2C were applicable to the case. For this purpose, a proper construction of the rule had to be made. The rule according to the learned counsel, clearly indicates that assets not disclosed in the balance sheet are to be disclosed as per accountancy principles at the market price. The proposition is not that even if the asset is not purchased it is not to be included. In fact, according to the learned counsel, the mode of acquisition of an asset is immaterial for the purposes of its inclusion in the net wealth. Taxation law has to be strictly construed. It admits of no importation of words not in the statute. The assessee's interpretation requires the insertion of a phrase 'required to be included'. These words are not in the statute and their import is totally unwarranted in the phraseology of the words used. According to the learned counsel, the importing of such words also would run counter to well settled principles of interpretation. It would in fact restrict the meaning of the whole set of assets omitted from the balance sheet. Importing a restriction is a well established principle. Unless an asset is specifically excluded, it must fall into the tax net. It was not within the competence of the executive authority to give an exemption. This was a central point as to the scope and extent of the executive authority with respect to delegated legislation.

4. According to the learned departmental counsel, legislative policy has to be determined and laid down by the Legislature itself. It cannot be delegated. Subordinate legislation also must remain confined to a strict limit delegated to it. Dealing with the scheme of the Act, it is pointed out that it is not a blanket proposition that the Court can carve out exception looking to the scope of the Act. Exceptions and exclusions are of four types, under Section 2(e), Section 3 of the Act, category of persons, under Section 5(1) of the Act, specific exemptions and lastly, under Section 45 of the Act, whatever was not covered.

There was no warrant while looking to the scheme of the Act for the inference that an asset like goodwill was intended to be excluded.

Unlike in the case of other statutes in the Act, the Legislature has retained for itself the power of granting exemptions which ultimately is a matter of legislative policy. If the rules are allowed to be interpreted so as to permit an exemption, they could become ultra vires. Such a contingency cannot be inferred from mere interpretation.

On a correct interpretation of the provisions including the rules, therefore, the conclusion is inevitable that the exemption claimed cannot be allowed.

5. Explaining the provisions of Rule 2C, it is pointed out that Clauses (a), (b) and (c) make reference to specific contingencies ; whatever is not covered would come under the residuary Clause (d). Assets not disclosed in the balance sheet would refer to those for which payment was made and those for which the payments were not made. There are several categories of goodwill, but where the goodwill does not figure in the accounts, the correct way was to look at the rules and the provisions such as Section 7(4) of the Act and determine the assessability. Unrecorded goodwill results in an understatement of assets. Accountancy principles alone would not affect the taxability of an asset existing and certain.

6. We have considered the matter. The assessee is a partner in a firm in existence for nearly three decades. Factually, the business may have a goodwill. In working out the net wealth of the assessee for the wealth-tax purposes, the assessee's interest in the firm has to be computed as per the rules. In view of the requirement that the assets of the firm itself are to be computed under the Act, thus, invoking a fiction, the acceptance of the common principle that rules 2 and 2C would apply to the facts of the case is correct. The dispute is about the interpretation of the clauses of Rule 2C. In the original assessment the WTO included the assessee's interest in the asset applying these Rules. According to the Commissioner he, however, ignored the value of goodwill not entered in the balance sheet, liable to be included under Clause (d) of Rule 2C. It is, thus, the WTO's order is held to be erroneous and prejudicial to the revenue. If, as the Commissioner has held, the value of the goodwill is to be entered in the net wealth, certainly the WTO's orders for these two years are erroneous and prejudicial to the revenue. In other words, it is on the factual acceptability of the Commissioner's proposition that the basis of his jurisdiction also obtains. A decision on this point, therefore, calls for a direct interpretation of the provisions of Rule 2C. The provisions of rules 2A, 2B and 2C of the Rules are as under : 2A. Determination of the net value of assets of business as a whole- Where the Wealth-tax Officer determines under Clause (a) of Sub-section (2) of Section 7 the net value of the assets of the business as a whole having regard to the balance sheet of such business, he shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G. 2B. Adjustments in the value of an asset disclosed in the balance sheet- (1) The value of an asset disclosed in the balance sheet shall be taken to be-- (a) in the case of an asset on which depreciation is admissible, its written down value ; (b) in the case of an asset on which no depreciation is admissible, its book value ; (c) in the case of closing stock, its value adopted for the purposes of assessment under the Income-tax Act, 1961, for the previous year relevant to the corresponding assessment year.

(2) Notwithstanding anything contained in Sub-rule (1) where the market value of an asset exceeds its written down value or its book value or the value adopted for purposes of assessment under the Income-tax Act, 1961, as the case may be, by more than 20 per cent, the value of that asset shall, for the purposes of Rule 2A, be taken to be its market value.

