9911796707
TMI Blog1988 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the goodwill of the firm was taken at Rs. 36,00,000 in the estate duty assessment of her assets by the Wealth-tax Officer. With effect from June 20, 1961, the firm had two partners, namely, the assessee and Smt. Ujjam Bai with 50% share each. On September 19, 1963, Shravan Kumar Patel, son of the assessee, was taken as a partner, but the share of the assessee remained intact at 50%. The assessee was appointed as a Minister in the Cabinet of the State of Madhya Pradesh, and, therefore, he decided to retire from the firm. An agreement was entered into with the other two partners on October 24, 1963, and the assessee retired from the partnership. It was agreed that the business of the firm shall be carried on by the remaining two partners and the assets and liabilities of the firm shall be the assets and liabilities of the continuing partners. However, it was agreed that notwithstanding the retirement of the assessee from the partnership business, he shall continue to own half-share of the goodwill of the firm. A right was also reserved in the assessee to rejoin the firm as partner with the same share due to change in the circumstances. Consequently, the assessee was not paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per annum to the assessee by the firm was an annuity and, therefore, not includible as an asset under section 2(e)(iv) of the Act. The assessee, in fact, had retained his share of goodwill and in effect let it out to the firm on payment of Rs. 50,000 per annum and he was getting this amount in cash. Goodwill is an asset of business. Rule 2C(b) of the Wealth-tax Rules, 1957, says that when goodwill is purchased by the assessee, the market value or the price actually paid, whichever is less, may be added. From this an inference cannot be drawn that merely because the goodwill had not been purchased for a price, it could not be included in the net wealth of the assessee. In the agreement, there are no conditions, precluding commutation of the annual payment of Rs. 50,000. However, the Commissioner set aside the order of the Wealth-tax Officer and directed that the goodwill for each year should be determined separately and that 50 per cent. thereof should be added to the wealth of the assessee. The assessee preferred 11 appeals before the Income-tax Appellate Tribunal. The Tribunal agreed with the Commissioner of Wealth-tax (Appeals) in principle that the value of the assessee's sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dwill of the firm was includible in the assessee's wealth and not the question as to whether the right of the assessee to receive a sum of Rs. 50,000 per annum was an asset chargeable to wealthtax ; (ii) that the amount of Rs. 50,000 is being paid annually for the use of the assessee's half-share in the goodwill of the firm, ownership of which continued with the assessee even after retirement, it is not an annuity and there is nothing to show that it could not be commuted in future if the assessee so desired. Learned counsel for the assessee replied by saying that it is always open to this court to reframe the question to bring out the real controversy between the parties. The real object of making a reference, stating a case and raising question, is to bring out the real controversy between the Department and the assessee, so that the High Court under its advisory jurisdiction can give an opinion on which the Tribunal can act. The High Court has ample jurisdiction to alter and reformulate questions submitted by the Tribunal in order to bring out the real controversy between the parties (CIT v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom)). If point of law is impl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the assets only if the terms and conditions relating to the grant make it impossible to interchange-it for a lump sum amount. It is generally a question of fact depending on the terms and conditions of the grant giving the annuity. The question of commutability may be inferred not only from the specific conditions but also from all relevant terms creating the annuity and other related conditions. Thus, non-commutability may arise either on account of a specific prohibition in the terms and conditions contained in the grant or it may otherwise be so inferred from the circumstances of the law applicable to their transfer. The Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888 held on the facts that, in view of the background of the payments and the circumstances leading to it, the sum of Rs. 25 lakhs paid to the assessee annually in lieu of the income from Sarf-e-Khas was an annuity, it was a fixed sum to be paid out of the properties of the Government of India in lieu of the previous income of the assessee from Sarf-e-Khas. As the privy purse, dealt with by the same agreement, was not commutable, from the circumstances and the background of the payment, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot. Where the property is -sold for what is an annuity in the strict sense of the word, the principal disappears and the annuity which takes its place is chargeable to tax. The Privy Council in Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 has held (i) that the annual payment was not an agricultural income, as it was not rent or revenue derived from land but money payable under contract imposing a personal liability on the covenantor, the discharge of which was secured by a charge on land ; (ii) that this was clearly a case where the owner of an estate (the assessee) had exchanged a capital asset for (inter alia) a life annuity which was income in his hands and not case in which he had exchanged his estate for a capital sum payable by instalments ; and (iii) that this income was taxable under the Income-tax Act even though the annuity did not constitute or provide profit or gain to the assessee. Here, the assessee, on his retirement from the firm, retained his ownership in his half-share of goodwill of the firm, but permitted its use by the firm in lieu of payment of Rs. 50,000 annually to him by the firm, so the amount so received could not be annuity as his right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned by the assessee and the other half by the remaining partners. But, on the retirement of the asessee, he retained his ownership in his half-share of the goodwill of the firm, though all other assets and liabilities of the firm came to be owned by the remaining partners and the assessee permitted use of his share of the goodwill of the firm by the other partners on an annual payment of Rs. 50,000 to him by the firm. So, the firm had the use of the entire goodwill for its business. Rule 2A of the Wealth-tax Rules, 1957, provides for determination of the net value of the assets of the business as a whole under section 7(2)(a) of the Wealth-tax Act and to make adjustments as per rules 2B to 2G. Rule 2B provides for adjustments in the value of an asset disclosed in the balance-sheet and rule 2C for adjustments in the value of an asset not disclosed in the balance-sheet. In this context, clause (b) thereof lays down that in the case of goodwill purchased by the assessee for a price, its market value or the purchase price actually paid, whichever is less, should be taken. Circular No. 5-D(WT) of 1966 dated September 18, 1966, of the Central Board of Direct Taxes says that the existin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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