C.P. Sen, J.
1. This is a reference under Section 27(1) of the Wealth-tax Act, by the Income-tax Appellate Tribunal, at the instance of the asses-see, for the opinion of this court, to answer the following question of law :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the value of the assessee's share in the goodwill of the firm, Mohanlal Hargovinddas, for the use of which he was getting a sum of Rs. 50,000 per annum in terms of the agreement dated October 24, 1963, was includible in the assessee's wealth for assessment years 1964-65 to 1974-75 ?'
2. Mohanlal Hargovinddas is an old firm manufacturing bidis and is one of the largest concerns of its kind in India. The firm had undergone several changes in its constitution. Smt. Jadav Bai, mother of the assessee, was a partner in the firm and she died in the year 1961. On her death, the 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 thepartnership 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 a partner with the same share due to change in the circumstances. Consequently, the assessee was not paid anything on account of goodwill, nor was he to be charged on his re-entry as a partner. But, as the benefit of the goodwill will be enjoyed by the firm as a whole and as the assessee is the owner of half-share of the goodwill, it was agreed that the firm will pay to the assessee a sum of Rs. 50,000 per year in respect of the use of the goodwill. It was expressly agreed that in view of his retirement, the assessee had no concern or share in the profits or losses in the business of the firm.
3. The assessee filed his wealth-tax returns for the assessment years 1964-65 to 1974-75, without including the value of his share in the goodwill of the firm, nor did he give any indication about it in his return. In fact, assessments for the years 1964-65 to 1967-68 were completed under Section 16(3) of the Wealth-tax Act, though these were subsequently re-Wealth-tax Officer disallowed the claim, but in appeal the claim was upheld, holding that it was a business expenditure and also revenue his returns of wealth, when considering the claim of the firm for deduction of the sum of Rs. 50,000 paid to the assessee as business expenditure. The Wealth-tax Officer has disallowed the claim, but in appeal the claim was upheld, holding that it was a business expenditure and also revenue expenditure. In the original proceedings for the assessment years 1968-69 to 1974-75 and in the supplementary proceedings for the years 1964-65 to 1967-68, the Wealth-tax Officer fixed the net value of the assessee's share in the goodwill, for which he was getting a sum of Rs. 50,000 annually from the firm and held that it was includible in his total wealth and since at the time of the death of Smt. Jadav Bai in 1961, the value of the goodwill of the firm was taken at Rs. 36,00,000 for estate duty assessment of her assets, the Wealth-tax Officer held that the value of the assessee's share in the goodwill of the firm could be reasonably fixed at Rs. 18,00,000 less Rs. 50,000 received in each year. Thus, all the assessments were completed by including a sum of Rs. 17,50,000 in his net wealth by way of the value of the assessee's share in the goodwill of the firm. The assessee preferred an appeal before the Commissioner of Wealth-tax (Appeals). The Commissioner did not accept the assessee's submission that the goodwill was not includible in the wealth. He also negatived that the payment of Rs. 50,000 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 orthe 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.
4. 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 share in the goodwill of the firm was includible in the wealth of the assessee and that the payment of Rs. 50,000 per annum by the firm to the assessee was not an annuity. Annual lease rent or annual fixed rent in respect of a property will not fall in the category of annuity. The assessee's share in the goodwill of the firm was not transferred and remained his property. The annual yield from the estate is certainly a relevant factor which cannot be glossed over while valuing the estate, i.e., the goodwill. So, the Tribunal directed the Wealth-tax Officer to give due weight to the yield aspect of the estate, while valuing the assessee's asset in the goodwill. Aggrieved by the order of the Tribunal, the assessee filed 11 applications under Section 27(1) of the Act for referring the following question of law :
'Whether the Tribunal was right in law in holding that the right of the appellant to receive a sum of Rs. 50,000 per annum was an asset chargeable to wealth-tax ?'