2C. Adjustments in the value of an asset not disclosed in the balance sheet- The value of an asset not disclosed in the balance sheet shall be taken to be- (a) in the case of a debt due to the assessee, the amount due to the assessee under that debt, and where such amount or part thereof has been allowed as a deduction under Clause (vii) of Sub-section (1) of Section 36 of the Income-tax Act, 1961, in computing the total income of the assessee for the relevant year for the purposes of assessment under that Act, the amount of the debt as reduced by the deduction to be allowed ; (b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (d) in the case of any other asset, its market value on the valuation date.

The last two rules in fact constitute adjustments to be made where the WTO determines under Clause (a) of Sub-section (2) of Section 7 the net value of the assets of the business as a going concern having regard to the balance sheet of such business. Rule 2B deals with adjustments in the value of an asset disclosed in the balance sheet, whereas Rule 2C deals with adjustments in the value of an asset not disclosed in the balance sheet. The basis of the computation, as is clear, is the balance sheet of the business, the assets in which are to be considered. According to the learned counsel for the assessee, the reference to an asset to be disclosed in the balance sheet only means the assets which, according to the proper method of accounting followed by the assessee, are to be included in the balance sheet. Merely because the balance sheet under the adopted method of accounting cannot incorporate within itself or include an asset that asset cannot be brought in the net of Rule 2C. The significance of this is that all assets omitted from the balance sheet or are not finding a place therein do not automatically require to be evaluated and included in the net asset. At best, therefore, only a mistaken omission of an asset or an accountancy error can refer to an asset not in the balance sheet.

This interpretation perhaps cannot be fully accepted. There may be situations where an asset is the asset of the business but had not been included in the balance sheet not necessarily on account of a mistake or a deliberate omission but on account of the very nature of the asset itself. On the contrary if even an asset on the proper drawing up of a balance sheet should have been included in it but the existing balance sheet does not include it, that is a situation coming under Rule 2C.The question here is, whether granting that the business has got goodwill, was it necessary to include it as an item in the balance sheet. Can its non-inclusion, therefore, be regarded as an item coming under Rule 2C.7. In the balance sheet of a business there are several assets which for one reason or the other are shown at book values and continue to be so shown from year to year. Thus, for instance, a debt may be bad but would be continued at the original figure. An amount due need not be paid but would continue to be at the same figure. There are assets like securities, etc., for which no depreciation is allowable but at the same time the market values fluctuate so violently that assets shown as a huge fortune in shares may be worth noting. In our view, Rule 2C do not make a provision for these contingencies. Even if an asset shown at a nominal value in the balance sheet has an extraordinary high value in the market that may not perhaps be adjusted under these rules. On the contrary, as a general proposition, it would not be proper also to adjust the value of one or the other asset in the balance sheet without adjusting other assets based on its market value. If a revaluation of all the assets and liabilities in the balance sheet were to be thought of-which might give an equitable value of the partner's interest-this does not clearly come within the provisions of these rules. While, therefore, not wholly accepting the assessee''s case about the accountancy angles stressed by him, the true scope of the rule would appear to be that when the WTO knows of taxable assets belonging to the business, but not included in the balance sheet, he should have recourse to Rule 2C.8. Apart from the general scope of the provisions as above, where such an asset is to be included, Rule 2C provides the method. This consists of 4 clauses-clause (a) dealing with debt, Clause (b) dealing with goodwill, Clause (c) dealing with managing agency rights, and Clause (d) the residuary clause. The discussion before us is confined to Clauses (b) and (d). Clause (b) provides that where the asset to be included is goodwill purchased by the assessee foria price, its market value or the price actually paid by him, whichever is less, is to be adopted. A straight reading of this clause means that when goodwill is not purchased by the assessee for a price, it is not to be included.

