1. The revenue is aggrieved against the order of the Appellate Controller deleting goodwill of Rs. 4.50 lakhs.
2. Shri M.G.R. Aitken died on 21-5-1970. He was seniormost partner of Crawford Bayley & Co., solicitors, Bombay, with share of 19 per cent.
The accountable person included in the estate of the deceased only Rs. 60,933 on account of the deceased's interest in the aforesaid firm and claimed that nothing was includible on account of share of goodwill of the deceased in the said firm because in a firm of professionals, the dominant factors were personal skill, integrity, honesty and professional expertise. The Assistant Controller, however, held that the aforesaid firm of solicitors had been in existence for a number of years and the clientele was attracted by the firm's name and not because the said firm had a particular individual as a partner and it was doubtful if many clients knew the names of the partners of the said firm, not to mention the personal skill, integrity, etc., of the partners of the said firm. As the said firm was a leading firm of solicitors, the Assistant Controller worked out the goodwill at two years' purchase of the average of the five year's profits of the firm and the deceased's 19 per cent share at Rs. 4.50 lakhs.
3. The Appellate Controller deleted the said addition holding that in the case of a professional firm, there was no goodwill, relying on Arundale v. Bell [1888] 52 LJ Ch. 537.
4. The revenue is in appeal before us. Our attention is drawn to different clauses of partnership agreement dated 11-3-1970 between nine partners including the deceased Shri M.G.R. Aitken of Crawford Bayley & Co. which recited (page 3) that seven partners including the deceased were the owners of the partnership business and the property and goodwill of the said firm and had admitted parties of eight and ninth part as two new partners and that the deceased was a senior partner.
Clause 12(2) recited that on the death of a partner the surviving partners succeed to the share of the deceased partner in the property and goodwill of the firm. Clause 18(h) recited that no active partner could engage directly or indirectly in any business other than that of the partnership. Clause 28 recited that no partner and no representative of a deceased partner shall except upon dissolution of the firm be entitled to receive any amount in respect of his share of capital, goodwill and property of the firm in the event of his death.
According to Clause 31, upon the death of an active partner, the surviving or continuing partner succeeds to the share of the deceased partner in the profits, property and goodwill of the firm. According to Clause 34, on the death of a partner, the widow was entitled to payment not exceeding Rs. 1,000 per month calculated at the rate of Rs. 50 for each year of her husband's service as a partner. According to Clause 36, a retiring partner could not practise for ten years within the restricted area as a solicitor, etc. Under Clause 39, in the event of the firm being wound up, the partners have to enter into a covenant with the purchasers not to practise as a solicitor for a period of ten years within the restricted area.
5. It was urged that on the reading of the aforesaid clauses, the case before us was distinguishable from Arundale's case (supra) on which the Bombay High Court had relied in Motichand and Devidas, In re. [1946] 14 ITR 534 because the Bombay High Court (at p. 544) went by the legal position that upon the dissolution of a partnership between solicitors, without any sale or assignment of the goodwill of the business and without any provision as to the use of the firm's name, each of the partners was entitled to carry on business in that name. In the case before us, the factual position was entirely contrary to the case before the Bombay High Court as well as in the aforesaid English case.
In the case before us, there was restriction on the retiring partners as well as on the dissolution of the firm to carry on solicitor's business.
6. We see merit in the revenue's contention that the aforesaid Bombay High Court decision as well as the English decision in the case of Arundale (supra) does not apply to the facts of the case before us.
Similar are our observations regarding the applicability of the Tribunal, Bombay Special Bench decision in Mrs. Kalavati Pakvasa v.Seventh ACED [1983] 3 SOT 126 where in paragraphs 8-10 the Special Bench had followed the aforesaid Bombay High Court decision being bound by it sitting at Bombay. We, therefore, hold that the aforesaid firm of Crawford Bayley & Co. had goodwill and the deceased's share in the goodwill of the firm passed on his death. For this proposition that the deceased's share of goodwill passed on his death, we draw support from paragraph 7 of the Special Bench decision in Mrs. Kalavati Pakvasa's case (supra).
7. The Bombay High Court in CGT v. Smt. Lalita B. Shah [1979] 118 ITR 794 was considering whether a father working as a chartered accountant and tax consultant had made a gift of goodwill to his son on taking the son as a partner. The High Court at p. 797 noted the revenue's contention that some goodwill must be deemed to attach to the business or profession of chartered accountants and tax consultants and after defining 'goodwill' observed at page 798 that there was little doubt that goodwill was applicable to a purely personal business like that of a solicitor and perhaps the same considerations may apply to the business of a chartered accountant or tax consultant and referred to Cordery on Solicitors, Sixth edn., p. 483 where it was observed that such goodwill is frequently dealt with as having an ascertainable value and it had been described as "the advantage, whatever it may be, which a person gets by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which had been carried on for some time previously". The High Court held that goodwill must be regarded as a property having a value of its own apart from other assets of the firm.
8. We, accordingly, hold that the aforesaid firm of Crawford Bayley & Co. had goodwill and the deceased's share in the goodwill passed on his death.
9. The next controversy is whether goodwill could be separately valued apart from the other assets of the firm. The learned counsel for the accountable person relied on CED v. Fakirchand Fatehchand Sachdev [1982] 134 ITR 268 (Bom.) where it was held that the revenue is not entitled to pick up just one or two items out of the total assets or properties of the firm for valuing the deceased partner's share in the firm. The Bombay High Court has relied (at page 299) on CGT v. P.Gheevarghese, Travancore Timber & Products [1972] 83 ITR 403 (SC) where on valuing the gift of goodwill by the father by taking the two daughters as partners in his proprietary business, it was held that the department was not justified in taking out only one of the assets of the assessee's proprietary business, viz., its goodwill and regard that as the subject of gift.
10. The learned counsel for the assessee distinguished Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485 (SC) where it was held that under Section 7 of the Wealth-tax Act, 1957 and rules 2A and 2B of the Wealth-tax Rules, 1957, the WTO could value one asset and need not value the assets of the business as a whole. It was urged that the said decision could not be imported in estate duty proceeding because the said decision was given in view of rules 2A and 2B.11. We have given careful consideration to the submissions of the assessee as also of the department who, in reply, claimed that goodwill did not appear as an asset in the balance sheet of the said firm Crawford Bayley & Co. and, therefore, the case was covered by CED v.G.H. Malhotra [1983] 144 ITR 925 (Bom.). The legal position that emerges is that the entire assets of the firm as per balance sheet have to be valued and not one asset of the firm, namely, goodwill. We do not have the balance sheet of the firm and cannot verify whether goodwill appeared as an asset or not in the said balance sheet of the firm. Of course, if goodwill does not appear in the balance sheet, then goodwill can be valued separately as was held in G.H. Malhotra's case (supra).
Under these circumstances, we restore this matter to the file of the Assistant Controller to value the deceased's share in the assets of the firm, including goodwill.
12. The Assistant Controller will also consider accountable person's objections to the valuation of goodwill of the firm at two years' purchase. It was urged that in the aforesaid Special Bench case of Mrs.
Kalavati Pakvasa, goodwill was valued only at half year's purchase by the Appellate Controller (as against three years' purchase taken by the Assistant Controller in that case). The Assistant Controller would consider all the relevant evidence before valuing the goodwill of Crawford Bayley & Co.