5. Allowing the application, the Tribunal, instead, has referred the question, which has been quoted earlier.
6. Learned counsel for the assessee submitted :
(i) That the right of the assessee to receive an amount of Rs. 50,000 annually from the firm for use of his share of goodwill of the firm, is nothing but an annuity, not commutable and, therefore, exempt from wealth-tax under Section 2(e)(iv) of the Wealth-tax Act;
(ii) that on the retirement of the assessee from the partnership the assets and liabilities of the firm became the assets and liabilities of the remaining partners, and, therefore, the assessee, as such, has no right to the goodwill of the firm, except to receive payment of Rs. 50,000 annually and the words 'owner of half of the goodwill' in the agreement have been used in the context that the assessee has a right to rejoin the firm, and so it could not be said that the ownership vested in the other partners, yet the assessee remained owner of half of the goodwill ;
(iii) that since goodwill has not been purchased for a price, it cannot be valued as an asset in view of Rule 2C(b) of the Wealth-tax Rules, 1957, and as per Circular No. 5-D(WT) of 1966, dated September 18, 1966, of the Central Board of Direct Taxes.
7. Learned counsel for the Revenue, on the other hand, contended :
(i) that the question referred is as to whether the value of the assessee's share in the goodwill 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 wealth-tax ;
(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.
8. 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.
9. The real object of making a reference, stating a case and raising a 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]27ITR279(Bom) ). If a point of law is implicit in the question raised by the Tribunal and if no additional facts are necessary to support that point, then it is open to the assessee to urge that point before the High Court notwithstanding that it was not considered by the Tribunal (Scindia Steam Navigation Co. Ltd. v. CIT : [1954]26ITR686(Bom) ).
10. Learned counsel for the assessee mainly stressed the point that the right to receive an amount of Rs. 50,000 received annually by the assessee from the firm towards his half-share in the goodwill of the firm is an annuity and exempt under Section 2(e)(iv) of the Act from the determination of 'asset'. The term 'annuity' has not been defined under the Act. Section 2(e)(iv) excludes a right to any annuity from net wealth in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum. The Supreme Court, in Ahmed G. H. Ariff v. CWT : [1970]76ITR471(SC) , held that the word 'annuity' in Clause (iv) of Section 2(e) must be given the signification which it has assumed as a legal term owing to judicial interpretation andnot its popular and dictionary meaning. The hallmark of annuity is (i) it is a money payment, (ii) made annually, (iii) it is of fixed sum, and (iv) usually it is a charge personally on the grantor. Hence, the Supreme Court, in the above-mentioned case, held that the right of the assessee to receive an aliquot share in the general income of the trust properties is not an annuity. The decision of the Calcutta High Court in Ahmed G. H. Ariff v. CWT : [1966]59ITR230(Cal) was affirmed. The High Court held that in such cases, the right of the assessee is not an annuity, but it is an aliquot share in the general income of the residuary trust fund and not a fixed sum payable periodically as an annuity. Here, of course, a fixed sum of Rs. 50,000 is payable annually to the assessee by the firm.
11. Section 2(e)(iv) excludes 'annuity' from 'assets' where the terms and conditions of the grant preclude commutation of any portion thereof. It connoted that there should be, in the contract of annuity, a specific term against commutation, if the annuity is to be excluded from the computation of net wealth. In the alternative, a prohibition against commutation should clearly emerge from the scheme of the settlement and from the terms and conditions relating to the annuity itself. Annuity shall be excluded 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 com mutability 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]162ITR888(SC) 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, though there was no express provision in the document itself, it could be said that there was an express provision, following from the circumstances precluding commutation of the amount of Rs. 25 lakhs payable annually and it was, therefore, exempt under Section 2(e)(iv) of the Wealth-tax Act. It has rightly been found here by the Tribunal that the agreement does not preclude commutation of the amount of Rs. 50,000 received by the assessee annually from the firm. Learned counsel contended that there was no negative term and the agreement contains no term allowing commutation. This may be so but the agreement reserves aright in the assessee to rejoin the firm and instead of rejoining, it can be inferred that the assessee may give up that right in lieu of lump sum payment. So, the amount of Rs. 50,000 received annually by the assessee from the firm towards his half-share in the goodwill of the firm is commutable and cannot be excluded from his net wealth.
