1. This appeal is filed against the order of the Appellate Controller, Madurai, passed in ED Appeal No. 39 (Madurai) of 1977-78 dated 19-11-1983.
2. According to the facts of this case, the Assistant Controller included the following amounts as part of the accountable person's share:(i) Share in reserve fund 35,176(ii) Share of goodwill 15,000(iii) Share of profit till the date of death 1,184 The accountable person submitted before the Assistant Controller that as per the terms of the partnership deed, no share from the above three items could be claimed by the deceased. It was further submitted that inasmuch as there was a total restriction in the partnership agreement in respect of sharing any portion from the above items, the same could not be considered to be passing on the death of the deceased. The Appellate Controller, after considering the partnership deed of Poormans Depot, Tuticorin, especially the clauses contained therein, viz.; Clauses 11, 12 and 14, came to the conclusion that in the instant case, because of the restrictions imposed, as mentioned above, the deceased is not entitled to any share in the above items. Accordingly, he deleted the inclusion of the above three items from the estate of the deceased.
3. Aggrieved, the department is in appeal before us. The learned departmental representative submitted that the Appellate Controller erred in deleting the abovesaid three items of assets from the dutiable estate of the deceased without assigning proper reason. He further submitted that the Appellate Controller failed to note that the interest of the deceased in the abovesaid assets passed on his death and, therefore, was dutiable under the Estate Duty Act, 1953 ('the Act'). It was also submitted that under the terms of contract of partnership, whatever be the position regarding the claim by the legal heirs of the deceased, the position under the Act, as regards passing of the property on death was different and, therefore, according to the learned departmental representative, the Appellate Controller ought to have sustained the addition made by the Assistant Controller. The learned departmental representative also relied upon a decision of the Madras High Court in CED v. Ibrahim Gulam Hussain Currimbhoy [1975] 100 ITR 320. On the other hand, the learned Counsel appearing for the accountable person supported the order of the Appellate Controller.
4. We have heard the rival submissions made by the parties. The fact remains that deceased was a partner in the firm called the Poormans Depot, Tuticorin. Clauses 11, 12 and 14 of the said partnership deed entered into on 30-12-1972 state as under: 11. The retiring partner is not entitled to claim any profit for the proportionate period of the account year in which such partner retires, nor any share in the reserve fund or the goodwill of the firm. This shall apply to the event of death also.
12. If the legal heirs of the deceased parties so decide to withdraw from the partnership, they shall be paid off only the capital amount and the credit balance standing to the credit of the deceased person in his/her No. 2 account and advance account on the date of death, and their legal heirs are not entitled to any share of profit for the proportionate period of the account year in which he or she dies.
14. Any partner retiring or any partner who dies during the existence of this partnership is not entitled to any share in the reserve fund, if any, created by the firm and is also not entitled to any share in the goodwill.
The deceased was a partner in the abovesaid firm holding 10 per cent share. Shri Muthukaruppa Nadar died on 13-7-1975. The case of the accountable person was that in view of the abovesaid clauses in the partnership deed, the amounts mentioned under the heads 'Reserve fund', 'Goodwill', and 'Share of profit' will not pass to the accountable person after the death of the partner Shri Muthukaruppa Nadar. This is because, according to the accountable person, no share from the above items can be claimed from the deceased as per the terms of the partnership deed. Therefore, on the date of the death of the deceased, these items did not pass to the accountable person. Normally, a partner on his death would be entitled to his share in all the assets of a firm. Restrictions were placed according to the abovementioned clauses in the partnership deed to the effect that the legal representatives of the deceased are not entitled to any share of profit for the proportionate period of the accounting year in which the deceased died and are not entitled to any share in the 'reserve fund' created by the firm and he is also not entitled to any share in the goodwill.
According to the learned Counsel appearing for the accountable person since there is a contract between the partners, as abovesaid, the rights and liabilities of the partners are subject to the contract entered into by the parties. He further pointed out that it is open to a partner to enter into a contract with other partners in the matter of restricting any right in the goodwill or reserve fund or in sharing the profit, as the case may be. He further pointed out that Section 14 of the Indian Partnership Act, 1932 says that the firm can own property.
He relied upon a decision in Smt. Mrudula Nareshchandra v. CED [1975] 100 ITR 297 (Guj.). In that case, the deceased was a partner in a firm.
