Punjab-Haryana High Court
Controller Of Estate Duty vs Smt. Pushpa Anand (Accountable Person ... on 27 May, 1997
Equivalent citations: [1999]235ITR534(P&H)
Author: Iqbal Singh
Bench: Iqbal Singh
JUDGMENT 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 a person. Section 36 of the Act lays down the method of estimating the principal value of the property. It requires the Controller to estimate the principal value of the property by reference to the price it would fetch if sold in the open market at the time of the death of the deceased. Therefore, in cases where a firm has a goodwill, it passes on the death of the partner and it has to be evaluated for the purpose of Section 5.
7. The question which requires adjudication in the present case is as to what is goodwill ?
8. In IRC v. Mutter and Co.'s Margarine Ltd. [1901] AC 217 (HL), Lord Macnaghten observed :
"What is goodwill ? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this, it must be dealt with as such."
9. Lord Lindley dealing with the concept of goodwill observed :
"Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own. . . .
The goodwill of a business usually adds value to the land or house in which it is carried on if sold with the business . . ."
10. In Rustom Cavasjee Cooper v. Union of India [1970] 40 Comp Cas 325, the Supreme Court gave the following meaning to the word "goodwill" (page 385) :
"Goodwill of a business is an intangible asset : it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making 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 or in excess of normal amounts because of its reputation, location and other features : Trego v. Hunt [1896] AC 7. Goodwill of an undertaking, therefore, is the value of the attraction to customers arising from the name and reputation for skill, integrity, efficient business management or efficient service."
11. In CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, a three-judge Bench of the Supreme Court discussed the concept of "goodwill" and observed (page 298) :
"Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves. 335, that goodwill was nothing more than 'the probability that the old customers would resort to the old places' was expanded by Wood V.C. in Churton v. Douglas [1859] John 174, to encompass every positive advantage 'that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business'. In Trego v. Hunt [1896] AC 7 (HL), Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of the Property describes it as property of a highly peculiar kind. In CIT v. Chunital Prabhudas and Co. [1970] 76 ITR 566, the Calcutta High Court reviewed the different approaches to the concept (pages 577, 578) :
'It has been horticulturally and botanically viewed as "a seed sprouting" or an "acorn growing into the mighty oak of goodwill". It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the "attracting force". In terms of comparative dynamics, goodwill has been described as the "differential return of profit". Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a "habit" and sociologically it is a "custom". Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 (HL) as the "sap and life" of the business. Architecturally, it has been described as the "cement" binding together the business and its assets as a whole and a going and developing concern.'"
12. In State v. Prem Nath [1977] 106 ITR 446, a Full Bench of this court dealt with the concept of goodwill. While overruling the judgment of the Division Bench in CED v. Ved Parkash Jain [1974] 96 ITR 303, the Full Bench approved the ratio of the decision of the Madras High Court in S. Deva Raj v. CWT [1973] 90 ITR 400 and observed (page 448) :
"It is clear from the observations of the Supreme Court that the goodwill of a firm is an asset of the firm the share in which, along with his share in the other assets of the firm devolves, on his death, upon his legal representatives notwithstanding any clause in the deed of partnership to the effect that the surviving partners are entitled to carry on the business on the death of the partner. A term extinguishing the right of a deceased partner to a share in the assets is not to be implied merely because the deed provides for continuance of business by the surviving partners."
13. In CED v. Mrudula Nareshchandra [1986] 160 ITR 342 (SC), their Lordships analysed the provisions of the Partnership Act, 1932, as well as the Estate Duty Act, 1953, and approved the views expressed by the Full Bench of this court in Prem Nath's case [1977] 106 ITR 446, as well as those expressed by the Calcutta, Gauhati and Madras High Courts. The decision of the Gujarat High Court in Smt. Mrudula Nareshchandra v. CED [1975] 100 ITR 297, which was not followed by this court was partly reversed by the apex court.
14. In S. C. Cambatta and Co. (P.) Ltd. v. CEPT [1961] 41 ITR 500, the Supreme Court again analysed the concept of goodwill with reference to a large number of English judgments and observed (page 505) :
"It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it and the lack of competition and many other factors go individually or together to make up the goodwill though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time locality is not everything. The power to attract custom depends on one or more of the other factors as well."
15. In Smt. Vindoor Bai v. CED [1981] 132 ITR 421, a Division Bench of the Allahabad High Court dealt with the concept of goodwill and held that each and every right which passes on death of the partner has to be valued on the assumption that there is a willing purchaser for the right or property. Some of the observations made by the Division Bench are quite relevant. Therefore, the same are extracted below (headnote) :
"Goodwill of a business is an intangible asset. It is the whole advantage of the reputation and connection formed with the customer together with circumstances making 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 or in excess of normal amounts because of its reputation, location and other features. It is the value of the attraction to customers arising from the name and reputation for skill, integrity and efficient management or efficient service. This, however, is not to say that every firm must have a goodwill. Goodwill is acquired during the course of a number of years of business. It rarely springs from the very institution of the firm. There are some firms which depend solely on the professional skill of a particular partner, which may have no goodwill at all.
