Wealth-tax Officer Vs. Habibunnisa - Court Judgment

Excerpt:
1. these appeals by the revenue are directed against the orders of the cit (appeals) deleting an addition made to the net wealth of the assessees.2. the admitted facts are as follows. there was a firm called m/s. a.rafeeq ahmed & co. constituted of seven partners under a deed of partnership dated 1-4-1975 carrying on the business of tanning and exporting of hides and skins. one of the partners, a. rafeeq ahmed died on 13-11-1975. the firm was re-constituted by another deed dated 25-11-1975 with seven partners. under the original deed of partnership, the name of the firm "a rafeeq ahmed & co.", its goodwill and the trade marks exclusively belonged to the deceased partner, a. rafeeq ahmed.therefore, when the successor firm took over the business it was agreed by that firm with the legal representatives of a. rafeeq ahmed that the firm will be permitted to use the name of the firm, its goodwill and trade marks upon payment of 10 per cent of the profits of the firm subject to a minimum of rs. 1,00,000 per annum to the legal representatives. this condition was also recorded in clauses 15 to 17 of the deed dated 25-11-1975. that deed also provided in clause 10 that the partnership shall be carried on mutually at the will of the partners while clause 11 provided that in the event of retirement or demise of any partner, the partnership shall not be dissolved, but shall be continued and carried on by the remaining partners. under this situation, the assessees before us, who are two of the legal representatives of a. rafeeq ahmed, were paid the following sums in the relevant assessment years as noted below :-share) 18,665 55,261 50,531 16,667mrs. hafsa banu(]/8th 1979-80 1980-81 the assessees returned the said amounts as the value of their share of the goodwill in the return filed by them for the respective assessment years. the wto was of the opinion that this had to be re-valued and took the value of the share of the goodwill of the assessees at. 10 times the income shown for each assessment year. on appeal, the cit (appeals) was of the opinion that the share of the assessees in the goodwill was a precarious asset and deleted the inclusion from the net wealth.3. in these appeals, it was contended on behalf of the revenue that in the case of the firm it had been held by the appellate tribunal by order dated 30-11-1983 in wta nos. 990 to 992/mds/83 that the goodwill and trade mark was valuable asset and, therefore, the value of that asset had to be included in the net wealth. it was argued that what the assessees received was only the income from the share of the goodwill which was the asset yielding income and whose value could be properly evaluated by capitalising the income by 10 times as was done by the wto. it was submitted that in the circumstances the valuation made and the inclusion of the asset by the wto should be restored.4. on the other hand, it was contended on behalf of the assessees that they could not exploit their share in the goodwill without any business of their own or anyone willing to use the trade mark in a business and since the firm which was actually using the trade mark had neither undertaken to keep the agreement alive for any specified number of years nor was it in a position even to guarantee the use of the trade marks for any length of time, it being a firm at will, the asset itself was precarious and was rightly excluded from the net wealth.5. on a consideration of the rival submissions, we are of the opinion that there are no merits in these appeals. as seen from the admitted facts stated above that the assessees are only the legal representatives of the person who had acquired the goodwill and the trade marks. that goodwill and trade mark cannot be independent of any business and can be exploited only through the business. that has been licensed to the present firm which has however not undertaken to use the goodwill for any specific period. moreover, the partnership deed itself says that the firm is at will and according to section 43 of the partnership act, a firm at will can be dissolved by a notice given by any one of the partners and will take effect immediately if no date is stipulated. may be that there is a condition in the partnership deed that it will not be dissolved by death or retirement and that the partners are related to each other. yet, every one of those seven partners has a right to dissolve the firm and hence it cannot be said in certain terms that said firm will continue to exist for any length of time or more particularly for six years as that is the period for which an asset should exist before it can be taken into account for wealth-tax purposes under section 2(e) of the wealth-tax act, 1957 in the case of cwt v. smt. r.a.'muthukrishna ammal [1969] 72 itr 801 (sc), there was a lease by the government for 25 years of salt pans with a stipulation that the lease could be terminated at any moment by the government and the supreme court held that the lease was precarious inasmuch as the leasehold interest was not available to the assessee for a period exceeding six years from the valuation date. on the same analogy in the present case also the agreement of the assessees with the firm for the exploitation of the goodwill is precarious because not only is there no stipulated period of tenure for the agreement to use the goodwill but also because the firm itself is at will and once the firm is dis-solved the agreement would fall to the ground. the question will then arise whether the reversionary right of the assessees to exploit the good will by themselves would not be an enduring asset required to be valued and added to the net wealth. here again, we have to remember that such a right can be of value only if it is exploited in a business and the assessees by themselves do not have any business and would have to search for someone who will carry on the same kind of business and be prepared to pay something for the use of the goodwill.the conditions under which the share of the assessees in the goodwill could be exploited are quite nebulous when we also remember that the assessees have only a share in the goodwill and they must also unite before they could properly exploit the asset. if all these conditions are kept in mind, it is difficult to imagine a willing purchaser paying anything valuable for the asset if and when it should revert to the assessees after the termination of the agreement by the firm which existed on the valuation date. in this situation, the assessees have returned the income received as the value of their share of the goodwill as on the valuation date and it does not, in our opinion, require any re-valuation. taking all these facts into consideration, we are convinced that the cit (appeals) was right in excluding the addition made by the wto by capitalising the income by 10 times. his orders are confirmed.

