S. Devaraj v. Commissioner Of Wealth-Tax

1. As both the cases raise substantially the same points, they are dealt with together.

2. The first case is with reference to an assessment made under the Wealth-tax Act while the other is with reference to an assessment made under the Estate Duty Act. As the questions involved in T.C. No. 49 of 1967 are more comprehensive, we take up that case first for consideration.

3. One T.R. Narayanaswami Naidu was the karta of a joint Hindu family. The joint family properties included a building called "Nataraja Nilayam" constructed in the year 1942 at Palani. It had been set apart for use of pilgrims visiting the town and admittedly the said building was not used for any private purposes of the family. The family properties were partitioned under a partition deed dated March 1, 1950, between the said Narayanaswami Naidu and his adopted son, Rajasekaran, as also minor, Devarajan, the adopted son of his pre-deceased son. Under that partition the building in question was directed to be maintained by Narayanaswami Naidu with the income from certain lands over which he had been given a life-interest. The partition deed further provided that after the death of Narayanaswami Naidu, the building has to be maintained by his daughter-in-law, one Janaki Ammal, with the income from the same lands, and that after her death, Rajasekaran and Devarajan were to maintain the building with the income from the same lands. Subsequent to the partition deed, a family settlement deed was executed on February 5, 1958, under which Janaki Ammal was deprived of her right to manage the building and also her right with regard to the lands with the income of which the building has to be maintained, and instead it was provided that after the death of Narayanaswami Naidu the lands should be equally divided between Rajasekaran and Devarajan and enjoyed with absolute rights, subject to their liability to maintain the said " Nataraja Nilayam ". Narayanaswami Naidu died on December 31, 1958. At the time of his death he was a partner in the firm of Messrs. T.R. Narayanaswami Naidu and Co., having a 3/l6th share in the profits and losses of the said firm. That firm was the managing agent of one Coimbatore Pioneer Mills Ltd. On the date of his death, the deceased had a share capital of Rs. 1,200 to his credit, and his share in the profit and interest amounted to Rs. 19,233.

4. The accountable persons filed an estate duty return admitting a net dutiable estate of Rs. 3,66,947. The said sum included the share capital and the share of profit and interest of the deceased in the managing agency firm, but did not include the value of the share of the deceased in the goodwill of the said managing agency firm. It also did not include the value of the building " Nataraja Nilayam."

5. The Assistant Controller of Estate Duty, however, proposed to value the building at Rs. 62,000 and 3/16th share in the goodwill of the firm at Rs. 66,000 and to include the same in the estate of the deceased. The accountable persons objected to this proposal and contended that the value of the building could not be included in the estate of the deceased because it had been set apart only for charitable purposes, and that, in any event, the value of the building was only Rs. 30,000. With regard to the goodwill, it was contended that in the case of managing agency business, there was no goodwill at all, and that in fact the accountable persons had not obtained any amount from the firm towards the value of the deceased's share in the goodwill of the firm. The Assistant Controller, however, overruled these objections and held that the building was not a trust property and that it was owned by the deceased at the time of his' death, and that, therefore, its value at Rs. 62,000 was includible in the estate of the deceased. On the question of goodwill, the Assistant Controller held that the managing agency firm did possess goodwill and on the death of the deceased the accountable persons were entitled to 3/16th share in the goodwill of the business of the firm and as such a sum of Rs. 66,000 being the value of the 3/16th share had to be included in the estate of the deceased.

6. The accountable persons preferred an appeal to the Appellate Controller of Estate Duty and reiterated the same contentions which were urged before the Assistant Controller. The Appellate Controller also rejected all the contentions of the accountable persons except on the question of valuation of the building. He reduced the value of the building from Rs. 62,000 to Rs. 40,000.