Clause 10 of the partnership deed provided that the firm shall not stand dissolved on the death of any of the partners and the partner dying shall have no right whatsoever in the goodwill of the firm. On the death of the deceased, the Assistant Controller, while valuing the estate of the deceased, came to the conclusion that the share of the deceased in the goodwill of the firm in which he was a partner was liable to be included in the principal value of his estate. The question arose as to whether the value of the goodwill could be taken into account while arriving at the principal value of the estate. The Gujarat High Court held that though the interest of the deceased in the firm was property within the meaning of the Act, still in view of clause 10, the interest of the deceased in the goodwill ceased or came to an end on his death. Therefore, the rights accrued in favour of the surviving partners who did not derive their interest as the representatives of the deceased and, therefore, it cannot be said that the property passed within the meaning of Section 5 of the Act.
According to the learned Judges in that case, what happened was that by virtue of clause 10, the interest of the deceased in the firm's goodwill ceased without being inherited by his heirs and the rights in the goodwill have, therefore, lost its continuity, identity and mobility and, therefore, it cannot be treated as property passing from one person to another as contemplated by Section 5. However, the learned departmental representative relied upon a decision of the Madras High Court in the case of Ibrahim Gulam Hussain Currimbhoy (supra) in support of the submissions contained in the ground of appeal. In this judgment, the Madras High Court had occasion to consider the judgment of the Gujarat High Court in Smt. Mrudula Nareshchandra's case (supra). While dealing with the same, the Madras High Court observed as under: ...With respect, we are not inclined to agree with the reasoning of the learned judges in that case. It has been pointed out by the Supreme Court in Khushal Khemgar Shah v. Mrs. Khorshed Banu AIR 1970 SC 1147 that the Partnership Act does not operate to extinguish the right in the assets of the firm of a partner who dies when the partnership agreement provides that on death the partnership is to continue. Therefore, it cannot be successfully contended that the interest of the partner in the assets of the partnership including the goodwill of the firm is extinguished on his death. Therefore, the interest in the goodwill which the deceased possessed and could dispose of along with his entire interest in the firm at the time of his death came to devolve on the surviving partners and their share in the interest of the goodwill is augmented to the extent of the share of the deceased as per clause 14 of the partnership deed. This will straightaway attract Section 5 of the Act. We have to, therefore, hold that there was in fact passing of property on the death of the deceased so as to attract Section 5....
5. Our attention was also drawn to another decision of the Calcutta High Court in CED v. Annaraj Mehta and Deoraj Mehta [1979] 119 ITR 544.
In that case, the Calcutta High Court held as under: What passes on the death of a partner is his share in the firm, that is, his interest in the entire unit of the firm. This has to include goodwill. The fact that such interest may devolve not on the legal representatives but on a different group or category of persons or that from the goodwill the legal representatives may be excluded would not make any difference for the purpose of assessment to estate duty. The entirety of the interest of the deceased partner that would pass, which necessarily includes goodwill, would be includible in the estate. The valuation of such entire interest has to be determined as provided under Section 36 of the Estate Duty Act, 1953, read with rule l(c), of the Estate Duty Rules, 1953....
6. There is also a decision of the Calcutta High Court in the case of Surajmall Gouti v. CED [1979] 119 ITR 182. In that case, the deed provided that in the case of death or retirement of any partner, the partnership will not stand dissolved but the legal representatives of the deceased would be entitled to be paid his share of capital and interest in the firm after the same could be determined by mutual consent on the basis of the profit and loss account and the balance sheet as on the date of death of the deceased. The estate duty authorities in calculating the value of the share of the deceased in the firm valued the individual items of assets and included the same in the principal value of the estate of the deceased. It was held by the High Court that the authorities were required to compute the entire value of the shares of the deceased on the basis of what it would fetch in the open market and that they were not entitled to value the share first on estimate item-wise and thereafter to add thereto the estimated enhanced value of any particular asset.
7. Therefore, according to the department, what passes on the death of a partner is his share in the firm, viz., his interest in the entire unit of the firm. This has to include the goodwill. The fact that such interest may devolve not on the legal representatives of the deceased but on a different group or category of persons would not make any difference for the purposes of the assessment of the estate duty. It is the entirety of the interest of the deceased partner in the firm that would pass and such interest of the deceased partner in the firm, which necessarily includes goodwill, would be includible in the estate.
8. However, the learned Counsel appearing for the assessee, relied upon the decision of the Kerala High Court in the case of P. T. Abdul Sattar v. CED [1984] 150 ITR 207. According to the facts in that case, A was partner of a firm. Clause 15 of the partnership deed provided that in the event of death or retirement of a partner, such deceased or retiring partner would not be entitled to any goodwill of the firm. A died in 1969 and the Assistant Controller held that the interest of A in the goodwill of the firm passed on his death and this was upheld by the Tribunal. On a reference, the Kerala High Court held that under clause 15 of the partnership deed, the interest of A in the goodwill of the firm automatically came to an end on his death. Therefore, property in the goodwill did not pass on his death. In that case, the Kerala High Court followed the judgment of the Gujarat High Court in Smt.
