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TMI Blog1984 (1) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... hare of profit of the deceased till the date of death. The Appellate Controller held that the share of profit up to the date of death could not be treated as passing on the death of the deceased. The department questions the correctness of this finding in the appeal filed by them. 3. The Assistant Controller estimated the value of the share of the deceased in future profits at Rs. 98,638. This was confirmed by the Appellate Controller, who rejected the contention of the accountable person that the right to share future profit is not includible in the total value of the estate. The correctness of this finding is questioned by the accountable person in the appeal filed by him. 4. Appeal by the department : The ground taken by the department is that the Appellate Controller erred in holding that the share of profits of the firm from the end of the last preceding financial year up to the date of death is not to be included in the principal value of the estate passing on the death of the deceased. 5. The firm was constituted by a deed of partnership dated 12-3-1976. The deceased Kurien Abraham was the first party to the deed. Shri A. Kurien, Shri A. Jacob and Shri Ravi Abraham, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, claimed by the learned departmental representative that the amount should be deemed to pass on his death. 7. On the other hand, the learned representative for the accountable person reiterated the argument advanced before the Appellate Controller. 8. We have considered the matter. As already stated, clause 12 of the partnership deed relates to the retirement of a partner and it provides that for purchasing his share, only his share of the profits up to the end of the preceding financial year will be taken into consideration. Clause 14 relates to death or insolvency and it reads thus : "14. If during the continuance of the partnership any partner shall die or become insolvent then the remaining partners shall have the option (to be exercised by notice in writing to the legal representatives of the deceased partner or to the receiver of his estate as the case may be within a month after the death or insolvency) to purchase the share of the other partner as at the date of his death or insolvency in the capital and assets of the partnership on the terms mentioned in clause 12 of the deed. The partnership shall not be dissolved in the event of the death or retirement of any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his death. 9. During the course of the argument, the learned representative for the accountable person, had relied upon the decision in the case of Surajmall Gouti v. CED [1979] 119 ITR 182 (Cal.) in which a general proposition has been laid down that the individual assets of the firm should not be valued in determining the share of the deceased in the partnership. The contention in this form had not been raised in the grounds of appeal. The accountable person has not filed any cross-objection objecting to the method of valuation of the share. On the other hand, in the appeal filed by him, he has only questioned the correctness of inclusion of another item in the valuation. This ruling is not, therefore, relevant. The learned representative also relied upon the ruling of the Bombay High Court in the case of CED v. Fakirchand Fatehchand Sachdev [1982] 134 ITR 268 for the position that the value of the share of the deceased should be worked out in accordance with the provisions of the partnership deed. This position has not been contested by the department. 10. In view of the finding recorded earlier, the appeal by the department has to succeed. But the share of profit cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s even at the time of the commencement of the partnership. In support of this position, the learned representative relied upon the decision of the Bombay High Court in Fakirchand Fatehchand Sachdev's case. As against this, it was contended by the learned departmental representative that the share of a deceased partner in the goodwill of the firm is a property which passes on his death. In support of the contention, reliance was placed upon the decision of the Allahabad High Court in the case of Smt. Vindoor Bai v. CED [1981] 132 ITR 421 and that of the Gauhati High Court in CED v. Kanta Devi Taneja [1981] 132 ITR 437. 14. We may mention at this stage that the question has been considered recently by the Kerala High Court with reference to the decided cases in the unreported decision of P. T. Abdul Sattar v. CED [IT Reference No. 153 of 1979, dated 30-8-1983]. It is, however, to be noted that the decision of the Kerala High Court and the decisions referred to therein relate to cases where the partnership deed expressly provided that a deceased or retiring partner shall not be entitled to any share in the goodwill of the firm. In the case before the Kerala High Court the deed provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dissolution of the firm, though the right which he had during the subsistence of the partnership, ceases to exist and would not be property passing on his death, the right which he had on the dissolution of the firm continues to subsist and would be property passing on his death. In a case, where the death of a partner does not dissolve the partnership but the surviving partners have the right to carry on the business of the partnership, what would pass would be the two sets of rights or both rights of the deceased as a partner, namely, his right during the subsistence of the partnership and the right which he would have on the dissolution of the firm. In a case of dissolution brought about by a partner's death, the property would pass on to the legal representatives, i. e., to his heirs intestate if he has died intestate or if he has died testate to the persons to whom he has willed away. In a case, where a partnership is continued by the surviving partners by reasons of the provisions in the partnership deed the rights of the deceased would pass on his death to the surviving partners. In either case, there would be passing of property for the purpose of section 5. 18. The Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner died, the remaining partners shall have the option to purchase the share of the deceased partner on the terms mentioned in clause 12. The option is to be exercised in writing to the legal representatives of the deceased partner or to the receiver of his estate, as the case may be, within a month of the death or insolvency. It is, therefore, clear that on the death of a partner, his rights will first pass to his legal representatives. At this stage, the partnership deed does not say that the share in the goodwill will not pass to the legal representatives. The surviving partners may or may not exercise their option to purchase the share of the deceased partner from the legal representatives. But if they decide to purchase, it is clear that they need not pay for the share of the goodwill but need pay only for the share in the capital investment, interest thereon together with the proportionate share of the reserve funds and the share of profits up to the last preceding financial year. The present case cannot, therefore, be equated to a case where the partnership deed provides that the legal representatives of a deceased partner will not be entitled to a share in the goodwill of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence the fact that the legal representatives of the deceased partner were not entitled to take the value of the goodwill into account at the time when the surviving partners exercised their option under the agreement, would obviously be irrelevant, and, therefore, the observations of the Privy Council were completely justified with reference to the facts of that case." These observations apply fully to the facts of the present case. 22. In the case of Attorney-General v. Boden [1912] 1 KB 539 the share of a partner, on his death, accrued to his sons, who were also partners subject to their paying out his legal representatives, the value of his share at the date of death ascertained by proper valuation without any consideration of or allowance for goodwill. It was observed by the Gujarat High Court that in this case, the interest of the deceased partner directly passed to his legal representatives immediately after his death and that his share was to accrue to the partners, who were his sons, only if they paid out the legal representatives. It is pointed out that if the partners had preferred not to exercise the option by paying the legal representatives of the deceased the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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