1. The question in this estate duty reference is about the manner of valuation of a partner's interest in a partnership held by the deceased at the moment of his death.
2. Unlike as in the W.T. Rules, there is no provision in the estate duty legislation which carries any express rules relating to valuation of a partnership interest. However, the presence of an express valuation formula in the law relating to wealth tax may perhaps, be explained by saying that, in wealth-tax, we deal with a live assessee who is a live partner, having a subsisting interest in an existing partnership. In such a situation, it would be essential to have the principle of valuation laid down in black and white, as it were, lest people should seek to push in the substantive doctrines of partnership law into a purely valuation question. For instance, there is the doctrine of partnership law which says that a partner, during the subsistence of his partnership, cannot put his finger on any asset of the partnership and say that he has such and such a share in that asset nor can he say that he has got a particular share in all the assets of the partnership put together. The conception of a partner's interest in the partnership, during the subsistence of the partnership, and perhaps a right to an accounting of such profits in terms of the articles of partnership. When the partnership a alive and the business is being carried on, the partner cannot demand from the other partners that his title, to any extent, be recognised in any of the assets of the partnership. The position is different when the partnership becomes dissolved. In one sense, it is only at a dissolution that the true character of a partner's interest is laid bare. At that moment only, and not at any time before, he is entitled to demand a finding up of the business, which would involve the realisation of all the assets of the partnership and the payment of all the outside creditors as well as any borrowings as such effected by the firm from any of the partners, so as to arrive at the net surplus of the firm's assets over the firm's liabilities. When such surplus is ascertained, every partner is entitled to his aliquot share in that surplus. This would really represent the quantum of the partner's interest, in terms of evaluation. Apparently because this is the substantive law on the subject of a partner's interest in a partnership firm, it was felt necessary, in a legislation like the W.T. Act, to introduce an express provision for evaluating a partner's interest during the subsistence of a partnership. Shortly stated, those provisions demand what is usually called the breakup value method. Under that method. all the assets of the partnership are valued either in the gross or individually and as against the aggregate value of the partnership assets are set off the debts of the partnership so as to arrive at the net worth of the firm as such. It is therefrom that the partner's interest is arrived at by applying the proportionate share he holds in the partnership under the terms of the partnership deed.
3. A similar provision is absent in the E.D. Act but this can also be explained. Estate duty is a levy which is triggered off only on the death of a person. If the deceased is a partners in a partnership firm at the time of his death, then, under the law, his death brings about a technical dissolution of the partnership. This being so, the substantive rules of dissolution under the general law of partnership themselves would come into play and it would be unnecessary for the estate duty legislation to have any specific rule for the purpose of evaluating the value of a partner's interest. The scheme of the E.D. Act, 1953, is that all properties passing or deemed to pass on the deceased's death are to be brought to charge. The expression 'property' is defined in the Act as including any interest in property, movable or immovable. It is trite law that the interest of a partner in a partnership is movable property even though the partnership itself might have, amongst its assets, items of immovable property. In their view, the partner's interest is itself a species of property. When a man dies possessed of an interest in a partnership, or to put in it other words, when a partner dies, his interest in the firm is also to be taken into account in making the estate duty assessment on the principal value of all properties passing on his death. How to evaluate such an interest is the problem which has been debated in this reference.
4. It would appear from the order of assessment in this case that the firm concerned in this reference went by the name of V. Guruviah Naidu and Sons. The deceased, Guruviah Naidu, was a partner in that firm with a 15% share. We have no idea of the nature of the business of the partnership. We do not also have a complete list of the assets of the partnership firm. It would, however, appear from the assessment order passed by Assistant Controller of Estate Duty that the only partnership asset worth mentioning was an item of immovable property, namely, a building situate in R. S. Puram, Coimbatore. The record shows that in the account books of the firm this building was valued at Rs. 1,18,637 either on the date of death or nearabout that date. Other details regarding the financial position of the partnership as at the date of the death of the deceased were furnished by the accountable person before the Assistant Controller. From these details, the Assistant Controller found that the capital account of the deceased in the partnership books showed Rs. 75,000 and as towards his share capital. There were also current account balances to the credit of the deceased in the partnership accounts. The Assistant Controller made a note of these entries in the books of the partnership. He, however, proceeded to enter into a valuation of the partnership building in R. S. Puram, Coimbatore, owned by the firm as its asset. In the opinion of the Assistant Controller, the book value of the building at Rs. 1,18,637 did not truly reflect the market value of the property as on the date of death. This conclusion of the Assistant Controller was base on the valuation report given by the accountable person's own valuer who evaluated the building at Rs. 1,50,000. The Assistant Controller treated 15% of the difference between the two figures of value of the building as the amount which had to be added to the share as according to the partnership books it must be regarded as representing the correct value of the interest of the partner in the partnership as on the date of his death. The working of the Assistant Controller may be depicted briefly in the following figures :
Capital account 75,000Current account balance 43,482Add:15% of the difference between book 4,704value and valuer's value of the firm's building ---------1,23,186---------
5. This amount of Rs. 1,23,186 was included in the dutiable estate as representing the market value of the deceased's partnership interest.