The asset is 'goodwill' and not 'goodwill purchased by the assessee' as urged for the department. There cannot be an asset called 'goodwill purchased by an assessee', from the very nature of things. The claim of the assessee, therefore, that where goodwill is the omitted asset it can be considered only when it is purchased by the assessee, has to be accepted. Reading all the clauses, it is clear that the residuary Clause (d) should deal with assets not covered by Clauses (a), (b) and (c). Clearly, Clause (d) deals with debt, Clause (b) with goodwill, and Clause (c) with managing agency rights. The residuary clause should, therefore, deal with only other assets. It would not be proper to interpret the rule so as to read goodwill purchased by the assessee as falling within Clause (b) and goodwill not purchased by the assessee for a price in Clause (d). If the analogy is extended, it would be erroneous to consider Clause (c) as dealing with managing agency rights purchased by the asses-see for a price whereas Clause (d) would cover managing agency rights not purchased by the assessee for a price. That this latter is erroneous apart from principle is clear from the circular of the CBDT which has clarified that managing agency rights are to be included in the net wealth only when purchased. Apart, therefore, from a direct interpretation of the rule itself, the circular of the CBDT referred to by the assessee also supports his case. There is a further fact that the interpretation put by the learned counsel for the department leads to another anomaly if not absurdity, viz., if goodwill is purchased by the assessee for a price, its market value or the price actually paid, whichever is less, would be adopted. On the contrary, if the same is not purchased by the assessee, its market value on the valuation date alone would be adopted if Clause (J) is applicable. This is clearly anomalous. We have, therefore, no hesitation in holding that where the goodwill is not purchased but is a self-generated asset, as in the present case, in applying Rule 2C its value cannot be included in the net wealth. The Commissioner's order is cancelled.

9. One more point requires to be clarified. It was pointed out that the provisions of Section 4(1)(&) and Section 4(2) of the Act, read with the rules, made thereunder do not admit of the conclusion above reached. The point canvassed is that inherent in the rule is the requirement that a position as on the dissolution of the firm has to be envisaged before applying the rules. At the time of dissolution goodwill always exists as an asset. Whatever be the manner in which it was acquired, its definite existence at the time of the dissolution requires it to be included as an asset in terms of the rules. While it cannot perhaps be urged that the rules to some extent are inconsistent with the provisions of the section, especially in the light of the argument advanced on behalf of the revenue, a harmonious construction of the section and the rules has to be made which makes it imperative to take into account the goodwill as on the date of the dissolution.

10. In this context the learned counsel for the assessee pointed out that Section 4 gives a mandate to the CBDT and does not lay down any other particular directive. The CBDT is asked to keep in mind a situation of dissolution of the firm when the Rules are framed. The section does not give a directive to the WTO or the appellate authorities including the Tribunal. It is a mandate to the CBDT only and not to others. The section does not say that the valuation is to be made on the ground of dissolution of the firm. Rule-making authorities have only been given a directive by way of guidance to proceed about the valuation ; no fiction is imported so as to imagine that the firm is dissolved. The Rules have to be interpreted as they are. According to the learned counsel for the assessee,, no one contended that the goodwill has no value. The question is whether in view of the rules and their specific terms, goodwill is includible as an asset in the present case at a certain value.

11. The above discussion throws up an inevitable situation relating to the valuation of the interest of a partner in a firm. Even without any provision in the Rules the statute itself with the aid of Section 7 envisages the inclusion of the assessee's interest in a firm as an asset. See the following from Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485 (SC) : ... under Clause (b) it is provided that where the individual assessee is a partner in a firm it is the value of his interest in the firm determined in the prescribed manner that is to be treated as belonging to him and is includible in his net wealth. In other words, Clause (b) is not a deeming provision in the sense in which a deeming provision is made in Clause (a). It cannot be said that the interest of a partner in a firm does not belong to him ; it, in fact, belongs to him and no legal fiction is required for treating it as belonging to him ; and the proper way to interpret Clause (b) would be that the deeming part of it relates to the quantum of his interest in the firm determined in the prescribed manner which is to be treated as belonging to him and includible in his net wealth....(p. 491) which makes this further clear. Whether, therefore, Rules provide for valuation of such share or not, the inclusion of the share at the market value is a statutory requirement. Inherent in this is the further requirement that the value of such interest cannot be put at a figure higher than the market value as this is the clear mandate of the charging section and Section 7. The Rules are made to make this contribution or inclusion easier ; Section 4(1)(b) is also directed towards this end. Lest the basic rules of partnership law or contractual adjustments authorised thereunder would be ignored or frustrated, Section 4(2) mandates that in making the Rules such provisions of the partnership law should not be overlooked. Since valuation of the interest is to be made on a particular day, viz., the valuation date of the assessee, the contemplated settlement of accounts should also relate to that date. What we want to emphasise is that the contemplated manner of settlement of accounts should in any case be as on the valuation date.

12. Two things inevitably follow from the above. The provisions of Section 4(2) are directed to the rule-making authority setting a limit to their power. They should not ignore any provisions with regard to the settlement of accounts on the dissolution of the firm. Secondly, the directive clearly stops short of requiring the authority to invoke a fiction regarding the firm and association as having been dissolved on the valuation date. If this latter were the position, the requirement of the rule would be different.