7. The accountable persons preferred a further appeal to the Appellate Tribunal. The Tribunal felt that the question whether the building " Nataraja Nilayam " was a trust property or not had not been properly considered by the authorities and, therefore, remitted the matter to the Appellate Controller to record further evidence and to submit a finding on that question. In pursuance of the remit order the Appellate Controller recorded further evidence which consisted of photostat copies of the stone slab fixed to the building and the notice board at the entrance of the building. On the basis of the said evidence the Appellate Controller submitted a finding to the effect that the building in question constituted an endowment for religious and charitable purposes. But, the Tribunal did not accept the finding of the Appellate Controller but held that the building in question did not constitute a trust property but was the private property of the deceased which passed on his death to the accountable persons and in that view, included the value of the building of Rs. 40,000, in the estate of the deceased. As regards the inclusion of Rs. 66,000 representing the deceased's share in the goodwill of the managing agency firm, the Tribunal held that goodwill cannot be associated with the business of managing agency firm because the managing agency business is governed by the terms of the agreement between the managing agency firm and the company and the right of managing agency was more personal and could not pass on to a successor. The Tribunal also held that no share in the goodwill of the business passed to the accountable persons on the death of the deceased and that in any event no amount was actually paid to the accountable persons by way of the deceased's share in the goodwill of the business. It also expressed the view that it was exceedingly doubtful whether the accountable persons would have succeeded if they had taken any legal steps for recovery of the deceased's share in the goodwill of the business but for their neglect or default. It also rejected the contention of the revenue that under Section 53 of the Act the accountable persons would be liable to pay the duty on the deceased's share in the goodwill in the business even if no share in the goodwill had been paid to them. In that view the Tribunal deleted the sum of Rs. 66,000 representing the deceased's share in the goodwill of the managing agency firm.

8. At the instance of the accountable persons the following question was referred to us for decision by the Tribunal;

" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the value of the building called ' Nataraja Nilayam ' was includible in the estate of the deceased that passed on his death ? "

and at the instance of the revenue the following question has been referred:

" Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 66,000 representing the value of the 3/16th share of the goodwill was not includible in the estate of the deceased that passed on his death ?"

With reference to the first question it has to be decided whether " Nataraja Nilayam " is a trust property having been endowed for religious and charitable objects as contended by the accountable persons. The reasons given by the Tribunal for holding that there is no trust created in respect of the said property are :

(1) the building had been constructed by the deceased with the funds of the joint Hindu family and not with his separate funds and therefore the building belonged to the joint family in the first instance ;

(2) the building has been included in the joint family properties that were divided under the partition deed dated March 1, 1950, and had been allotted to the share of the deceased ;

(3) there is no trust deed with reference to the building ;

(4) the partition deed dated March 1, 1960, did not contain any specific recital to the effect that the building has been set apart as a trust for religious and charitable purposes or that the deceased had divested himself of his absolute rights in the said property;

(5) a mere provision for the maintenance of the building by the deceased and thereafter by others cannot amount to creation of a trust with reference to the building:

(6) under the settlement deed dated October 10, 1958, Rajasekaran and Devarajan had been given the right to divide and enjoy the building equally ;

(7) the exclusive use of the building from 1942 to 1958, for religious and charitable purposes did not amount to a permanent dedication of the building as a trust property ; and (8) neither the stone slab nor the notice board in front of the building could establish a valid dedication of the building for religious and charitable purposes.

9. We have been taken through the partition deed dated March 1, 1950, and the settlement deed dated October 5, 1958, and after going through the recitals therein, we find that the Tribunal has entertained certain misconceptions as to the true nature and character of the building in question. We are not able to share the interpretation which the Tribunal has placed on certain recitals in the partition deed and the settlement deed. Neither under the partition deed nor under the settlement deed the building " Nataraja Nilayam " had been taken as a partible property. It is only the devolution of the lands which have been set apart for the maintenance of the said building that has been provided for both under the partition deed arid the latter settlement deed. Both the documents clearly dealt with the right to manage the building " Nataraja Nilayam ". The stone slab and the notice board in front of the building show when it was founded and for what purpose the building is to be used. The Tribunal itself has proceeded on the basis that the building has been used for religious and charitable purposes from 1942 to 1958, but holds that it is not sufficient to establish a permanent dedication of the building as a trust.

