The Judgment of the Court was delivered by

R.N Pyne, J.:— In this reference under s. 64(1) of the E.D Act, 1953, arising out of the estate duty proceedings consequent on the death of one George Galstaun Apcar, deceased, we are concerned with the question regarding valuation of the goodwill of a partnership in which the deceased, during his lifetime, was a partner.

2. For better appreciation of the question referred to the court for its opinion, it is necessary to set out some of the relevant facts. They are: The deceased, John Galstaun Apcar (hereinafter referred to as “the deceased”), along with Mr. John S. Gregory and Mr. Sukumar Dey (hereinafter referred to as “the accountable persons”) were partners in a firm, M/s. Talbot & Co., Calcutta, constituted by a deed of partnership dated December 14, 1962. The terms of the said deed of partnership relevant for our purpose may be stated. They are:

“17. As soon as possible after the 31st day of December in every year during the continuance of the partnership a general account shall be made up to such date of the credits, property, effects, debts and liabilities of the partnership and of all transactions matters and things usually comprehended in a general account of the like nature. Every such account shall be balanced agreed to and signed by all the partners and when so signed shall be binding on all the partners except that if any manifest 1 error therein be detected and pointed out by any partner to the others and other of them within six months after such signature thereof such error shall be forthwith rectified. Immediately after the signing and settling of every such annual general account each partner shall be entitled to draw out and receive his share of the net profits of the business for the past year on bringing into account all monthly sums previously drawn out by him under the provisions in that behalf herein before contained.

18. If any partner’ shall die during the continuance of the partnership the surviving partner or partners shall as from the date of such death and if more than one in the proportions in which they were at such date entitled to share in the net profits of partnership succeed to the share of the deceased partner in the partnership business and the property and goodwill thereof and shall undertake all the debts, liabilities and obligations of the partnership and pay the representatives of the deceased partner as price of such share:

(a) His share in the capital and property of the partnership as ascertained by the last annual account taken prior to his death, and

(b) His share of undrawn current profits up to the date of his death.

19. For the purpose of ascertaining the amount payable to the representatives of a deceased partner of his share in the goodwill of the business the value of such goodwill shall be deemed to be Rs. 1,00,000 which sum shall be added to the sum payable as aforesaid in respect of the deceased partner's share in the capital and property of the partnership.”

3. The deceased executed a will on April 19, 1961, appointing his wife, Mrs. S. Mary Apcar, as the sole executrix. After the death of the deceased on April 17, 1965, the widow submitted an account showing the net value of the estate of the deceased at Rs. 1,50,616, including the share of the deceased in the said firm. The value of the business goodwill of the firm was stated to be Rs. 1,00,000. The Asst. CED did not accept this value of the goodwill and fixed the same at Rs. 5,00,000 and determined the proportionate value of the share accordingly. The total value of the estate was, therefore, determined at Rs. 3,28,745 and the assessment was made on it. ‘Subsequently by an order dated May 8, 1967, passed under s. 61 of the E.D Act, 1953 (hereinafter referred to as “the Act”), the Asst. CED revised the principal value and the accountable persons mentioned above were treated to be the accountable persons. Against this order dated May 8, 1967, the accountable persons preferred an appeal to the Appellate CED. It was contended before him that they were not accountable persons in respect of the estate of the deceased and, secondly, the value of the good-will of the firm at Rs. 5,00,000 was unjustified and its value as mentioned’ in the partnership deed of Rs. 1,00,000 should have been accepted. The Appellate CED did not accept these contentions and upheld the order passed by the Asst. CED. The Appellate Controller observed that “even on the basis of book profits, the average annual profits would not be less than Rs. 2,50,000. So the valuation of Rs. 5,00,000 as made by the Assistant Commissioner (Controller) is actually something less than two years’ profits”. Thereafter, the accountable persons preferred a second appeal before the Appellate Tribunal and the very same contentions were urged before it. Reliance was also placed on a decision of Bench ‘B’ of the Tribunal in E.D.A No. 3(Cal) of 1968–69 (Assistant Controller of Estate Duty, B-Ward, Calcutta v. Sri Purushottamdas Bangur, Calcutta) as also on a decision of the High Court of Australia in the case of Perpetual Executors and Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation (94 CLR 1). The Tribunal held that s. 5 of the E.D Act, 1953, applied and the valuation would have to be in accordance with the provisions of the partnership deed. Following the said decision the Tribunal further held that the value of the share of the deceased in the firm of Talbot & Co. including its goodwill should be determined in accordance with the terms of the partnership deed. In other words, the value of the goodwill would be taken at Rs. 1,00,000 for the purpose of estate duty proceedings and it would not be correct to determine it on the basis of any hypothetical market value. Regarding the other contention of the accountable persons the Tribunal held that irrespective of the fact that the first assessment was made against the widow of the deceased, the accountable persons could not escape liability to pay estate duty to the extent of the estate of the deceased in their hands in view of the fact that they have acquired his share in the firm from the widow of the deceased. In the result, the Tribunal partly allowed the appeal. Thereafter, on the application of the revenue, a question of law said to arise out of the Tribunal's said order was referred to this court for its consideration. The question of law set out at page 4 of the paper book is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the value of the share of the deceased, George Galstaun Apcar, in the firm, M/s. Talbot & Co., including its goodwill, would be determined in accordance with the terms of the partnership deed dated 14-12-52 for the purpose of the Estate Duty Act, 1953?”

