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Issues Involved:
1. Whether the transaction of retirement of the assessee constituted extinguishment of his rights in the partnership firm within the meaning of Explanation 2 to section 2(15) of the Estate Duty Act, 1953. 2. Whether the Tribunal was justified in allowing deduction of Rs. 1,45,000. Issue-wise Detailed Analysis: 1. Extinguishment of Rights in the Partnership Firm: The primary question was whether the retirement of the deceased partner constituted an extinguishment of his rights in the partnership firm under Explanation 2 to section 2(15) of the Estate Duty Act, 1953. The deceased partner retired from the partnership three days before his death, receiving Rs. 50,000 for his share in the goodwill, although the actual value was Rs. 1,95,000. The Assistant Controller of Estate Duty included the difference of Rs. 1,45,000 as a gift to the deceased's sons, which was upheld by the Appellate Controller on the grounds that the transaction fell within Explanation 2 to section 2(15) of the Act. The Tribunal, however, reversed this decision, stating that neither section 9 nor Explanation 2 to section 2(15) applied, as there was no clause in the partnership deed entitling a retiring partner to claim his share in the goodwill. The Tribunal held that the deceased was only entitled to Rs. 50,000 as per mutual agreement, and therefore, no extinguishment of rights without consideration occurred. The High Court referred to the Supreme Court's decision in CED v. Mrudula Nareshchandra [1986] 160 ITR 342, which established that goodwill is property that can be disposed of by a partner. The court noted that even in the absence of a specific clause in the partnership deed, section 55 of the Indian Partnership Act ensures that every partner has a right to the goodwill of the firm. Therefore, the deceased's acceptance of Rs. 50,000 instead of Rs. 1,95,000 constituted a relinquishment of his right in the goodwill, passing the benefit to the continuing partners. 2. Justification of Deduction of Rs. 1,45,000: The Tribunal allowed the deduction of Rs. 1,45,000, which was contested by the Revenue. The High Court examined sections 5, 6, 9, and 27 of the Estate Duty Act to determine the applicability of estate duty on the relinquished portion of the goodwill. Section 5 is the charging section, section 6 deems property the deceased could dispose of as passing on death, and section 9 addresses gifts made within two years of death. Section 27 specifically targets dispositions to relatives within two years of death, treating them as gifts unless made for full consideration. The High Court concluded that the deceased's acceptance of a lesser amount for his share in the goodwill amounted to a gift to his sons, falling under sections 27 and 9 of the Act. Consequently, the difference of Rs. 1,45,000 was rightly included in the estate of the deceased for estate duty purposes. Conclusion: The High Court answered both questions in favor of the Department and against the assessee. The first question was answered affirmatively, confirming that the transaction constituted an extinguishment of rights under Explanation 2 to section 2(15). The second question was answered negatively, rejecting the Tribunal's justification for the deduction. The Department was awarded costs of Rs. 250.
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