13. Another aspect of the above situation is that Section 4(1)(b), read with Section 4(2), puts a gloss on the manner of evaluating and including the share interest of a partner-assessee in his net wealth.

The primary requirement of inclusion of an asset in the net wealth being valuation at the market rate on the valuation date, the gloss put by the provisions of Section 4 cannot, in any way, alter this, at any rate beyond the limits of the charging and computation sections against the assessee. In other words, while the provisions of Section 7 would straightaway have enabled the WTO to include the market value of the partnership share in his net wealth under the normal law and without further clear directions to this effect, the quantum of such inclusion cannot be enhanced. The purpose of the specific provisions relating to partnership interest in Section 4 could only be rationalisation of the computation to make it easy and, if necessary, reduce the liability.

Any interpretation, therefore, of the impugned provisions of Section 4 cannot admit of an enhancement of liability of the assessee over and above what the charging section read with Section 7 can bring in.

Whether the Tribunal has jurisdiction to comment on the validity of the Rules made under a statute or not, it is clear that the Rules made under the Act have to be interpreted harmoniously with the provisions of the Act itself and not in a way repugnant to the sections of the (Act. This is judicially well settled. Any interpretation, therefore, of the Rules made under the Act dealing with the inclusion of the share income of a partner in his net wealth should take this aspect into consideration. Interpretation, therefore, of Rule 2 as well as Rule 2C which results in any enhancement of tax liability over and above the normal charging of computation provisions cannot be supported. If it only enforces the same liability, these elaborate provisions are redundant and unnecessary. The inevitable conclusion is that the Legislature has enacted the provisions of Section 4(1)(6) or Section 4(2) specifically with the purpose of giving a benefit to the assessee in the valuation of assets such as debts, goodwill and managing agency rights. As pointed out above, if the interpretation advanced by the department for Rule 2C(b) is accepted, the above purpose would be thwarted. A contingency would arise where even the market value adopted would lead to the anomaly referred to in paragraph No. 8 above. From a general analysis and constructions of the provisions of the Act and the Rules made thereunder also, we come to the same conclusion, viz., that where goodwill is purchased by the assessee for a price, no value for the same, much less a market value which is the maximum value that can be put on any asset, can be adopted.

1. I have carefully gone through the order of my learned brothers.

However, I have not been able to take the same view as they have proposed in their order. Since the point involved in these appeals is of great importance and having far reaching consequences, I would like to deal with the same in some great detail instead of following the order of the Tribunal in the case of Manibhai J. Patel (supra) to which I was a party.

2. As noted in the order of my learned brothers, the issue involved in these appeals is whether in valuing the share of interest of the assessee in the firm in which she is a partner, the value of the goodwill, for which no price is paid, is to be considered or not.

3. The facts of the case and the arguments made by the parties are noted in the order of my learned brothers and, therefore, I do not propose to reproduce them here once more.

4. Under charging Section 3 the wealth-tax is charged in respect of net wealth on the corresponding valuation date of every individual, an HUF and certain category of companies. Now the expression 'net wealth' is defined in Section 2(m) of the Act to mean the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date with some exceptions mentioned therein with which we are not concerned in these appeals. Section 5 contains various detailed provisions of exempting certain assets in respect of which wealth-tax is not payable.

Section 6 of the Act contains the provisions excluding certain assets/debts outside India from the purview of the Act. Section 45 enumerates certain cases to which the provisions of the Act are not applicable.

5. Since a firm is not a taxable entity under the Act, some provisions are made to ascertain the value of the interest of a partner in the firm. Section 4(1)(6) states that where the assessee is a partner in a firm, the value of his interest in the firm shall be determined in the prescribed manner. Sub-section (2) of Section 4 stipulates that in making any rules with reference to the valuation of the interest referred to in Clause (b) of Sub-section (1) of Section 4, the CBDT shall have regard to the law for the time being in force relating to the manner in which accounts are to be settled between partners of a firm on the dissolution of the firm.

6. Before we go to the Rules, it would be necessary to advert to the relevant provisions of Section 7, so far as they are material for our purpose. The said section, captioned as 'value of assets, how to be determined', reads as under: (a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as may be prescribed ; 7. Now let us took at the relevant rules contained in the Rules. Rule 2, captioned as 'valuation of interest in partnership or association of persons' reads as under : 2. (1) The value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member, shall be determined in the manner provided herein. The net wealth of the firm or the association on the valuation date shall first be determined. That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association, or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits. The sum total of the amounts so allocated to a partner or member shall be treated as the value of the interest of that partner or member in the firm or association.