4. It appears that there is a mistake in the question as set out at page 4 of the paper book. We think the proper question should be:

“Whether, on the facts and in the circumstances of the case, the Triibunal was justified in holding that the value of the share of the deceased, George Galstaun Apcar, in the firm of M/s. Talbot & Co. including its goodwill would be determined in accordance with the terms of the partnership deed dated 14-12-52 for the purpose of the Estate Duty Act, 1953?”

5. Learned counsel for the revenue submitted that upon the death of the deceased there was a passing of the property, which in the instant case is the share of the deceased in the partnership, to his legal representative. He, however, contended that under the deed of partnership upon the death of a partner the other surviving partners would succeed to the share of the deceased partner in the partnership upon payment to the representative of the deceased partner certain amounts for the deceased's share in the assets, property and goodwill of the partnership to be determined in the manner as provided in the deed of partnership. Learned counsel, therefore, submitted that while considering the question what property has passed upon the death of the deceased under s. 5 of the Act the value of the deceased's share in the partnership should be determined in the manner as provided in the deed and, therefore, in that view of the matter, the value of the goodwill should be taken at Rs. 1,00,000. Therefore, according to the learned counsel, for the purpose of valuation of the property which passed to the legal representative of the deceased, the value of the goodwill should be taken at Rs. 1,00,000 as fixed by the said deed. But the learned counsel has further submitted that there is another aspect of the matter which needs consideration in the instant case. It is his submission that, in the instant case, upon the death of the deceased partner, benefit also accrued to the surviving partners due to the cesser of interest of the deceased in the partnership under s. 7 of the E.D Act, 1953. Elaborating his argument, learned counsel submitted that in the instant case we have to consider the two situations, i.e, one before the death of the deceased and the other after his death. According to the learned counsel, upon the death of the deceased, due to cesser of his interest in the partnership, the surviving partners were also benefited. For determing the value of such benefit, learned counsel submitted, the market value of the goodwill and not the value as mentioned in the partnership deed will have to be taken into account. Learned counsel has submitted that so far as the goodwill is concerned, the value of such benefit which has accrued to the widow (the representative of the deceased) would be calculated on the basis of the valuation mentioned in the partnership deed (viz., Rs. 1,00,0000); but so far as the surviving partners are concerned, the value of such benefit should be the market value of the goodwill less Rs. 1,00,000, being the value mentioned in the deed. Learned counsel has further submitted that the deceased's interest in the goodwill of the partnership was not confined to Rs. 1,00,000 only but it was much more than the said sum. Learned counsel has, therefore, submitted that, while considering the question what property has passed to the surviving partners, market value of the goodwill should be taken into account. Learned counsel referred to a passage at page 1440 of Dymond's Death Duties, 15th edn., which reads as follows:

“If the surviving partners have power to take over the share at a price less than the real value, the value in the free estate may be limited to the option price (see pp. 104-11) but duty may also be chargeable (e.g, under the Finance Act, 1894, s. 2(1)(d)) on the difference between the option price and the open market value, so that it will still be necessary to estimate the latter.”

6. It should be noted that sub-ss. (1) and (4) of s. 7 of the E.D Act, 1953, correspond to s. 2(1)(d) of the U.K Finance Act, 1894.

7. Learned counsel for the revenue further contended that for determining’ the value of the goodwill option given to the other partners under the deed’ at the stated price should not be taken into account and he has referred to r. 14(2) of the E.D Rules, 1953. Summing up his submissions learned counsel stated that while considering the liability of the respondents for the duty the value of the goodwill would be determined on the basis of its market value less the value mentioned in the deed. So far as his contention regarding the question of passing of the property under s. 7 of the Estate Duty Act, 1953, learned counsel submitted that as this contention is implicit in the question submitted it is open to us to consider the same and in support of this contention he has referred to the case of CIT v. Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589 (SC).

