1985 (2) TMI 104 - AT - Income Tax

Issues Involved:

1. Inclusion of Reserve Fund in the Dutiable Estate
2. Inclusion of Goodwill in the Dutiable Estate
3. Inclusion of Share of Profit till the Date of Death in the Dutiable Estate

Issue-wise Detailed Analysis:

1. Inclusion of Reserve Fund in the Dutiable Estate:

The Assistant Controller included the deceased's share in the reserve fund (Rs. 35,176) as part of the accountable person's share. The accountable person argued that, according to the partnership deed of Poormans Depot, Tuticorin, specifically clauses 11, 12, and 14, the deceased was not entitled to any share in the reserve fund. The Appellate Controller, after reviewing the clauses, agreed and deleted the inclusion of the reserve fund from the estate of the deceased.

The department appealed, arguing that the Appellate Controller erred in this deletion. The department contended that the interest of the deceased in the reserve fund passed on his death and was thus dutiable under the Estate Duty Act, 1953. They cited the Madras High Court decision in CED v. Ibrahim Gulam Hussain Currimbhoy, which held that a deceased partner's interest in the firm's assets, including the reserve fund, does not extinguish on death but passes to the surviving partners, thereby attracting estate duty.

2. Inclusion of Goodwill in the Dutiable Estate:

The Assistant Controller included the deceased's share of goodwill (Rs. 15,000) in the dutiable estate. The accountable person argued that, per the partnership deed, the deceased had no entitlement to the goodwill. The Appellate Controller agreed and excluded the goodwill from the estate.

The department appealed, asserting that the Appellate Controller failed to recognize that the deceased's interest in the goodwill passed on his death and was thus dutiable. They referenced the Gujarat High Court decision in Smt. Mrudula Nareshchandra v. CED, which held that the interest in the goodwill ceased on the death of the partner and did not pass to the heirs, thus not attracting estate duty. However, the Madras High Court in Ibrahim Gulam Hussain Currimbhoy disagreed with this reasoning, stating that the interest in the goodwill passes to surviving partners and is dutiable.

3. Inclusion of Share of Profit till the Date of Death in the Dutiable Estate:

The Assistant Controller included the deceased's share of profit till the date of death (Rs. 1,184) in the dutiable estate. The accountable person argued that, according to the partnership deed, the deceased was not entitled to any share of profit for the period of the accounting year in which he died. The Appellate Controller agreed and excluded the share of profit from the estate.

The department appealed, maintaining that the Appellate Controller erred in this exclusion. They argued that the deceased's interest in the profit passed on his death and was thus dutiable. The department cited the Calcutta High Court decision in CED v. Annaraj Mehta and Deoraj Mehta, which held that a deceased partner's share in the firm, including profit, passes to surviving partners and is dutiable.

Conclusion:

The Tribunal, after considering various judgments, concluded that the interest of the deceased in the assets of the partnership, including the reserve fund, goodwill, and share of profit, does not extinguish on death but passes to the surviving partners. This attracts section 5 of the Estate Duty Act, 1953. Consequently, the Tribunal set aside the order of the Appellate Controller and directed the authorities to include the aforementioned three items in the dutiable estate of the deceased. The appeal filed by the department was allowed.

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