12. Another essential prerequisite of annuity is wanting in the present case, Kanga and Palkhivala in the book, the Law and Practice of Income-tax, under the caption 'Annuities and annual instalments of capital' at page 123 of the Seventh Edition, have commented that an annuity, in the ordinary sense of the expression, means the purchase of income. It involves the conversion of capital into income. The classic definition which has never been departed from, is that given by Baron Watson in Foley v. Fletcher 117 RR 967, viz., annuity means where an income is purchased with a sum of money and the capital has gone and has ceased to exist, the principal having been converted into an 'annuity', such an annuity, which is properly so called, is always exigible to income-tax. But annual payments are sometimes loosely called 'annuities' where they are in fact annual instalments of capital. The fine distinction between an annuity properly so called and the annual capital payments has repeatedly been emphasised and no sure or simple test has been or can be laid down for the solution of this problem. One test is to ascertain whether the principal is gone for ever and is satisfied by periodical payments. In other words, the question is whether or not it is the purchase of the annual income in return for the surrender of the capital. If it is purchase of income, the annual payment is taxable ; if it is capital payment, it is not. 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 a 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 a 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 in the goodwill is not extinguished.
13. The Supreme Court in CED v. Mrudula Nareshchandra : [1986]160ITR342(SC) has held that the goodwill of the firm was an asset in which the deceased had a share and on his death, his interest therein did not vanish or get extinguished but passed to the surviving partners. The deceased was partner-in a firm having 28 per cent. share. 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 whatever in the goodwill of the firm.' So, it was held that the benefit accruing to the other partners on the cesser of the deceased's interest in the goodwill on his death, his interest therein did not vanish or get extinguished but passed to the surviving partners and was liable to estate duty. The cases cited by learned counsel for the assessee are clearly distinguishable. In CWT v. Dr. E. D. Anklesaria : [1964]53ITR393(Guj) , the Gujarat High Court held that the terms and conditions relating to the annuity precluded the commutation of the annuity into a lump sum grant and as such the value of the annuity was entitled to exemption under the provisions of Section 2(e)(iv). In CWT v. Smt. Hoolas Devi , the Rajasthan High Court held that though there was no provision in the will prohibiting commutation, the contents of the will showed that the annuity, being a fixed sum and not being a particular portion of profit, was payable only out of the income of the capital investment and this payment was to be made during her lifetime. The payment had to be made only month by month and the payment would be the first charge on the income of the trust, The right to get a monthly maintenance grant was neither transferable nor saleable. It was also not chargeable to any part of the capital investment and, therefore, not commutable
14. Lastly, it may be mentioned that Sampath lyengar in his book ' Three New Taxes', Sixth Edition, at page 1083, has commented that if it is found that goodwill in fact exists, then the most vital thing to remember is that it is an intangible property and cannot be transferred by the present owner to another person independently of the business itself. In other words, the goodwill has to be sold along with the business to which it relates as if they were one piece. Here, half of the goodwill of the firm was owned by the assessee and the other half by the remaining partners. But, on the retirement of the assessee, 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 valueof 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 existing instructions which are to the effect that no attempt should be made to include the value of the goodwill, unless it has been actually paid for by the assessee and is also shown as an asset of the business in the balance-sheet. These provisions lay down certain norms for determination of net worth of the assets of the business as a whole under Section 7(2)(a) and provide for certain adjustments and are to be read in that context. From these provisions, it cannot be inferred that if the goodwill has not been purchased for price, then it cannot be included in the net wealth of an assessee. In this case, the assessee has retained his share of goodwill and he is exploiting this asset for income from year to year. Therefore, apart from the fact that the goodwill is an asset of the business, in this case, it is an asset from which income is derived. It is, therefore, includible in the net wealth of the assessee.
15. The question has been correctly referred to this court for its opinion and it is answered in favour of the Revenue and against the assessee. Under the circumstances, there shall be no order as to costs.