6. Objection was taken by the accountable person to the addition of Rs. 4,704 in the dutiable estate. The objection did not relate to the quantum of valuation of the property. The objection, rather, was sought to be founded on a point of principle. It is now urged before us that the Assistant Controller was enjoined only to value of partnership interest of the deceased and, in so doing, he was not permitted to take note of individual assets of the partnership firm in which the deceased held his interest. Before the Tribunal, however, the accountable person put forward a different approach to the question of valuation. It was contended that there was no dissolution of the partnership firm at all on the death of the deceased, because under the terms of the partnership, the surviving partners were permitted to carry on the business wihout winding-up or dissolution of the firm. With this provision in the partnership deed as the basis, it was urged before the Tribunal that the only way of valuing the partnership interest of the deceased in the firm was to accept, without question, What the surviving partners gave to his heirs. It was pointed out before the Tribunal that the surviving partners took stock of the state of the account of the deceased partner and then arrived at Rs. 53,419.40 as the only amount which remained to his credit in the firm and that alone was the measure of the interest which the deceased had in the firm which could properly be brought into dutiable estate.
7. Although the argument was addressed in this comprehensive fashion before the Tribunal, apparently the aim of the submission was merely to have the addition of Rs. 4,704 taken out from the principal value of the dutiable estate. At any rate, this was how the Tribunal understood the submission, although parts of the order of the Tribunal might gave the impression that they had accepted the assessee's submission based on the general principle that the interest of the deceased partner in a firm does not get dissolved in his death but continues with the surviving partners and hence such interest must be calculated only on the basis of what the surviving partner are prepared to grant to this heirs of the deceased. If this really were the argument, the Tribunal did not adopt Rs. 53,890.40 as the value of the deceased's share. The Tribunal ultimately ordered the deletion only of Rs. 4,704 from the dutiable estate.
8. The EOD has brought this tax reference before us questioning the correctness of the Tribunal's decision. The question of law reads as under :
9. Whether the Tribunal was right in excluding the sum of Rs. 4,704 on the ground that there was no dissolution of the firm and hence the value to be adopted is the book value and not the market value of the property
10. We have been able to indicate even in our narrative giving the gist of the Tribunal's order that there is an essential contradiction in the Tribunal's order. Whereas, the principle adumbrated by the Tribunal was that in the case of a firm, which under the articles of partnership, does not get dissolved by the death of a partner, the deceased's share must be determined only on the basis of book value of his share and not on the basis of the market value thereof, the Tribunal had not gone the whole-hog with the idea nor considered the correctness of the determination made by the assessing authority on that basis but had stopped short with the deletion of only Rs. 4,704.
11. It is perhaps due to this internal contradiction in the Tribunal's determination of the question that Mr. S. V. Subramaniam before us took a broader line in his submission. As we earlier indicated, his submission was that the relevant valuation provisions in the E.D. Act do not warrant the assessing authority to value anything other than the partnership interest. The further submission was that for the purpose of evaluating the deceased partner's interest, it is not permissible for the Assistant Controller to enter into the details of the assets of the firm in which an interest was held by the deceased.
12. Learned counsel referred to the provisions of s. 36 of the E.D. Act, as well as rule 7(c) of the E.D. Rules. We may at once say that there is nothing in rule 7(c) which carries any principle of valuation. All it says is that the share of a partner in a partnership has got to be treated as an 'indivisible' asset, whatever that expression may mean. Although s. 36 in the crucial valuation provision under the estate duty law, even that provision does not contain any specific rule for the evaluation of a partnership interest. Learned counsel then referred us to the prescribed form which relates to the form of estate duty account. He particularly referred to the first part of Account No. 1 in the statutory form, and drew our attention to the column in which the accountable person had to mention the appropriate value of the item of properties in question. This column reads as under :
'The deceased's share in movable and immovable property as partner in the firm of...... as per balance-sheet annexed, signed by the surviving partners'
13. According to Mr. Subramaniam, the framing of the estate duty account in this form with a provision drafted into the entry, in the manner in which it is found in the extract given above must be regarded as a veritable rule of valuation of the partnership interest of a deceased. Learned counsel said that the implication of this entry in the estate duty account was that the deceased's share must be adopted, without modification, from the balance-sheet which carries the value of movable and immovable properties of the firm.