8. Rule 2A prescribes the determination of the net value of assets of business as a whole. It states that where the WTO determines under Clause (a) of Sub-section (2) of Section 7, the net value of the assets of a business as a whole having regard to the balance sheet of such business, he shall make adjustments specified in rules 2B to 2G of the Rules.

9. Rule 2B specifies the adjustments in the value of an asset disclosed in the balance sheet. Since the goodwill with which we are concerned in these appeals is not disclosed in the balance sheet, we can safely ignore the provisions of Rule 2B. Rule 2C specifies adjustments in the balance sheet. Since the bone of contention of the parties revolves round this rule, the same is reproduced below : 2C. The value of an asset not disclosed in the balance sheet shall be taken to be- (a) in the case of a debt due to the assessee, the amount due to the asses-see under that debt, and where such amount or part thereof has been allowed as a deduction under Clause (vii) of Sub-section (1) of Section 36 of the Income-tax Act, 1961, in computing the total income of the assessee for the relevant year for the purposes of assessment under that Act, the amount of the debt as reduced by the deduction to be allowed ; (b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (d) in the case of any other asset, its market value on the valuation date.

10. On careful reading of the aforesaid provisions of the Act and the Rules made thereunder, I am of the view that goodwill for which no price is paid, has to be taken into consideration in determining the value of interest of a partner in a firm. The scheme of the Act is very clear. It aims to charge wealth-tax in respect of net wealth of an assessee. The definition of 'net wealth' is very wide for it means the amount by which aggregate value of all the assets, wherever located, belonging to the assessee is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. However, wherever the Parliament thought of granting exemptions/concessions, it is stipulated in the Act itself, as for example, Sections 5, 6 and 45.

Therefore, where there is no ambiguity in the provisions of the statute, it is not possible to apply any consideration based on the provision being so applied as to be more advantageous to the assessee or to give the assessee a kind of choice in the matter of adjustment.

In this view of the matter, it is not possible to accept the stand taken on behalf of the assessee.

It is pertinent to note that a firm is not an assessee under the Act, but it is treated as such under Rule 2 for a limited purpose of determining the value of partner's interest in the firm. Sub-section (2) of Section 4 stipulates that in making any rules with reference to the valuation of the interest referred to in Clause (b) of Sub-section (1) of that section, the CBDT shall have regard to the law for the time being in force relating to the manner in which accounts are to be settled between partners of a firm on the dissolution of the firm.

Therefore, in my view, the provisions of Rule 2C(b) and (d) should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the maker of the enactment.

The value of goodwill depends on many factors which are fairly known.

When a business is doing well over the years, the market value of its goodwill will be more while in the adverse circumstances, the market value of the goodwill may be much less. Therefore, when a goodwill is acquired for a price, the assessee has been given an option under Rule 2C(6), to take the value of the goodwill which is more beneficial to him. In other words, Clause (b) of Rule 2C only deals with the goodwill which is purchased for a price. Therefore, I am not prepared to accept the submissions made on behalf of the assessee that the said clause envisages all types of goodwill whether purchased for a price or not.

Now the question would arise as to where will the self-generated goodwill be considered. To this my answer is under Clause (d) of Rule 2C. I have come to this conclusion for more than one reason, viz., (i) the definition of 'net wealth' is very wide which would get restricted if we were to accept the submissions made on behalf of the assessee, (ii) the Parliament has not granted exemption either directly or impliedly in respect of the value of goodwill for which no price is paid, (iii) the Rules have to be harmonised with the provisions of the Act and, therefore, while construing the Rules we have to keep in mind the law in force relating to the manner in which the accounts are settled between the partners on the dissolution of the firm, (iv) relevant provisions contained in the Indian Partnership Act, 1932, as well as the manner in which the accounts are settled between the partners on dissolution of the firm, take into consideration the goodwill irrespective of the fact whether it is purchased for a price or self-generated, and (v) Clauses (a), (b) and (c) of Rule 2C deal with specific assets with certain qualifications. Therefore, in the absence of such qualification, these assets would fall for consideration under Clause (d) of the said rule.

11. Now turning to the facts of the present appeals, it is pertinent to note that in the partnership deed dated 18-8-1975, the partners have made a specific clause regarding goodwill, which reads as under : 8. We, all the partners, have agreed that the name and other goodwill of the partnership firm is decided at Rs/3 lakhs and, therefore, if any partner of this partnership firm retires or is injured or affected, he will be entitled to claim the amount of goodwill coming to his share.

If a partner is entitled to claim a share in the goodwill on certain happenings, I fail to appreciate why in valuing his interest in the firm, the goodwill should not be considered.

12. In view of what is stated above, I have no hesitation in upholding the order of the Commissioner under appeal.


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