JUDGMENT
V.V. Kamat, J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred, under Section 26(1) of the Gift-tax Act, 1958, and asked for an answer to the following question ;
” Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the notification dated July 20, 1977, of the Central Board of Direct Taxes would not apply to a case of valuation of a right to share the profits with the right to share in the assets of the firm ?”
2. Reading the question, it would be seen that what is required to be considered and answered is as to whether the notification (annexure “F”) dated July 20, 1977, would govern the situation or not.
3. The factual matrix is in a narrow compass. The assessee was a partner of a firm in the name and style of Lakshman and Company dealing with the cashew exports at Quilon. The year in question is 1978-79. Up to the end of the previous year, that ended on June 30, 1977, his share in the profits was six per cent. and thereafter on a change in the constitution of the firm, it got reduced to two per cent. and in regard to this, the Gift-tax Officer took the view as regards this reduction from six per cent. to two per cent., as a surrender, being in the nature of a deemed gift subjected to gift-tax in regard to which quantification led to a resort: to the circular (annexure “F”) in the present paper book.
4. The Gift-tax Officer by the order dated May 30, 1982 (annexure), applied the circular and since the firm was not mainly a professional firm calculated on the basis of three times the purchase in the context.
5. The first appellate authority (Appellate Assistant Commissioner of Income-tax, Trivandrum) did not disturb the question of application of the notification and upheld the assessment in principle. However, considering the nature of the business of the partnership and taking into consideration that in cashew industry where the orders are liable for fluctuation depending upon the vicissitudes of the market found it more reasonable to take a goodwill at 1.5 times the super profit. In reaching this conclusion with reference to the peculiarities of cashew business, the appellate authority relied on the decision of the Income-tax Appellate Tribunal dated March 29, 1981, in the case of K. G. Sasikumaran Nair of Quilon. Even before the first appellate authority reliance was placed on the said
notification requiring computation at three years’ average super profit in regard to which it is observed that similar contention was also raised before the Tribunal (supra) and it did not find favour. Thus, the computation at three times the average super profit per year was reduced to 1.5 times allowing the appeal to that extent partly.
6. Before the Income-tax Appellate Tribunal moved by the Department the only question related to quantification and consequently whether the notification governs the situation. The Department contended that the notification has a mandatory effect.
7. The Tribunal relied on its earlier decision in the case of A. C. F. Mohammed Haneef dated March 26, 1985, where the Tribunal considered the scope and ambit of the notification to rule that it would apply only to the case of valuation of a right to share the profits without the right to share the assets,
8. Before the Tribunal, the Department relied upon the decision dated September 30, 1988, in the case of K. T. Mathew, G. T. A. to contend that the said circular has been applied as a mandate to govern the situation. The Tribunal has considered the said judgment and has observed that the earlier judgment dated March 26, 1985, was not brought to the notice. Additionally, it is observed that the Tribunal has been consistently holding that the notification would not be applicable to the situations covered thereby.
9. Both these judgments are available to us at annexures “D” and “E”, respectively. If the judgment dated September 30, 1988 (annexure “E”), is perused for the purpose it would be always clear from paragraph 8 thereof that there is no discussion whatsoever with regard to the question of applicability of the circular. The entire discussion is only in paragraph 8 of the said judgment and it would be of benefit to reproduce the discussion in the context and it is as follows :
” For the Revenue, reliance was placed upon the circular of the Central Board of Direct Taxes, in S. O. No. 301, dated July 20, 1977, issued under Rule 10(4) of the Gift-tax Rules, 1958, which is reported in [1978] 112 ITR (St.) 14. The value of the subject-matter of the gift has to be worked out as per the guidelines and principles laid down by the Board in this behalf. The Board has issued the notification referred to above, according to which interest at 12 per cent. per annum shall be allowed on the capital as standing to the credit of the partner. In view of this notification, we
are of the opinion that interest should be allowed at 12 per cent. We reverse the finding of the Appellate Assistant Commissioner in this regard and restore the order of the Gift-tax Officer.”
10. It is obvious that not only that the earlier view was not present to the mind of the Tribunal then deciding this way but even the text of the circular does not appear to have been looked at.
11. At the other end we have the advantage of considering the judgment dated March 26, 1985 (annexure “D”). The consideration before us is discussed in paragraph 5 thereof and it is specified therein that a multiplier of 2 in the case of professional firms as against a multiplier of 3 in the case of any other firm is available from the notification as a guide to computation. The contention of the assessee therein regarding the applicability of the notification to a valuation of the partner’s right to share the profits of the firm with the right to share the assets is specifically referred to and it is observed that the circular and the notification would apply only to cases mentioned above in spite of the situation that the Department had been following the mode of valuation in all the cases of valuation of the right to share the profits. It is obvious that the Tribunal has found fault with the Department blindly acting on the notification applying it to all situations. It is observed further that the Tribunal had been taking consistently a view that the notification will apply only in the case of valuation of the right to share profits without the right to share the assets and precisely that the notification would not apply to a case of valuation of right to share the profits with the right to share the assets. In this context, there is a reference even to yet an earlier order of the Tribunal, dated March 29, 1981, in the case of K. G. Sasikumaran Nair, where in regard to a partnership firm dealing with cashew business a multiplier of 1.5 was applied, taking into consideration the fluctuating nature of the business as a factor governing special consideration for deviation from the rigour of the notification. The Tribunal also took into consideration the fluctuating nature of the cashew business and justified the multiplying factor of 1.5.
12. In the process, the Tribunal has also considered the submission on behalf of the Department when reliance was placed on the decision in the case of Das and Co. v. CIT [1962] 45 ITR 369 (Patna) as well as the case of CED v. Biswanath Rungta [1968] 67 ITR 748 (Cal) to observe that a rough and ready method that is largely employed for ascertaining the value of the goodwill is to take it as being worth one to three years’ purchase without any deduction in respect of interest on capital and owner’s services,
would not govern the situation for the reasons emphasising the situational peculiarities of the cashew business.
13. Thus, even prior to the judgment (annexure “E”) the notification (annexure “F”) was considered in a limited way in its application in the process of computation. Even thereafter in the impugned order (annexure “E”) the situation gets a re-emphasis when the Tribunal has observed that constant approach is to understand the notification in the context and not as governing all situations as was done by the Department. It is also seen that a solitary deviation in the judgment (annexure “E”) is also without any reasoning in support in regard thereto.
14. We find staring intrinsic material in the notification itself pinpointing the direction in the situation in which the Tribunal has understood the same notification. The direction of the Central Board of Direct Taxes as is available in the notification itself is to the following effect :
” The Central Board of Direct Taxes hereby directs that the value of a partner’s right to share the profits of the firm without the right to share the assets shall be calculated in the manner specified in the annexure to this circular.”
15. It would be at once clear that the scope of application of the notification is specified sufficiently in the nature of the direction as seen above.
16. Therefore apart from the consistency of the approach of the Tribunal, taking a note of a solitary dissent without any reasons in support thereto the language of the notification itself makes out the scope and applicability of the notification to situations directly specified therein. For the above reasons, we answer the question in the affirmative, against the Revenue and in favour of the assessee.
17. A copy of the judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.