14. There are two observations which are provoked by the learned counsel's reliance on this part of the estate duty account. One is that the text of this entry is destructive of learned counsel's earlier submission that note whatever can be taken of the individual assets of a partnership while proceeding to make an evaluation of the deceased's interest in the partnership. Again, far from the entry in the form of account being a rule of valuation which binds the Income-tax Department, it is intended only to commit the accountable persons to a particular value. This is shown by the next succeeding entry in the same account which relates to a case where no balance-sheet is available. according to the remarks column, in such a case, the accountable person is enjoined by the form of account to the interest of the deceased in the partnership. Quite apart from the internal evidence contained in the text of the form of estate duty account as such, we are satisfied, on the terms of s. 36, that the balance-sheet value cannot be regarded as the last word on the subject of valuation of a partnership interest any more than an entry in the estate duty account filed by an accountable person is conclusive of the respective value of the property whom therein. On the contrary, s. 36, in clearest terms, imposes on the assessing authority, namely, the Assistant Controller, the responsibility of estimating the principal value of each and every one of the items of property which go to make the dutiable estate. The section, in so many words, says that the principal value of any property shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in the open market at the time of the deceased's death. The wording of this section shows that in every case it is the bounden duty of the Assistant Controller to determine the market value of the property on the basis of the principle laid down in that provision. This would be so whether or not any estate duty account is at all filed by the accountable person and irrespective of the value shown as respects the various items shown in the account filed by the accountable person. Section 36(2) reiterates and reemphasises the objective valuation on the basis of the market value, which the Assistant Controller is under a statutory obligation to arrive at. The balance-sheet value of a property may not necessarily be the same as the market value of the property, unless the date of purchase of the property coincides with the date of the drawing up of the balance-sheet and unless there is evidence to show that the price at which the property was purchased, in every respect accords with the market value. For, if a property is retained in any business, then under ordinary principles of accounting, depreciation will have to be charged to the property and in every successive balance-sheet the asset will not carry its original cost but something less then that, after charging depreciation, at a figure which is called its 'written down value'. In a period of rising prices for real estate, even the original cost of a property retained will be a wrong figure and successive balance-sheet will not give a true version of the market value of the property. The position will be much worse if the balance-sheet charges depreciation and only shows the written down value of the property at the time of any balance-sheet, if the market for real property is all the while rising. A balance-sheet value must, therefore, be regarded provisions of ss. 36(1) and (2), it cannot be accepted as a proper conception of the basis of valuation under the E.D. Act to contend that the Assistant Controller has got to adopt, without question, the balance-sheet value merely because the form of account prescribed by the rule-making authority under the Act requires the accountable person to mention his partnership interest as one of the items to be shown in the form of account and report the balance-sheet value of that item as part of the entries in the said account.
15. Mr. Subramaniam then submitted that as a matter of construction of s. 36(1), what the assessing authority is enjoined to determine is the amount which would be arrived at by imagining an open market sale at the time of the deceased's death. In so doing, according to learned counsel, the Assistant Controller ought not to overlook the peculiar incidents which might attach to any property and might be susceptible to market fluctuations. Learned counsel submitted that in a case such as the present one, where the partnership article provided that the firm should continue notwithstanding the death of any partner, the principle to be applied would be not to go into the detailed break-up valuation of the firm's assets, but merely to adopt the book figures of valuation of the deceased's interest, because under the terms of the partnership articles as well as under the general law of partnership, there being no dissolution, the value of assets ought not to be taken on the basis of a winding up and a distress sale of the firm's assets.