Mrudula Naresh-chandra's case (supra). On the other hand, the Kerala High Court distinguished the following judgments: Ibrahim Gulam Hussain Currimbhoy's case (supra), Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwalla AIR 1970 SC 1147, State v. Prem Nath [1977] 106 ITR 446 (Punj. & Har.)(FB) and Smt. Surumbayi Ammal v. CED [1976] 103 ITR 358 (Mad.).
While distinguishing the abovesaid decisions, the Kerala High Court observed as under: Section 5, the charging section of the Act, levies estate duty on property which passes on the death of a person. Soon after the corresponding duty was imposed in England, the scope and amplitude of the term 'property passing on death' had been the subject-matter of judicial thought and discussion. The way to a clear and a correct view was by no means an easy one. Ours, however, is not an unlighted path. Even the very section of the Indian enactment had been subjected to exhaustive discussions in the judicial decisions rendered by the various High Courts in India, Gujarat, Bombay, Madras and the Punjab vide Smt. Mrudula Nareshchandra v. CED [1975] 100 ITR 297 (Guj.), CED v. Fakirchand Fatehchand Sachdev [1982] 134 ITR 268 (Bom.), CED v. Ibrahim Gulam Hussain Currimbhoy [1975] 100 ITR 320 (Mad.), State v. Prem Nath [1977] 106 ITR 446 (Punj. & Har.) and Smt. Surumbayi Ammal v. CED [1976] 103 ITR 358 (Mad.). We would treat these decisions as 'the lanthorn by which we could see our way on the dark road', as Froude would put it The learned Counsel further relied upon a decision of the Madras High Court in the case of CIT v. Bharani Pictures [1981] 129 ITR 244 for the proposition that the firm was a body of individuals and persons and as such, was an entity comprehended by Section 2(xviii) of the Gift-tax Act, 1958. Similarly, for the proposition that a partnership firm under the Indian Partnership Act is not a distinct legal entity apart from the partners constituting it and equally in law a firm as such has no separate rights of its own in the partnership assets, and all that is meant by 'firm's assets' is property or assets in which all partners have a joint or common interest, the learned Counsel relied upon a decision of the Supreme Court in Malabar Fisheries Co. v. CFT [1979] 120 ITR 49. We have also noted a later decision of the Bombay High Court in CED v. Fakirchand Fatehchand Sachdev [1982] 134 ITR 268, wherein the Court held as under: (12) For the purposes of the Estate Duty Act, 1953, what is to be seen is whether property has changed hands, irrespective of the destination of that property. The value of such property is liable to be included in the value of the estate of the deceased. (13) Where a partnership is dissolved by the death of a partner, his share in the firm passes on his death to his legal representatives.
Where a partnership is not dissolved on the death of a partner but the surviving partners become entitled to continue the partnership business, the deceased partner's share passes to his surviving partners subject to their making payment to the legal representatives of the deceased partner of the amount of the value of his share in accordance with the provisions of the deed of partnership. (14) Whether the share of a deceased partner passes on his death to his legal representatives or to his surviving partners, the property actually passes under Section 5 and cannot be said to be deemed to pass under Section 7(1) ... (15) ... in a case where the surviving partners are entitled to continue the partnership business and the property is deemed to pass under Section 7(1) it would not be correct to say that its value cannot be computed under Clause (b) of Section 40 ....
9. Thus, on considering the facts appearing in this case in the light of the decisions rendered by various High Courts--Smt. Mrudula Nareshchandra's case (supra), Fakirchand Fatehchand Sachdev's case (supra), Ibrahim Gulam Hussain Currimbhoy's case (supra)-- Prem Nath's case (supra) and Smt. Surumbayi Ammals case (supra)--we are of the view that it cannot be successfully contended that interest of the partner in the assets of the partnership including the goodwill of the firm is extinguished on his death. Therefore, the interest in the goodwill which the deceased possessed along with his entire interest in the firm at the time of death came to devolve on the surviving partners and the share in the interest of the goodwill is augmented to the extent of the share of the deceased as per Clauses 11, 12 and 14 of the partnership deed in question. According to us, the facts in this case straightaway attract Section 5. In that view of the matter, we set aside the order passed by the Appellate Controller on this point. Therefore, we direct the authorities below to include the abovesaid three items in the dutiable estate of the deceased.