ORDER
S. Kannan, Accountant Member
1. This appeal by the accountable person is directed against the order dated 21-3-1990 of the Appellate Controller of Estate Duty, Madras.
2. The facts of the case are : one Sri M.P.P. Nataraja Nadar (hereinafter referred to as “the deceased”), died on 16-5-1981. During his life-time he was a partner in a firm called “M/s. M.P. Ponnappa Nadar Sons”, having 25% share in the profit or loss of the firm. It is common ground that he was a partner in the said firm in his capacity as the karta of the HUF consisting of himself and his six sons.
3. It is also common ground that the said deceased retired from the firm on 16-4-1981.
4. On 27-1-1982 the accountable person filed the estate duty return relating to the estate of the said deceased, disclosing the principal value of the estate at Rs. 3,68,339. The Assessing Officer applied his mind, inter alia, to two issues, namely
(i) the share of the said deceased in the goodwill of the said firm and (ii) the share of the said deceased in the closing stock of the said firm.
5. As respects the goodwill, the Assessing Officer found that the value of the share of the said deceased in the goodwill was not returned by the accountable person. Taking note of the fact that it was not disputed that the firm had goodwill and relying on the decision of the Supreme Court in the case of CED v. Mrudula Nareshchandra [1986] 160 ITR 342 : 26 Taxman 348, which was followed by the Gauhati High Court in the case of CED v. Murarilal Sovasaria [1989] 179 ITR 380, the Assessing Officer held that the share of the said deceased in the goodwill of the firm is property that passed on his death and that it was by the same token exigible to estate duty. Accordingly, he computed the goodwill of the firm at Rs. 3,48,515 and brought to charge 25% thereof.
6. As respects the closing stock of the firm on the date of retirement of the said deceased, the Assessing Officer found that the closing stock had not been revalued at market price. According to him, the closing stock needed to be revalued at market price whenever a partner retires from the firm. He, therefore, revalued the closing stock and arrived at a differential of Rs. 1,15,220. He brought to charge 25% of the said sum.
7. The Appellate Controller of Estate Duty declined to interfere in the matter.
8. It is in these circumstances that the accountable person is now before us.
9. As respects goodwill, Shri T.R. Rajaraman, the learned counsel for the accountable person, contended that the lower authorities were not justified in holding that the share of the said deceased in the goodwill of the firm was exigible to estate duty. He contended that on the date of his death the deceased was not a partner of the firm and, hence, there was no question of bringing to charge the share of the said deceased in the goodwill of the firm. In this regard he referred to and relied upon the following cases : CED v. S. Kuppuswami [1981] 131 ITR 709 (Mad.), CED v. G.H. Malhotra [1983] 144 ITR 925 (Bom.), Smt. Urmila v. CED [1980] 122 ITR 958 (Bom.) and Kamala Devi Jhawar v. ACED [1983] 5 ITD 137 (Cal.).
10. As regards the addition made consequent on the revaluation of the closing stock as on the date of retirement of the said deceased, Shri Rajaraman contended that there was no case for making the impugned addition.
11. On his part, Shri P.A. Iyengar, the learned Departmental Representative, strongly supported the impugned orders of the lower authorities on both the issues.
12. We have looked into the facts of the case. We have considered the rival submissions.
13. A specific query from the Bench elicited the following facts : (a) there was no separate agreement or deed relating to the retirement of the said deceased from the said firm and (b) there was no taking of accounts on the retirement of the said deceased from the said firm. Since the said deceased retired on 16-4-1981, which was the last day of the year of account ending on that date, the accounts were made as usual at the end of that year and the accounts so made were adopted as the basis for computing the sums payable to the retiring partner, namely the said deceased.
14. We may first deal with the issue relating to the goodwill.
15. We may at the outset notice certain well settled principles having a direct bearing on this issue. These are : –
(i) Section 14 of the Partnership Act, 1932 expressly declares that the goodwill is an asset of the firm. This is of course subject to contract to the contrary between the partners.
(ii) A partner of a firm has a marketable interest in all the capital assets of the firm including the goodwill.
(iii) Goodwill of the firm will have to be taken into account not only when there is a general dissolution of the firm but also on the retirement or death of a partner – see Khushal Khemgar Shah v. Khorshed Banu Dadiba Boatwalla AIR 1970 SC 1147.
(iv) The only exception to the principle at (iii) above is a case where the deed of partnership contains a term to that effect
(v) The principle at (iii) above is not in any way diluted or overridden simply because the partnership deed contained a term to the effect that the partnership shall continue notwithstanding the death of a partner. This is because in the absence of a specific term in the deed of partnership to that effect, the Partnership Act does not operate to extinguish the proprietary right of a partner in the assets of the firm (including goodwill). This is because, as pointed out by the Supreme Court in the case of Khushal Khemgar Shah (supra): “In interpreting the deed of partnership, the Court will insist upon some indication that the right to a share in the assets is, by virtue of the agreement, that the surviving partners are entitled to carry on the business on the death of the partner, to be extinguished. In the absence of a provision expressly made or clearly implied, the normal rule that the share of a partner in the assets devolves upon his legal representatives will apply to the goodwill as well as to other assets”.
