G. Santhanam, Accountant Member -
(1.) THIS is an appeal by the Accountable Person. Shiv Vithal Govindarao Saraf passed away on 18-10-1984. He was a partner in the firm of M/s. Saraf Trading Corporation, a partnership firm which carried on business as commission agents and exporters of tea. The firm was originally constituted under a deed of partnership dated 27-11-1963 with three partners, namely :-
On 16-9-1981 the partnership was reconstituted with the admission of Dr. Miss Asha V. Saraf as a full-fledged partner and Master Vivek Anil Saraf, son of Dr. Anilkumar V. Saraf, to the benefits of partnership. Clauses 7 to 10 of the partnership deed are relevant for purpose of this appeal, which read as follows :
7. The profits or losses of the firm shall be determined at the end of the accounting year and shall be divided between the partners and beneficiary only as hereinafter provided :
(a) An amount not exceeding 10% of the profits of the firm for the year shall be distributed among the partners and beneficiary every year, on such basis as may be agreed from year to year.
(b) In view of the nature of the present business, the balance of profits, remaining after distribution as above, shall be accumulated to absorb losses of the firm and for other contingencies till such time as the partners decide otherwise, so however that at least 50% of the accumulated profits of a year after setting off any brought forward loss shall be distributed among the partners and the beneficiary in any event before the expiry of three years from the date of accumulation and the balance 50% of the accumulated profits before the expiry of six years from the date of accumulation. The partners do not have any specified or equal share in the accumulated profits and the partners shall decide the amount to be credited or debited as the case may be, to any one or to each partner at any time, giving weightage to the circumstances of the case. An outgoing or retiring partner shall have no share in the accumulated profits and on death, the estate of a deceased partner will get such share, if any, as the continuing partners shall decide.
(c) In the event of a loss, it shall first be set off against past accumulated profits, if any and the balance, if any, shall be carried forward and set off against future profits or shall be apportioned amongst the partners and not the minor beneficiary in such proportion and such manner having regard to the circumstances in which the loss arose.
(d) On the dissolution of the firm, after paying all the liabilities of the firm and the amounts standing to the credit of the partners and minor, the net surplus will be divided amongst the partners and the minor in such proportion as the partners may decide by majority.
(e) As and when the question of determining the shares of the partners or beneficiary or a deceased partner arises and if any dispute arises, the same shall be decided according to the wishes of the seniormost surviving partner and his decision shall be final and binding on all the partners and their successors or representatives, as the case may be.
8. The firm's bank accounts shall be operated severally and by any other person, if so authorised by any partner of the firm.
9. The firm shall not stand dissolved if any partner is admitted to the partnership or if any partner retires or goes out for any reason from this partnership or expires.
10. No partner of the firm shall be entitled to any specified share in the goodwill, if any, of the firm at any time and the goodwill shall continue to vest with the firm till all the properties of the firm are sold and realised.
The Assistant Controller of Estate Duty was of the view that in the income-tax proceedings the share of profits of the partners were taken equally applying the provisions of Section 13(b) of the Partnership Act. He overruled the objections of the Accountable Person that the provisions of Section 13 of the Partnership Act are not attracted in the case of the deceased since Clause 7 of the partnership deed cited supra spelt out the manner and the method of distribution of profits and accumulated profits as between the partners. He also noticed that during the life-time of the deceased, the firm had distributed a sum of Rs. 2,50,000 on 15-11-1982 giving a sum of Rs. 1,70,000 to the deceased. In the subsequent year, namely, year ended 4-11-1983, in a distribution of Rs. 1,20,000 the deceased got a share of Rs. 30,000. However, after the death of the deceased, a sum of Rs. 15 lakhs was distributed and the deceased was only given a sum of Rs. 9,000. Hence, he held that the profits were not distributed properly. He also noticed that the deceased was allowed to withdraw more than Rs. 10 lakhs during these periods resulting a debit balance of Rs. 17,93,351 at the time of his death. Therefore, he concluded that the surviving partners indulged in some kind of planning so as to avoid tax liability. Hence, he chose to adopt 1/5th share of undistributed profits as the share of the deceased in the interest of the firm.
(2.) Similarly he took into account 1/5th share in the profits of the firm for the year ended on 24-10-84 on the ground that the time lag between the passing away of the deceased and the closing of the firm's account was short and that almost all the transactions of the firm were over as on the date of the death of the deceased.