8. Learned counsel for the accountable persons submitted that in the instant case the property in question, namely, the deceased's share in the partnership, passed on his death under s. 5 of the E.D Act. He further submitted that in the instant case we are not concerned with the value of the deceased's share in a partnership which included the goodwill and the same should be valued in the manner as provided in the partnership deed. Counsel relied on the decision of the High Court of Australia in the case of Perpetual Executors and Trustees Association of Australia v. Federal Commissioner of Taxation (94 CLR 1). Learned counsel further contended that as in the instant case the question of applicability of s. 7 of the E.D Act was not mooted before the revenue authorities, including the Tribunal, arid also does not come within the purview of the question referred, it is not open to the revenue to argue this point.

9. In the Australian case (94 CLR 1) cited by the counsel for the accountable persons the facts were that one “T” at the date of his death was engaged in business in partnership with other persons pursuant to the terms of a partnership deed which, inter alia, conferred on certain of the partners who survived “T” options to purchase his share in the capital of the partnership at his death at a sum to be computed as therein set out (without taking into account the value of the goodwill of the partnership. The options were duly exercised and the purchase price ascertained in accordance with the terms of the deed. It was held by the majority of judges that “T's” interest in the partnership being delimited and described by the provisions of the partnership deed, the existence of the option provision therein and the degree of possibility of their exercise were material factors for consideration in assessing the value of T's interest in the partnership property, including goodwill for estate duty purposes and that it being conceded by the Commissioner that at the date of death there was a practical certainty that the options would be exercised, the value of the interest of T in the partnership property, including goodwill, could not be greater than the price obtainable from the surviving partners calculated in accordance with the terms of the partnership deed. It should be noted that in that case, the court did not consider the question of the benefit accruing to the surviving partners due to the cesser of interest of the deceased partner in the partnership.

10. Though the contentions regarding applicability of s. 7 of the Act and of the valuation of the goodwill in that connection now made before us, were not made before the Tribunal, yet in our view the said contentions of the revenue are within the scope of the question framed by the Tribunal and are implicit therein. Here we are really concerned with the question of liability for the estate duty payable in respect of the deceased's share in the partnership and the question of valuation of such share including the goodwill. Therefore, these contentions are nothing but other aspects of that question. The principle laid down in Scindia Steam Navigation Co.'s case, [1961] 42 ITR 589 (SC) applies to this case.

11. In the instant case, in our view, upon the death of the deceased, the property, namely, share of the deceased in partnership (including the goodwill), passed to his legal representative and the value of such share should be determined in the manner as provided by the partnership deed because of the provisions contained in the deed as stated earlier. But so far as the other surviving partners are concerned, in our view, due to cesser of interest of the deceased in the partnership upon his death, corresponding benefit also accrued to them and for determining the value of such benefit for the purpose of estate duty, market value of the goodwill and not the value as stated in the partnership deed should be taken into account but it should be borne in mind that as the surviving partners are required to pay to the personal representative of the deceased the amount mentioned in the deed in respect of the goodwill, the said amount should be deducted from the market value. In our view, so far as the goodwill is concerned, the/benefit to the surviving partners is to the extent of its market value less the sum of Rs. 1,00,000 being the amount which they are liable to pay to, the personal representatives in terms of the partnership deed. In this connection reference may be made to the following observation in Dymond's Death Duties, 14th edn., at page 81, where it is observed:

“Where on the death the deceased's share accrues to the surviving partners without payment, it passes direct to them under s. 1, and duty is payable by them, subject to any exemption under s. 3 if the facts constitute a ‘purchase’. There is no dutiable item in the free estate (except, e.g, any accrued profits payable to the estate).

12. Where the share accrues to the surviving partners but they are (and can be compelled) to pay a sum to the estate for it, it is considered that (i) such sum is dutiable as an item of free estate, and (ii) value of the share, less the sum, is dutiable as in the preceding paragraph.” We, therefore, answer the question referred by saying that for the purpose of determining the duty payable by the personal representative (widow) of the deceased the share of the deceased in the firm, Messrs. Talbot & Co., including its goodwill, valuation should be made in accordance with the provisions of the partnership deed dated December 14, 1952, but for the purpose of determining the liability of the surviving partners (the respondents herein) for payment of duty in respect of the benefit accruing to them due to the death of the deceased the market value of the goodwill less the value thereof as mentioned in the said deed should be taken into account for the purpose of valuation, and we answer the question accordingly. In the facts and circumstances of this case, we do not propose to make any order for costs.

Sabyasachi Mukharji, J.:— I agree.