16. Learned counsel cited a few decisions in support of his contention, namely, Surajmall Gouti v. CED : 119ITR182(Cal) , of the Calcutta High Court, Smt. Gunvantibai v. CED : 130ITR122(MP) , of the Madhya Pradesh High Court and CED v. Fakirchand Fatehchand Sachdev : 134ITR268(Bom) , of the Bombay High Court. We have found a general trend of discussion on a study of the judgments. The courts have tended to discuss the valuation question in these case not from the point of view of the charge to estate duty, but, rather, from the point of view of ascertaining what the position of the deceased's partnership interest is, either under the law of partnership or under the peculiar terms of the instrument of partnership governing the deceased's share. Some of the learned judges were disposed to regard the charge to estate duty from the point of view of either the heirs of the diseased partner or from the point of view of the surviving partner. The judgment of the Bombay High Court in CED v. Fakirchand Fatehchand Sachdev : 134ITR268(Bom) , may be said to concentrate on this aspect more than the other decision which we have referred. This case before the Bombay High Court as well as the others we have referred to, were cases of partnership agreements which provide that the firm shall not dissolve on the death of a partner, but shall continue with the surviving partners. In almost every one of them, it was laid down by the learned judges as a general rule of partnership law, that the deceased partner's share has to be calculated not on the basis of the break-up value method or on the basis of whatever was due to the deceased's partner or his heirs as money lying to the credit of the deceased partner's account. The corrollary to this theory was that any part of the interest of the partner, other than the amount to which the legal representatives would be entitled, may be regarded as an interest passing by survivorship to the surviving partner. In other words, what happened on the death of a partner, was conceived in a dual fashion from the point of view of destination of the property by way of devolution. Part of the property, to the extent of the credit balance in the account of the deceased partner was supposed to go to the legal heirs of the deceased, the balance of the interest of the deceased partner was supposed to pass, by rule of to survivorship, to the remaining partners. From the point of view of those on whom the deceased partner's interest devolves, the view adumbrated in the decision aforesaid may be accepted as correct. But that view is apposite for the purpose of the E.D. Act. Estate duty is not an inheritance tax. A tax on inheritance is a levy on the person who inheritance of the property, the burden being made to fit in with the size of the inheritance of the heir or the legatee, as the case may be. Estate duty, on the contrary, is a levy on property on the occasion when it passes hands, the occasion being the death of a person. This is why estate duty is sometimes referred to as a species of a mutation duty, a levy on the occasion of the property changing hands. That the inheritance has nothing whatever to do with the charge to estate duty is illustrated by the fact that part of the dutiable estate under the E.D. Act, can be on 'Estate per antre vie' under the Act, an estate per antre vie has to be regarded as a separate estate independent of the general estate liable for estate duty. This illustrates the real nature of the impost under the E.D. Act. The fact that, on the death of a partner and depending upon the terms of the partnership, the surviving partners take the partner's interest, subject only to payment to the deceased partner's heirs whatever appears in the firm's books to the deceased's credit, may in one sense have pertinence for ascertaining who are the beneficiaries following the death of the partner. This inquiry, however, has no relevance for the purpose of estate duty, neither of the charge, nor for the valuation of the partner's interest. To the extent that the decisions abovenamed hold that the dutiable estate under the Act must be restricted only to the amount payable to the deceased's heirs. the decisions are wrong, for they would lead to under-assessment of the share of the deceased in the partnership. In such an assessment, only that which devolves on the deceased's heirs will be taken into account. The assessment will not take note of that which goes to the surviving partners on the death of the deceased partner.
17. We are supported in this part of our opinion by a decision of a Division Bench of this court in CED v. Ibrahim Gulam Hussain Currimbhoy : 100ITR320(Mad) . That was also a case where a partnership was not dissolved on the death of a partner, but the surviving partners continued the business. There was also a provision in the partnership deed that the deceased's heirs would not be entitled to any part of the goodwill of the firm, as a matter of accounting of the share of the deceased. In these circumstances, on the death of the partner concerned, the Assistant Controller made an assessment of the dutiable estate including therein the value of the deceased's interest in the partnership. The Assistant Controller did not take a comprehensive view of the deceased's interest, but took up for special valuation the deceased's interest in the goodwill of the partnership. The goodwill was ascertained to be Rs. 84,000 and 2/16th share of the deceased in that firm was calculated at Rs. 12,722 and this was added to the admitted value of the deceased's interest in the partnership. The accountable person objected to the inclusion of Rs. 12,722 on score that it represented the component value of the goodwill appertaining to the deceased's interest in the firm. The Tribunal agreed with the accountable person and deleted the amount from the principal value of the estate. On a reference to this court, it was urged that no part of the goodwill devolved on the heirs of the partner. It was contended that under the terms of the partnership, the beneficiaries of that interest were exclusively the surviving partners. On the basis of this contention, it was urged that no part of the goodwill could be included in the dutiable estate as forming part of the deceased's interest in the partnership. This contention was, however, negatived by this court, The Bench held that, goodwill, being an asset of the firm, belonged to all the partners, and the death of the deceased resulted in augmenting the interest of the surviving partners in the goodwill and hence there was a passing of the deceased's share in the goodwill even if there was no devolution of the deceased's interest in the goodwill on the legal representatives. We rely on this decision for a limited purpose, namely, that in the very nature of the charge to estate duty, the inquiry to whom the property passes is a matter of indifference, but whether the property passes at all and what is the value of the property which passes are the only criteria. The court expressed the view that estate duty is not restricted in its scope to that which devolves on the heirs of the deceased. The partners in that case, who were strangers, were nevertheless entitled to the goodwill including the deceased's share of the goodwill on the deceased's death. On this footing, the court included the goodwill in the dutiable estate.