Under the Estate Duty Act, each and every right which passes on death has to be valued. The evaluation has to be done on the basis of the assumption that there is a willing purchaser for the right or property. In this evaluation, it would not be proper to find out whether the right or article left by itself is capable of earning money. It is the settled practice to value goodwill for estate duty and the methods adopted are not unreal or imaginary."
16. In CED v. Kanta Devi Taneja [1981] 132 ITR 437, a Division Bench of the Gauhati High Court held that an 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 his share in all partnership assets including goodwill. On the death of a partner, his interest in the entire unit of the firm including goodwill passes, irrespective of the provisions of the partnership deed as to its final devolution.
17. In Mahabir Prasad Poddar v. CED [1976] 104 ITR 612, a Division Bench of the Patna High Court upheld the inclusion of the estimated value of the goodwill of the business in the value of the estate of the deceased and observed that the firm which was dealing not only in kirana business but was also the selling agent and stockist of Hindustan Lever and also Wimco had a goodwill value which had to be estimated for the purpose of the principal value of the estate of the deceased.
18. In Smt. Kamlawati Raizada v. CED [1976] 105 ITR 703, a Division Bench of the Allahabad High Court held that the firm which was engaged in the business of purchase and sale of chaff cutting machines and parts thereof and supply of gittis and contract work had a goodwill which passed on to the partners after the death of one of them.
19. In K. A. Subramaniam v. CED [1962] 46 ITR (ED) 1, a Division Bench of the Madras High Court held that the hotel business had a goodwill which has to be taken into consideration properly for determination of the value of the estate.
20. The principles which emerge from the above discussion are :
(i) The goodwill of a business is an intangible asset. It is the advantage or reputation and location found with the customer. 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.
(ii) The goodwill is comprised of a variety of elements. The location, the service, the standing of the business, the honesty of those who run it are some of the factors which contribute to the goodwill of the business.
(iii) The goodwill is acquired during the course of a number of years of business. It is founded on the belief and faith of the customer. It rarely springs from the very inception of the firm.
(iv) Under the Estate Duty Act each and every right which passes on death has to be valued on the assumption that there is a willing purchaser for the right or property.
(v) The interest of a partner in a partnership firm is property within the meaning of Section 2(15) of the Act. Such interest extends to a share in all partnership assets including goodwill.
(vi) 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.
21. The facts of the present case show that the deceased Shri Tilak Raj Anand was running a proprietorship which was engaged in the business of dealership of various products of Hindustan Petroleum Corporation Limited. There was hardly any competition in the market. The firm's shop was situated in Gole Market which was an important truck parking area. The firm did business for seven to eight years before the death of the deceased. The Assistant Controller and the appellate authority took all these factors into consideration and rejected the argument of the accountable person that the firm had no goodwill. Though the Tribunal correctly appreciated the principles of law, it did not agree with the Assistant Controller and the appellate authority, about the valuation of goodwill. Instead it observed :
"It is true that goodwill of a firm is an asset of the firm the share of the deceased partner in which along with his share in other assets of the firm devolves for purposes of estate duty on his death upon his legal representatives but this rule of law cannot apply to the facts of the present case. In the present case there were only two partners, the late Sh. Tilak Raj Anand and Shri Suresh Anand, his son. As Shri Tilak Raj Anand died, the partnership came to an end. It was the partnership which was appointed a dealer of Hindustan Petroleum Corporation Limited. That dealership also lapsed or was terminated. Suresh Anand and his mother formed another partnership and applied to Hindustan Petroleum Corporation Limited to be appointed a dealer of its products under a fresh agreement which was acceded to by the latter. In this perspective of facts no one can claim that the goodwill or any interest in the goodwill in the business of Subhash Lubricants in which Shri Tilak Raj Anand was a partner devolved upon his legal heirs or the surviving partner. The moment death took place the partnership stood dissolved and with the dissolution of the firm ended the agreement under which Subhash Lubricants was appointed a dealer. The dealership being terminated there could not possibly arise a question that the goodwill in that business of dealership could pass to the surviving partner or to the legal heirs of the late Shri Tilak Raj Anand."
22. In our opinion, the Tribunal has decided the issue of goodwill on pure conjectures and surmises when it observed that the dealership also lapsed or was terminated with the death of Shri Tilak Raj Anand and that Suresh Anand and his mother formed another partnership because no evidence was produced by the accountable person regarding termination of the dealership. Similarly, the view taken by the Tribunal that the goodwill ended on the death of Tilak Raj Anand is clearly erroneous and against the law laid down by the various High Courts and the apex court. In our opinion, the goodwill earned by the firm as a dealer of the products of Hindustan Petroleum Corporation Limited constituted the property of the firm and it passed to the surviving partners after the death of Shri Tilak Raj Anand and, 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.
23. In the result, we allow the reference and answer both the questions in favour of the petitioner.