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1997 Supreme(P&H) 911
PUNJAB & HARYANA HIGH COURT
G.S.Singhvi and Iqbal Singh JJ.
Controller Of Estate Duty
Versus
Pushpa Anand (Accountable Person Of Tilak Raj Anand (Decd.))
Estate Duty Reference No. 1 of 1982,
Decided On : MAY 27, 1997
The goodwill of a business is an asset of the firm and it passes to the surviving partners after the death of a partner.
Headnote:
ESTATE DUTY - Goodwill of a business - Whether goodwill of a business passes on death of a partner - Whether goodwill of a business is an asset of the firm - Whether goodwill of a business is property within the meaning of Section 2(15) of the Estate Duty Act, 1953.
Fact of the Case:
The deceased, Tilak Raj Anand, was engaged in the business of dealership of various products of Hindustan Petroleum Corporation Limited as a sole proprietorship. He took his son, Suresh Anand, as a partner with effect from April 1, 1976. After the death of Tilak Raj on July 19, 1977, the Assistant Controller proceeded to assess the value of the goodwill of the firm partly as his own estate and partly as a gift to his son, Suresh Anand, as a result of conversion of the proprietary business into a partnership firm. The Tribunal found that there being only two partners, namely, Tilak Raj Anand and Suresh Anand, on the death of the former, the partnership came to an end and dealership also lapsed or was terminated on the dissolution of the firm.
Finding of the Court:
The court held that the goodwill of a business is an intangible asset that is comprised of a variety of elements, including location, service, standing of the business, and honesty of those who run it. The goodwill is acquired during the course of a number of years of business and is founded on the belief and faith of the customer. The interest of a partner in a partnership firm is property within the meaning of Section 2(15) of the Estate Duty Act, 1953, and such interest extends to a share in all partnership assets including goodwill. On death of a partner, his interest in the entire unit of the firm including goodwill passes and the value of the goodwill has to be added to the principal value of the estate for the purpose of the Act of 1953.
Issues: 1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that there was no goodwill of the business which could pass on the death of the deceased? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the sum of Rs. 52,195 representing the value of goodwill of the business from the principal value of the estate of the deceased?
Ratio Decidendi: The court held that the Tribunal erred in holding that there was no goodwill of the business which could pass on the death of the deceased. The court found that the firm had a goodwill which was an asset of the firm and it passed to the surviving partners after the death of Shri Tilak Raj Anand. Therefore, the Assistant Controller of Estate Duty was justified in including the value of the goodwill in the principal value of the estate of the deceased.
Final Decision: The court allowed the reference and answered both the questions in favor of the petitioner.
G.S.Singhvi, J.
1. On an application filed by the petitioner under Section 64(1) of the Estate Duty Act, 1953 (hereinafter referred to as "the Act"), the Tribunal referred the following questions of law for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that there was no goodwill of the business which could pass on the death of the deceased ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the sum of Rs. 52,195 representing the value of goodwill of the business from the principal value of the estate of the deceased ?"
2. There is not much of controversy between the parties on the factual aspect of the case. The late Shri Tilak Raj Anand was engaged in the business of dealership of various products of Hindustan Petroleum Corporation Limited. He carried on the proprietary business till March 51, 1976. He took his son, Suresh Anand, as a partner with effect from April 1, 1976. Tilak Raj had 80 paise share in the partnership whereas the share of Suresh Anand was 20 paise in the rupee. Clause 2 of the instrument of partnership stated that the business of partnership was to deal in lubricants and other products of the corporation, which showed in effect that the partnership was intended to be a dealer of the products of Hindustan Petroleum Corporation Limited. After the death of Tilak Raj on July 19, 1977, the Assistant Controller proceeded to assess the value of the goodwill of the firm partly as his own estate and partly as a gift to his son, Suresh Anand, as a result of conversion of the proprietary business into a partnership firm. According to the Assistant Controller, the transfer amounted to a gift made to Suresh Anand for which no consideration had passed to the late father. Since the disposition or gift had taken place within two years of the death of Tilak Raj, the Assistant Controller proceeded under Section 9 of the Act to assess the value of goodwill of the proprietary business into a partnership business. Accordingly, he assessed the value of such goodwill at Rs. 1,02,840, which he added to the principal value of the estate passing on the death of Tilak Raj Anand.
3. The accountable person appealed before the Appellate Controller of Estate Duty but failed to convince him that there was any error in the order of the Assistant Controller. The Appellate Controller of Estate Duty upheld the findings of the Assistant Controller. The accountable person then filed an appeal before the Appellate Tribunal. The Tribunal found that there being only two partners, namely, Tilak Raj Anand and Suresh Anand, on the death of the former, the partnership came to an end and dealership also lapsed or was terminated on the dissolution of the firm. Suresh Anand and his mother formed another partnership and applied to Hindustan Petroleum Corporation Limited that the new firm be appointed as a dealer of its products under a fresh agreement. On that basis, the Tribunal held that the goodwill or any interest in the goodwill in the business of the dissolved firm in which Tilak Raj Anand was a partner did not devolve upon his legal heirs or the surviving partner. Accordingly, the Tribunal reversed the finding of the Controller of Estate Duty and deleted the addition of Rs. 52,195.
4. We have thoughtfully considered the rival contentions and have gone through the decisions relied upon by learned counsel for the parties.
5. Section 14 of the Partnership Act, 1932 , states that, subject to contract between the partners, the property of the firm includes the goodwill of the business. It can thus be said that the goodwill of the business is the property of the firm. This is also the view expressed by the Supreme Court in Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwalla, AIR 1970 SC 1147.
6. Under Section 5 of the Act, duty chargeable on the principal value of the property passes on the death of
