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TMI Blog1978 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... irm. The firm was dealing in medicines and operating under the partnership deed dated 20th February, 1959. A copy of the said deed of partnership is annexed as annex. " A " to the statement of case. The deceased was also (though not at the time of his death) a partner earlier in two other firms, viz., (1) M/s. Kantilal Manilal Co. and (2) Messrs. Pannalal Brothers. Both these firms were carrying on business as chemists and druggists, the former firm at Bombay and the latter firm at Calcutta. The deceased, however, retired from both these firms on 9th January, 1959. In respect of M/s. Kantilal Manilal Co., the partnership deed then in operation was one dated 17th January, 1952, and under the same the deceased had a one-sixth share. The partnership deed in operation in respect of Messrs. Pannalal Brothers was one dated 10th June, 1960, and in the said firm he had a six and half annas share out of a total of sixteen and half annas. Deeds of retirement were executed when the deceased retired from these firms, though the one in respect of M/s. Kantilal Manila] Co. is dated 20th February, 1959, while the others in respect of M/s. Pannalal Brothers is dated 9th January, 1959. Copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was conceded that the case in respect of the two firms, viz., Kantilal Manilal Co. and Messrs. Pannalal Brothers, in which there had been retirement prior to the death, was identical. With respect to the contention that there was no goodwill in the firms at the time of death or retirement, the same was negatived by the Tribunal with reference to the clauses of the partnership deeds and the clauses of the deeds of retirement. It is unnecessary to go any deeper into this aspect of the case as it does not arise from the two questions on which our opinion is sought in this reference. The finding of the Tribunal, it may be briefly stated, on the question whether any or all the three firms had a goodwill was against the assessee in respect of all the three firms. The Tribunal next turned its attention to the question whether the share of the deceased in the goodwill passed on his death or was relinquished within the meaning of s. 9 read with Expl. 2 to cl. (15) of s. 2. This question was first considered with reference to the share in the goodwill of the firm of M/s. Natwarlal Co. and it was held that it indeed passed on his death and became liable to estate duty under s. 5 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that this was clearly a case of deemed passing of property as contemplated by the provisions contained in s. 7 inasmuch as on the death of the deceased his interest in the goodwill came to an end and to the extent of the cesser of his interest there was an enhancement in the shares in the goodwill of the continuing partners. It was submitted that this was the view taken by a Division Bench of the Gujarat High Court in Smt. Mrudula Nareshchandra v. CED [1975] 100 ITR 297. In order to consider the correctness of such submission, it will become necessary to set out the relevant provisions from the deed of partnership dated 20th February, 1959, which was the operative deed governing the partnership of M/s. Natwarlal Co. Our attention was drawn to cls. 12 and 13 of the deed of partnership which provides as under : " 12. All the assets including the goodwill, outstandings, import and export quota rights and other rights, benefits and privileges together with the liabilities of the said original firm of Messrs. Natwarlal Co. constituted by the parties hereto of the first and second parts and the said Mansukhlal Jesinglal have been taken over by the party of the first part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions contained in cl. 10 of the deed of partnership being considered by it, which was in the following words : " 10. The firm shall not stand dissolved on death of any of the partners and the partner dying shall have no right whatsoever in the goodwill of the firm. " The Gujarat High Court considered the case before it and, thereafter, after setting out the relevant statutory provisions, proceeded to consider whether the share of interest which the deceased had in the goodwill of the firm either passed under s. 5 or is deemed to have passed under s. 7 of the Act in the following words : " We shall first take up for our consideration the question whether section 5 applies to the facts of the case. As already noted above, a mere event of passing of property from one hand to the other is sufficient to attract the provisions of section 5. The use of the word 'passes ' signifies the movement of the property from one hand to the other by some legally recognised method of devolution. This passage or the movement of the property from one hand to the other should be the result of death of the person concerned. Therefore, in the case of a person, whose right or interest in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of the deceased on his death and hence both the conditions of s. 7 were satisfied. However, one further argument was urged on behalf of the accountable person before the Division Bench which was based on the provisions contained in s. 40. The argument was that the benefit which is contemplated by s. 7 was one which is capable of being valued in terms of s. 40 of the E.D. Act. This argument was considered and upheld by the Division Bench in the following words : " Section 40 thus clearly postulates that the property in which the interest has ceased must be capable of yielding income, because unless it is so capable, the interest, which has ceased, cannot be said to be extending either to the whole or to less than the whole of the income within the meaning of section 40. In other words, if the property in which the interest has ceased to exist has no inherent potentiality to yield any income, standing by itself, it would not be possible to evaluate the benefit accruing or arising from the said cesser under any of the provisions of the Act including section 40. To put it differently, the cesser of such interest is not made exigible to duty. " The Division Bench then proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne before the Division Bench of the Madras High Court. In any case, it is impossible to hold on the provisions of cl. 13 of the deed of partnership that there was any cesser, and hold further that the only provision which could be attracted was s. 7. In our view, cl. 13 clearly contemplates devolution of the share of the deceased in all the assets including the goodwill on the continuing partners but providing that there is to be payment to the legal representatives for the share in the assets but excluding goodwill. This would clearly bring the case within the meaning of s. 5 and the points which appealed to the Gujarat High Court in Smt. Mrudula Nareshchandra's case [1975] 100 ITR 297 do not arise for our consideration in the matter before us. It may be pointed out that a Full Bench of the Punjab and Haryana High Court had occasion to consider both these decisions, viz., of the Gujarat High Court in Smt. Mrudula Nareshchandra's case [1975] 100 ITR 297 and of the Madras High Court in lbrahim's case [1975] 100 ITR 320 in State v. Prem Nath [1977] 106 ITR 446 (Punj) [FB]. It may be mentioned that the Full Bench became necessary in view of the earlier Division Bench decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the accountable person submitted that the Tribunal was clearly in error in concluding that there was a gift of the share of the goodwill by reason of cl. 2 by the deceased to the continuing partners and invoking s. 9, as the alleged gift was within a period of two years of the death of the deceased. It was submitted that the view expressed by the Tribunal in para. 11 of its order, a portion of which has been earlier extracted, is totally incorrect and the basis on which the Tribunal has proceeded, viz , there should be a separate consideration for the share in the goodwill, is totally uncalled for. It was submitted that the retiring, partners including the deceased had given up their share in the assets including the goodwill but at the same time had been relieved of their share in the liabilities of the firm as existing on the date of retirement. In other words, it was submitted that if a benefit had been secured by the provision to the continuing partners, viz., the obtaining of the share of the retiring partners in the assets including the goodwill this was accompanied by taking over of an obligation, viz., he entire liabilities of the firm and the further obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountable person that for the purpose of quantifying the share in goodwill and determining the monetary value thereof, only the returned profits of the firm as distinguished from the assessed profits were required to be considered. The Tribunal has rejected this argument in para. 18 of the impugned order, and we are in agreement with the view expressed therein that, normally, it would be assessed income and not the returned income which would have to be considered as the proper basis. We are also in agreement with the Tribunal's view that the assessed income to be considered would be the one finally determined. The view taken by the Tribunal in para. 18 of its order appears to be correct and there is no reason to interfere with its conclusion on the quantification of the goodwill. No other point was urged before us. In the result, the questions referred to us are answered as follows : Question No. 1.--The share of the deceased in the goodwill of Messrs. Natwarlal Co. was includible in the principal value of the property under s. 5 of the E.D. Act. The share of the deceased in the goodwill of Messrs. Kantilal Manilal Co. and Messrs. Pannalal Brothers was not includible in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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