COMMISSIONER OF GIFT TAX Vs. PRANAY KR SAHARIA

JUDGEMENT

(1.) THE following question has been referred by the Income-tax Appellate Tribunal, at the instance of the Revenue, under Section 26(1) of the Gift-tax Act, 1958 (for short, "the Act") :

(2.) MESSRS. Sarda Trading Corporation is a firm constituted as per partnership deed dated August 18, 1971, with Ramgopal Saharia, Smt. Pramila Saharia and Smt. Abha Saharia as partners. Subsequently, the respondents herein, minor members of the family, were admitted to the benefits of the partnership. The partnership was reconstituted on July 51, 1973, dropping the minors from the benefits of the partnership. The Gift-tax Officer issued notice under Section 13(2) of the Act. No return was filed. Notice under Section 15(4) of the Act was issued and the authorised representatives of the respondents were heard. By separate orders, the Gift-tax Officer estimated the goodwill, as on the date of reconstitution, at Rs. 2,10,000, assessed the share of the minors, treated the same as having been gifted to the partners within the meaning of Sections 4(a) and 4(c) of the Act and assessed gift-tax. In appeals preferred by the assessee, the Appellate Assistant Commissioner set aside the order holding that :

(3.) SUCH minor's share is liable for the acts of the firm but the minor is not personally liable for any such act. He may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and, in such case, the amount of his share shall be determined by a valuation made, as far as possible, in accordance with the rules contained in Section 48. In such a suit, all the partners may elect to dissolve the firm and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners. At any time within six months of his attaining majority or obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become, or that he has elected not to become, a partner in the firm, and such notice shall determine his position as regards the firm. If he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months. The mode of settlement of accounts between partners is prescribed in Section 48 of the Partnership Act. The provision is subject to agreement by the partners. Losses shall be paid first out of profits, next out of capital, and, lastly, by the partners individually in the proportion in which they were entitled to share profits. The assets of the firm shall be applied first in paying the debts of the firm to third parties, secondly, in paying to each partner rateably towards advances as distinguished from capital, thirdly, in paying to each partner rateably what is due to him on account of capital and then the residue shall be divided among the partners. The expression "goodwill" is not defined in the Partnership Act. It has been described as denoting the benefits, arising from connection and reputation, as every positive advantage as distinguished from negative advantage that has been acquired by the firm in carrying on its business. It represents the public approbation which has been won by the business. Undoubtedly, goodwill forms part of the assets of the firm or partnership. This is clear from the provisions of Section 55 of the Partnership Act, which states that, in settling the accounts of a firm after dissolution, the goodwill shall, subject to the contract between the partners, be included in the assets, and it may be sold either separately or along with the other property of the firm. Share in goodwill is capable of being inherited--See Khushal Khemgar Shah v. (Mrs.) Khorshed Banu Dadiba Boatwalla, 1970 3 SCR 689.