1. Under s. 64(1) of the E. D. Act, the following two questions have been referred :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 84,000, being the amount gifted by the deceased to his sons, should not be included in the estate of the deceased by invoking section 10 of the Estate Duty Act
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 18,000, being 2/5ths share of the goodwill referable to the share of the sons of the deceased in the partnership firm, could not be included in the estate of the deceased by invoking section 10 of the Estate Duty Act ?'
2. The estate duty assessment, which has led to this reference, came to be made on the death of one S. M. Mohamed Ibrahim on 25th January, 1965. Till 1st November, 1957, he was carrying on a proprietary business in hardware under the name and style of M/s. S. M. Mohamed Ibrahim and Sons, Colombo. This was converted into a partnership concern on 1st November, 1957, by his admitting his two minor sons into the benefits of partnership. At that time, he gifted Rs. 42,000 to each one of his sons by debiting his capital account and crediting the respective accounts of the sons in the books of the business. The gifted amounts were treated as capital contributions by the newly admitted persons. The Asst. Controller invoked s. 10 of the E. D. Act and brought to tax the sum of Rs. 84,000. The assessment was confirmed by the Appellate Controller. On further appeal to the Tribunal, it held that the benefit the donor had as a member of the partnership with reference to the sum of Rs. 84,000 was not a 'benefit' referable in any way to the gifts but was unconnected therewith and in that view it excluded the sum of Rs. 84,000 from the assessment.
3. At the time when the sons were admitted to the benefits of the partnership, they were given each a one-fifth share in the partnership firm. The Asst. Controller came to the conclusion that by reason of the admission of the two sons to the benefits of the partnership the deceased had gifted two-fifths share of the goodwill to them and he took its value at Rs. 18,000 and included it in the principal value of the estate by invoking s. 10 of the Act. The Appellate Controller confirmed the assessment. The Tribunal took the view that the goodwill being an asset belonging to the partnership could not be the subject-matter of gift by the deceased when he admitted his minor sons to the benefits of the partnership and that in this view the inclusion of Rs. 18,000 by invoking s. 10 of the E. D. Act was not valid. The questions set out earlier arise out of this order of the Tribunal.
4. Section 10 of the E. D. Act, in so far as it is material, runs as follows :
'Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extent 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......'
5. There are provisos to this provision, but they are not material for our present purpose. This provisions has come up for consideration in a number of decisions some of which were rendered by the Supreme Court. The Supreme Curt had occasion to consider the applicability of s. 10 in CED v. Kamlavati : 120ITR456(SC) . In that case, one Maharaj Mal, who died, was a partner in a firm with a half share. There were two other partners with one-fourth share each. On 27th March, 1957, Maharaj Mal made a gift on 1 lakh rupees to his son, Lalit kumar, and Rs. 50,000 to his wife, Kamlavati. Almost simultaneously with effect from 28th March, 1957, Lalit Kumar was taken as a partner in the firm with one-fourth share and Maharaj Mal thereafter had, instead of half share, one-fourth share. Maharaj Mal died on 9th January, 1962, and on his death the firm was reconstituted and the widow was taken into the firm with one-eighth share. The question that arose for consideration by the Supreme Court was whether the provisions of s. 10 of the E. D. Act applied to the gifts of Rs. 1,00,000 and Rs. 50,000 made by the deceased to the two persons mentioned above. It was held that the said provision did not apply. At page 463 of the report, it was observed :
'To avoid the conflict in the application of the ratio of the various Supreme Court cases as seems to have been done by some of the High Courts, we would like to clarify and elucidate some of the aspects and facets of the matter a bit further. When a property is gifted by a donor the possession and enjoyment of which is allowed to a partnership firm in which the donor is a partner, then the mere fact of the donor sharing the enjoyment or the benefit is clearly referable to the gift, i.e., to the parting with such enjoyment or benefit by the donee or permitting the donor to share them out of the bundle of rights gifted in the property. If the possession, enjoyment or benefit of the donor on the property is consistent with the other facts and circumstances of the case, other than those of the factum of gift, then it cannot be said that the donee had not retained the possession and enjoyment of the property to the entire exclusion of the donor or, to the entire exclusion of the donor or, to the entire exclusion of the donor in any benefit to him by contract or otherwise. It makes no difference whether the donee is a partner in the firm from before or is taken as such at the time of the gift or he becomes a creditor of the partnership firm by allowing it to make use of the gifted property for the purposes of the partnership.'
6. At page 465, the learned judges pointed out :
'But we want to emphasise that the principles of law laid down by this court in several decisions which we have reviewed in this judgment with some further clarification and elucidation should be carefully and broadly applied to the facts of each case without doing too much of dichotomy and hair splitting of facts so as not to easily apply or not to apply the provision of law contained in s. 10 of the Act.'
7. Therefore, the point to be considered now is whether the possession, enjoyment or the benefit of the donor in the property is consistent with the other facts and circumstances than those of the factum of the gift. If so, it cannot be said that the donees have not retained possession of the property to the exclusion of the donor. The admission of the donees into the partnership or the enjoyment of the property as partnership property cannot be taken as bringing the transaction within the scope of section 10 of the E. D. Act. In the present case, the sum of Rs. 84,000 was gifted to the sons. There is nothing to show that there was any benefit which arose to the donor as a result of the transaction of the gift. The enjoyment or possession with reference to the sum of Rs. 84,000 is referable to the formation of the firm and not to the gifts and, therefore, the sum of Rs. 84,000 cannot be brought to tax in the light of the judgment of the Supreme Court in CED v. Kamlavati : 120ITR456(SC) .
8. As regards the second question which relates to goodwill we entertained some doubt as to whether there was any gift at all in a case of this kind. At the time of the formation of the partnership the persons were merely taken into the firm and in consequence of their rights as partners they enjoy the benefit of the goodwill. The factum of gift is itself open to dount. However, it is unnecessary to go into this aspect as the position regarding the sum of Rs. 18,000 appears even otherwise to stand a fortiori. There is nothing referable to the gifts as far as the enjoyment of the goodwill is concerned. The enjoyment of the goodwill by the persons who were taken into the firm was as a consequence of the original gift Rs. 84,000 and of their joining the firm. As the original gift of Rs. 84,000 itself stands excluded from the assessment since s. 10 of the E. D Act does not apply, the sum of Rs. 18,000 cannot also stand in the assessment.
9. The Tribunal appears to proceed on the basis that there was earlier a partnership so that the deceased could not have dealt with the goodwill separately as a partner in the firm. From the facts stated earlier it would be clear that the firm itself was constituted simultaneously with the gifts. Therefore, there is no question of the deceased dealing with goodwill as an asset of the partnership during the currency of the partnership. However, it is unnecessary to go into this asect any further in the view that we have taken earlier.
10. The result is that both the questions are answered in the affirmative and in favour of the accountable person. The accountable person will be entitled to his costs; counsel's fee Rs. 500.