Judgment:
1. These appeals by the Revenue are directed against the orders of the CIT (Appeals) deleting an addition made to the net wealth of the assessees.

2. The admitted facts are as follows. There was a firm called M/s. A.Rafeeq Ahmed & Co. constituted of seven partners under a Deed of Partnership dated 1-4-1975 carrying on the business of tanning and exporting of hides and skins. One of the partners, A. Rafeeq Ahmed died on 13-11-1975. The firm was re-constituted by another Deed dated 25-11-1975 with seven partners. Under the original Deed of Partnership, the name of the firm "A Rafeeq Ahmed & Co.", its goodwill and the trade marks exclusively belonged to the deceased partner, A. Rafeeq Ahmed.

Therefore, when the successor firm took over the business it was agreed by that firm with the legal representatives of A. Rafeeq Ahmed that the firm will be permitted to use the name of the firm, its goodwill and trade marks upon payment of 10 per cent of the profits of the firm subject to a minimum of Rs. 1,00,000 per annum to the legal representatives. This condition was also recorded in Clauses 15 to 17 of the Deed dated 25-11-1975. That Deed also provided in Clause 10 that the partnership shall be carried on mutually at the will of the partners while Clause 11 provided that in the event of retirement or demise of any partner, the partnership shall not be dissolved, but shall be continued and carried on by the remaining partners. Under this situation, the assessees before us, who are two of the legal representatives of A. Rafeeq Ahmed, were paid the following sums in the relevant assessment years as noted below :-share) 18,665 55,261 50,531 16,667Mrs. Hafsa Banu(]/8th 1979-80 1980-81 The assessees returned the said amounts as the value of their share of the goodwill in the return filed by them for the respective assessment years. The WTO was of the opinion that this had to be re-valued and took the value of the share of the goodwill of the assessees at. 10 times the income shown for each assessment year. On appeal, the CIT (Appeals) was of the opinion that the share of the assessees in the goodwill was a precarious asset and deleted the inclusion from the net wealth.

3. In these appeals, it was contended on behalf of the Revenue that in the case of the firm it had been held by the Appellate Tribunal by order dated 30-11-1983 in WTA Nos. 990 to 992/Mds/83 that the goodwill and trade mark was valuable asset and, therefore, the value of that asset had to be included in the net wealth. It was argued that what the assessees received was only the income from the share of the goodwill which was the asset yielding income and whose value could be properly evaluated by capitalising the income by 10 times as was done by the WTO. It was submitted that in the circumstances the valuation made and the inclusion of the asset by the WTO should be restored.

4. On the other hand, it was contended on behalf of the assessees that they could not exploit their share in the goodwill without any business of their own or anyone willing to use the trade mark in a business and since the firm which was actually using the trade mark had neither undertaken to keep the agreement alive for any specified number of years nor was it in a position even to guarantee the use of the trade marks for any length of time, it being a firm at will, the asset itself was precarious and was rightly excluded from the net wealth.

5. On a consideration of the rival submissions, we are of the opinion that there are no merits in these appeals. As seen from the admitted facts stated above that the assessees are only the legal representatives of the person who had acquired the goodwill and the trade marks. That goodwill and trade mark cannot be independent of any business and can be exploited only through the business. That has been licensed to the present firm which has however not undertaken to use the goodwill for any specific period. Moreover, the partnership deed itself says that the firm is at will and according to Section 43 of the Partnership Act, a firm at will can be dissolved by a notice given by any one of the partners and will take effect immediately if no date is stipulated. May be that there is a condition in the Partnership Deed that it will not be dissolved by death or retirement and that the partners are related to each other. Yet, every one of those seven partners has a right to dissolve the firm and hence it cannot be said in certain terms that said firm will continue to exist for any length of time or more particularly for six years as that is the period for which an asset should exist before it can be taken into account for wealth-tax purposes Under Section 2(e) of the Wealth-tax Act, 1957 In the case of CWT v. Smt. R.A.'Muthukrishna Ammal [1969] 72 ITR 801 (SC), there was a lease by the Government for 25 years of salt pans with a stipulation that the lease could be terminated at any moment by the Government and the Supreme Court held that the lease was precarious inasmuch as the leasehold interest was not available to the assessee for a period exceeding six years from the valuation date. On the same analogy in the present case also the agreement of the assessees with the firm for the exploitation of the goodwill is precarious because not only is there no stipulated period of tenure for the agreement to use the goodwill but also because the firm itself is at will and once the firm is dis-solved the agreement would fall to the ground. The question will then arise whether the reversionary right of the assessees to exploit the good will by themselves would not be an enduring asset required to be valued and added to the net wealth. Here again, we have to remember that such a right can be of value only if it is exploited in a business and the assessees by themselves do not have any business and would have to search for someone who will carry on the same kind of business and be prepared to pay something for the use of the goodwill.

The conditions under which the share of the assessees in the goodwill could be exploited are quite nebulous when we also remember that the assessees have only a share in the goodwill and they must also unite before they could properly exploit the asset. If all these conditions are kept in mind, it is difficult to imagine a willing purchaser paying anything valuable for the asset if and when it should revert to the assessees after the termination of the agreement by the firm which existed on the valuation date. In this situation, the assessees have returned the income received as the value of their share of the goodwill as on the valuation date and it does not, in our opinion, require any re-valuation. Taking all these facts into consideration, we are convinced that the CIT (Appeals) was right in excluding the addition made by the WTO by capitalising the income by 10 times. His orders are confirmed.