10. It is well established that no express words of gift either directly or indirectly in the shape of a trust are required to create a dedication. All that is necessary is that the religious purpose or object of the donor shall be clearly specified and that the property intended for the endowment should be set apart and dedicated to those purposes. There are a large number of decided cases where it has been held that to constitute a valid dedication of property by a Hindu for religious and charitable purposes, no document in writing or registered is necessary, On the question whether a karta of a joint Hindu family can make effective dedication of the joint family properties for religious and charitable objects, the Judicial Committee in Gangi Reddi v. Tami Reddi, [1927] L.R. 54 I.A. 136 ; A.I.R. 1927 P.C. 80 expressly affirmed the proposition of law enunciated by this court in Narasimhaswami v. Venkatalingam, A.I.R. 1927 Mad. 636 [F.B.] that a dedication of a portion of the family property for the purpose of a religious charity may according to Hindu law be validly made without any instrument in writing even if it be appropriation of some landed property. It is also well established that the existence of a trust can be established even by the conduct of parties. Though normally a Hindu while dedicating property to a deity or any other religious or charitable object ordinarily goes through the ceremonies of sankalpa and samarpan, it cannot be said that those ceremonies are essential to the creation of an endowment. The performance of these ceremonies is only relevant to show the intention of the grantor, and if there is clear and unequivocal manifestation of intention to create a trust and'there is formal divestiture of the ownership in the property on the part of the donor with the intention to devote it to religious and charitable purpose the dedication must be deemed to be complete. The dedication of property is not a sacrament but a secular act; but the mere renunciation of ownership by the donor with a particular object is sufficient to create an endowment. We are of the view that the Tribunal has not kept in mind these general and accepted principles while considering the question as to whether " Nataraja Nilayam " is a trust property or not.

11. There was a subsequent litigation between Janaki Ammal, the daughter-in-law of the deceased, Rajasekaran, the adopted son of the deceased, and Devarajan, the adopted son of Janaki Ammal, wherein Janaki Ammal questioned, inter alia, the validity of the partition deed dated March 1, 1950, and in the course of the entire litigation the parties proceeded on the basis that the building " Nataraja Nilayam " was a trust property and the dispute between them was as to the right of management of the trust. The said litigation ultimately reached the Supreme Court in C. A. No. 2296 of 1966 and the Supreme Court observes :

"We may also mention that in the deed of March 1, 1950, it has been provided that the respondent would be entitled to manage the charity properties known as 'Nataraja Nilayam' after the death of her father-in-law which event has already happened."

12. We are, therefore, of the view that the conduct of the parties right from 1942, when the building "Nataraja Nilayam" was constructed, clearly shows that the building has been specifically set apart and used for religious and charitable objects. We have to, therefore, disagree with the view taken by the Tribunal that the building " Nataraja Nilayam " is not a trust property and as such its value has to be added on to the estate of the deceased.

13. On the question as to whether the deceased's share in the goodwill of the managing agency firm could pass on his death, we are not in a position to agree with the observation of the Tribunal that a managing agency business cannot have any goodwill. In J.K. Trust v. Commissioner of Income-tax, [1957] 32 I.T.R. 535; [1958] S.C.R. 65 (S.C.) it has been specifically held by the Supreme Court that the managing agency business has got goodwill. This court in a recent decision in T. C. No, 275 of 1967 R. Ranganayaki Ammal v. Controller of Estate Duty, [1973] 88 I.T.R. 336 (Mad.) has held that the managing agency firm has goodwill and that the deceased's share in the goodwill can be included in the estate of the deceased as the property passing on death. The Tribunal is, therefore, in error in holding that the managing agency has no goodwill at all.

14. The Tribunal has also taken the view that as no share in the goodwill of the business was actually paid to the accountable persons towards the deceased's share in the goodwill, it is not possible to say that any share in the goodwill passed on the death of the deceased and that Section 53 cannot be invoked in this case. Here again, we are not in a position to agree with the view of the Tribunal. The question is not whether the accountable persons had the benefit of the deceased's 3/16th share in the goodwill but the question is whether that share legally passed to or vested in the accountable persons on the death of the deceased. In Khushal Khemgar Shah v. Khorshed Banu, their Lordships of the Supreme Court considered goodwill of a business of a firm as property of the firm in view of Section 14 of the Partnership Act which expressly states that the goodwill of the business is also the property of the firm. In that case the court was ascertaining the rights of the parties in relation to goodwill with reference to the partnership deed which contained the following clause:

" This partnership shall not be dissolved or determined by the death of any of the parties hereto but the same shall be continued as between the surviving partners on the same terms and conditions but with such shares as shall then be determined."

15. Based on the said clause the surviving partners had contended that the goodwill being merely a right to the name, place of business and the reputation of the firm, the share of the deceased partner in the goodwill of the firm devolved only on the surviving partners and not upon the legal representatives of the deceased partner. While rejecting that contention the Supreme Court expressed :

The goodwill of a business is however an intangible asset being the whole advantage of the reputation and connections formed with the customers together with the circumstances which make the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features. An agreement between the partners that the name, the place of business and the reputation of the firm are to be utilised by the surviving partners will not necessarily warrant an inference that it was intended that the heirs of the deceased partner will not be entitled to a share in the goodwill.