(vi) The above principle is applicable to the case of a retiring partner also vide PremchandJain v. CED [1983] 144 ITR 41 (MP). This is because the retirement of a partner so far as he is concerned is dissolution of the firm.
16. The facts of the case may now be examined in the light of the aforesaid principles.
17. As pointed out supra, the said deceased was a partner in the firm of M/s. M.P. Ponnappa Nadar Sons. This partnership firm was constituted under a deed executed on June 18,1962. The material terms of the deed are:
(6) The firm shall have no fixed capital. The amounts standing to the credits of the partners from time to time shall be deemed to be their capitals. The firm shall be at liberty to pay interest on such capitals as may be agreed upon by the partners from time to time.
(8) The partnership shall be terminable at will.
(9) The accounts of the firm shall be closed to profit and loss every year on an auspicious day in the month of Chithirai. The net profit or loss shall be divided between us equally.
(11) In respect of matters not provided herein, the provisions of the Indian Partnership Act shall apply.
18. As pointed out earlier, no deed of retirement was drawn up when the deceased retired from the firm on 16-4-1981. On May 20,1981 the six sons of the deceased became partners of the firm and they shared equally the l/4th share, which earlier belonged to their father. Apart from adverting to the fact of the said deceased having retired from the partnership due to ill-health on 16-4-1981 and to the further fact that the six sons of the said deceased became partners, the deed dated May 20,1981 is almost identical with the earlier deed dated June 18,1962.
19. A couple of points readily suggest themselves. The deed dated June 18,1962 is absolutely silent on the question of goodwill. Therefore, under the Partnership Act as also pursuant to the clear provisions of Clause 11 of the deed, the provisions of the said Act will have to be applied. This would mean that goodwill was the asset of the firm and that the right of the retiring partner in the assets of the firm including goodwill did not get extinguished.
20. We have thus a case which is identical with the case of PremchandJain (supra) before the M.P. High Court. It should, therefore, follow the retiring partner was entitled to get the value of his share in the goodwill just as he was entitled to get the value of share in other assets of the firm. It is, however, common ground that on his retirement from the firm the said deceased did not get his share of goodwill of the firm. Consequently, on the date of his death, the said right not having got extinguished in any manner, is a property passing on his death. We, therefore, hold that the lower authorities were justified in bringing to charge the share of the said deceased in the goodwill of the firm.
21. Shri Rajaraman, it may be recalled, relied on four cases. Of these, the Madras case of S. Kuppuswamy (supra) was considered by the Madhya Pradesh High Court and distinguished. The Bombay case of Smt. Urmila (supra) is also distinguishable, because there the decision went on the basis of the clear provision of the deeds of retirement. The other Bombay case of G.H. Malhotra (supra) is also not applicable, because, as is ex facie clear from page 928 of the report, the matter was decided on the basis of an implied concession on the part of the Departmental Counsel that the deceased did not have any share in the goodwill of the firm.
Secondly, the Court held : “…the said deceased did not have any share in the goodwill of the firm at the time of his death as he has already retired prior to his death from the firm and, hence, there was no question of his having any right to dispose of his share in the goodwill of that firm at the time of his death”. A couple of points may here be made. The short report does not set out the terms and conditions of the retirement of the deceased. Secondly, the statement that the deceased did not have any share in the goodwill of the firm from which he retired merely because he had already retired prior to his death, if we may say so with respect, is too widely stated. Neither the Supreme Court decision in the case of Khushal Khemgar Shah (supra) nor the M.P. decision in the case of Premchand Jain (supra) was cited before the Bombay High Court. For a fact, as we see it in the said case, the legal heirs of the deceased are in no way precluded from demanding that the accounts of the firm be made according to the well known accounting and legal principles and the share of the deceased in the goodwill of the firm be paid to them. We, therefore, hold that the said case cannot avail the accountable person before us.
22. The same considerations will apply to the decision of the Tribunal in the case of Kamala Devi Jhawar (supra).
23. In view of the foregoing, therefore, we hold that the lower authorities were justified in bringing to charge the share of the said deceased in the goodwill of the firm.
24. As regards the revaluation of the closing stock of the firm on the retirement of the said deceased from the firm, the well settled legal position is that in such cases the closing stock will have to be valued at market price vide the decision of the jurisdictional High Court in the case of G. R . Ramachari & Co. v. CIT [1961] 41 ITR 142 (Mad.); A.L.A. Firm v. CIT [1976] 102 ITR 622 (Mad.) and CIT v. Bharath Auto Stores [1991] 188 ITR 477 (Mad.). In this context, it may here be repeated that as pointed out by the M.P. High Court in the case of Premchand Jain (supra), the retirement of a partner so far as he is concerned is dissolution of the firm.
25. In view of the foregoing, therefore, we hold that the lower authorities were justified in revaluing the closing stock on the date of the retirement of the said deceased from the said firm. We, therefore, decline to interfere in the matter.
26. In the result, the assessee’s appeal is dismissed.