The Assistant Controller of Estate Duty further held that even though the deceased was only a lessee of a building in which the business was carried on by the firm, the leasehold properties commanded a market value and therefore he included the value of the leasehold property for the purpose of Estate Duty assessment at 1/5th of its value. He also overruled the objection of the Accountable Person that the firm did not have any goodwill. Though the partnership deed did not give a right to the deceased to claim goodwill, even then he was entitled to it. In this view of the matter he relied on the decision of the Supreme Court in the case of CED v. Mrudula Nareshchandra  160 ITR 342 : 26 Taxman 384 (SC). In arriving at the value of the goodwill, he did not give any deduction for income-tax on the ground that income-tax is not a charge on profit and gave only marginal reduction for managerial remuneration etc. and computed the interest of the deceased at 1/5th of the value of the goodwill as determined by him. In such computation he included the amount of duty drawback, cash assistance, etc., which were received by the firm during the course of the business as the profits of the undertaking. He also noticed that the firm in which the deceased was a partner was entitled for refunds for the assessment years 1982-83, 1983-84 and 1984-85 though such refund was quantified subsequent to the death of the deceased and this was to be included in the computation of goodwill. Thus, he took 1/5th of the value of such goodwill as the share of the deceased. He also revalued some of the assets of the firm and took 1/5th of the surplus in such revaluation. He overruled the objections of the assessee to the revaluation of the above assets as done by the Assessing Officer on the ground that the assessee had not shown that the market value will be more than the value admitted in the balance-sheet. Thus, he determined the principal value of the estate of the deceased at Rs. 70,93,950. The assessee carried the matter in appeal.
The learned Appellate Controller of Estate Duty upheld the view of the Assessing Officer that the interest of the deceased in the firm was rightly computed at 1/5th of the undistributed profits up to the date of death and the profits earned during the year up to the date of the death. He also upheld the view of the Assessing Officer that the assessee was entitled to a share in the goodwill notwithstanding the provisions in the Partnership deed and that share was to be taken at 1/5th of the value of the goodwill. He justified the multiplier at 3 and saw no reason to interfere with the interest at the normal rate of 10% of the average capital employed and the quantum of managerial remuneration allowed by the Assessing Officer in evaluating the goodwill. He upheld the inclusion of the firm's refund and also the interest thereon under Section 214 of the IT Act. He upheld the inclusion of refund of Rs. 6,33,366 which was granted to the assessee on 14-2-1984 in relation to the assessment year 1983-84. He gave relief to the assessee in respect of the valuation of the flat by directing the Assessing Officer to substitute the value at Rs. 35,000 as against Rs. 4,50,000 based on wealth-tax records. He deleted the addition made by the Assessing Officer in respect of the assets found in the balance-sheet by revaluing the same on estimate basis. He justified the charging of interest under Section 53(3) of the Estate Duty Act amounting to Rs. 1,74,797. Thus the appeal of the Accountable Person was partly allowed.
(3.) NOT satisfied with the relief granted by the Appellate Controller of Estate Duty, the Accountable Person is on appeal. We have heard rival submissions and perused the records, consisting of the following :-
(a) Copy of Estate of Late V.G. Saraf as filed before the A.C.E.D;
(b) Deed of Reconstitution of Partnership of M/s. Saraf Trading Corporation (STC);
(c) Extract of the minutes of the Partners' meeting on 16-09-1981;
(d) Statement showing distribution of profits by M/s. STC;
(e) NOTe on nature of business of STC;
(f) Alternate computations of Goodwill of STC;
(g) I.T. Assessment Orders of STC for the assessment years 1982-83 to 1985-86;
(h) Copy of Tribunal's order in GTA No. 31/Coch./1983; (i) Copy of Tribunal's order in GTA No. 34/Coch/78-79;
(j) Chapter on "Valuation of Goodwill" in Advanced Accountancy by Shukla & Grewal;
(k) Copy of Lease Agreement between STC and Cochin Port Trust;
(1) Copy of the order of the Tribunal dated 24-6-1993 in the case of Saraf Trading Corporation in IT Appeal Nos. 489 to 491/Coch. of 1989 for the assessment years 1982-83 to 1984-85.;