16. The relevant clause in the partnership deed in this case is Clause 4 which is as follows :

" The duration of the firm shall be unlimited and the partnership shall not be determined by reason of death, insolvency, lunacy, incapacity> retirement, outgoing and incoming of any partners so long as the business of the firm is continued by at least two partners. "

17. The above clause straightaway attracts the principle laid down by the Supreme Court in the above case. Therefore, the accountable persons as legal representatives of the deceased partner, Narayanaswami Naidu, will be entitled to the deceased's share in all the partnership assets including the goodwill on "devolution, and Sections 39, 42 and 46 of the Partnership Act dealing with the concept and consequences of the dissolution of the firm cannot be said to extinguish the proprietary right of the deceased partner in the assets of the firm including the goodwill. The fact that the accountable persons had not in fact got a share in the goodwill of the managing agency firm from the surviving partners as found by the Tribunal will not affect the legal consequences of the devolution of the deceased's interest in the goodwill to the accountable persons. It may be that in the instant case the accountable persons did not as a matter of fact get anything other than the deceased's share in the capital and the profits of the business. But, as already stated, the entitlement of the accountable persons to the deceased's share in the goodwill cannot be disputed in view of the decision of the Supreme Court in Khushal Khemgar Shah v. Khorshed Banu, . The observation of the Tribunal that " it is exceedingly doubtful whether the accountable persons would have succeeded if they had taken any legal steps for recovery of the deceased's share in the goodwill of the business " which formed the basis for its finding that the deceased's share in the goodwill did not pass on his death to the accountable persons is no longer tenable.

18. Section 53 of the Act setting out the duties and liabilities of the accountable persons provides that every legal representative on whom the beneficial interest in the property passing on death of the deceased vests or any other person in whom any interest in the property so passing is vested in possession by alienation or other derivative title shall be accountable for the whole of the estate duty on the property passing on the death, but his liability for duty shall not exceed the assets of the deceased which he actually received or which, but for his own neglect or default he might have received. On the facts of this case, Section 53 stands attracted for the interest of the deceased in the goodwill of the managing agency firm had vested by operation of law and by the terms of the partnership deed in the accountable persons on the death of the deceased and on such vesting the liability to estate duty in respect of that item stands attracted. The fact that such a vested interest was not reduced to possession, that is, by actual receipt of the value of the deceased's share in the goodwill of the business, will not enable them to escape from estate duty. Besides, Section 53 makes the legal representative on whom the property passes on the death of the deceased liable for the whole of the estate duty Therefore, in our view, the Tribunal is not right in holding that Section 53 can foe invoked against the accountable persons only if the deceased's share of the goodwill had actually passed to them. In this view we answer the first question in the negative and against the revenue and the second question also in the negative and against the accountable persons. In the circumstances of this case where the assessee and the revenue have succeeded in part, there will be ho order as to costs.

19. T.C. No 31 of 1967, as already stated, relates to the assessment under the Wealth-tax Act for the assessment years 1961-62 and 1962-63 against one S, Devarajan, one of the accountable persons in T.C. No. 49 of 1967, and the questions referred under Section 27 of the Wealth-tax Act, 1957, are these:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that a sum of Rs. 31,600, representing the half share of the assessee in the building ' Nataraja Nilayam' was includible in the net wealth of the assessee in each of the assessment years 1961-62 and 1962-63?

(2) Whether, on the facts and in the, circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 11,586 and 12,373, representing the sale proceeds of the agricultural lands in question are includible in the net wealth of the assessee in the assessment years 1961-62 and 1962-63 respectively?"

20. The first question relates to the inclusion of the half share of the value of the building " Nataraja Nilayam " in the net wealth of the assessee. It has already been held in T.C. No. 49 of 1967 that the building " Nataraja Nilayam " is a trust property and that neither the deceased nor the assessee has any proprietary interest therein. Therefore, the inclusion of the half share of the value of " Nataraja Nilayam " in the net wealth of the assessee for the years 1961-62 and 1962-63 cannot be justified. We, therefore, answer the first question in the negative and in favour of the assessee.

21. As regards the second question, the learned counsel for the assessee represents that he is not pressing the same. The question having been referred to us at the instance of the assessee, it is not necessary for us to consider that question when the assessee himself does not want to press the same. We, therefore, return the reference relating to that question as unnecessary.

22. The result is that the first question is answered in favour of the assessee. There will, however, be no order as to costs.