18. The decision of the court in that case was apparently conditioned by the manner of assessment which was adopted by the Assistant Controller. We have, however, explained in earlier paragraphs that the approach must be not to find out who are the beneficiaries of any part of the property of the deceased, including the partnership interest, whether it is the heir or the legatee of the deceased. The approach, as we earlier stated, must be to find out whether the property passes and then proceed to evaluate the market value of the property on the interest therein which passes. None of the cases cited including that of this court, which we have mentioned above, makes this direct approach. Nevertheless, the observations of this court support us to a considerable extent.
19. Having discussed the case law cited from the view-point of their general trend, we do not think it necessary to go into the details of any of the cases cited. Nor can we accept Mr. Subramaniam's submission that for arriving at the market value of the deceased's share, it is not open to the assessing authority to take up the valuation of individual assets the partnership. In pure theory, which does not take note of practicalities, it would be correct to say that a valuer of a partnership interest should not see before him anything other than the partnership interest as such. Since a partnership interest is a property in itself, it has got to be evaluated on its own terms. However, it would not be practicable to arrive at the market value of an interest in partnership by completely ignoring the position that the interest is an interest in a partnership. We have, therefore, necessarily to take stock of the net worth of the partnership and then proceed to deduce therefrom each partner's interest as but a fractional share thereof. To arrive at the net worth of the partnership, we have perforce to take note of the individual items of assets which go to make up the assets side of the partnership, as well as the outstanding debits and liabilities of the partnership. These are but necessary steps in order to arrive at the final result, namely, the valuation of the interest of the partner in the partnership.
20. We have referred earlier to the valuation provisions in the E.D. Rules in regard to valuation of a partner's interest. Those provisions only adopt the break-up value method, involving as it does, the valuation of partnership asset, in the first instance, and then proceeding therefrom to ascertaining the aliquot share of the partner concerned. If, therefore, in the present case, the Assistant Controller concentrated his attention on the market value of the property in R. S. Puram, Coimbatore, belonging to the firm, that was but a necessary step for the valuation of the partnership interest. The valuation of the firm's property is not an end in itself, but a means to arrive at the deceased's own interest in the partnership.
21. Mr. Subramaniam, however said that the Assistant Controller was wrong in picking up only one asset of the partnership firm for the purpose of ascertaining the market value thereof. The suggestion was that the Assistant Controller ought to have done the same thing in each and everyone of the individual assets of the partnership. What the learned counsel says is perfectly correct. But we must in this case assume one of two things. Either there were no assets of the firm worth mentioning other than the building in R. S. Puram, Coimbatore, or there were other assets with respect to which the Assistant Controller was prepared to accept the book value of those assets of the firm as representing more or less their market value as on the date of death. In either case, there was no necessity for the Assistant Controller to make any fuss about arriving at the market valuations of each and every one of the assets of the firm item by item. We do not find in the method adopted by the Assistant Controller any contravention either of any principle of valuation or of any of the express provisions of s. 36 of the Act. The sum of Rs. 4,704 when mentioned in isolation may give an appearance that some fundamental principle of valuation has been given the go-by. In truth, however, as we earlier observed, this is only the end result of a comprehensive valuation made by the Assistant Controller of the interest of the interest of the deceased as a partner in this firm.
22. For all the above reasons, we must return a negative answer to this question before us. In the peculiar circumstances of the case, there will be no order as to costs.