Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that for evaluation of the fair market value of the interest of the deceased partner in a firm at the time of his death under Section 36(1) of the Estate Duty Act read with Rule 7(c) of the E.D.Rules, 1953, valuing of certain assets independently of balance sheet could not be restored to for inclusion in the principal value of the deceased's estate in the instance case? In pure theory, which does not take note of practicalities, it would be correct to say that a valuer of a partnership interest should not see before him anything other than the partnership interest as such. Since a partnership interest is a property in itself, it has got to be evaluated on its own terms. However, it would not be practicable to arrive at the market value of an interest in a partnership by completely ignoring the position that the interest is an interest in a partnership. We have, therefore, necessarily to take stock of the net worth of the partnership and then proceed to deduce therefrom each partner's interest as but a fractional share thereof. To arrive at the net worth of the partnership, we have perforce to take note of the individual items of assets which go to make up the assets side of the partnership, as well as the outstanding debts and liabilities of the partnership. These are but necessary steps in order to arrive at the final result, namely, the valuation of the interest of the partner in the partnership. ... (emphasis supplied) In the result, for the above reasons, we answer the question in the affirmative against the Revenue and in favour of the assessee/accountable person.

THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE B.N.RAO NALLA              

REFERRED CASE No.222 OF 1996      

05.01.2012

The Controller of Estate Duty,Andhra Pradesh - II, Hyderabad

Late Sri M.Gangappa, by A/P Sri M.Ramana, Yemmiganuru    

Counsel for the petitioner : Sri S.R.Ashok

Counsel for the respondents :  --

? Citations:
1. (1986) 160 ITR 342 (SC)
2. (1984) 147 2006 ITR 342


ORDER: (Per Hon'ble Sri Justice V.V.S.Rao)

        In this reference at the instance of the Controller of Estate Duty (CED)
under Section 64(1) of the Estate Duty Act, 1953 (the Act, for brevity), the
following question is referred for the opinion of this Court.  
        Whether on the facts and in the circumstances of the case, the ITAT was
correct in law in holding that for evaluation of the fair market value of the
interest of the deceased partner in a firm at the time of his death under
Section 36(1) of the Estate Duty Act read with Rule 7(c) of the E.D.Rules, 1953,
valuing of certain assets independently of balance sheet could not be restored
to for inclusion in the principal value of the deceased's estate in the instance
case?

        The fact of the matter which is not in serious dispute is as follows.  In
GIR No.G.212, the Assistant Controller of Estate Duty (ACED), Tirupati, passed
an assessment order with reference to the statement of account filed by M.Ramana
- accountable person (A.P.) wherein the value of the property passed on the
death of M.Gangappa (died on 22.01.1978), the A.P. was directed to pay estate
duty of Rs.2,08,154/- and a demand was made for Rs.1,44,494/- after giving
credit to the amount already paid.
        Late M.Gangappa was a partner having interest in several partnership
firms.  In the statement, the A.P. discloses the value of the property of the
firm in which late Gangappa had interest as per the valuation of the balance
sheet.  At the time of scrutiny, the ACED declined to accept such valuation.
The principal value to the estate was determined based on the market value
ignoring the balance sheet of different firms.  Being aggrieved, an appeal was
filed.  By an order dated 31.10.1988, the Appellate Controller reversed the
order of the ACED holding that the value of the net assets including the
goodwill of the firm should be with reference to balance sheet of the firm and
accordingly deleted the additions made by the ACED.  The Revenue then went in
appeal before the Income Tax Appellate Tribunal (ITAT).  By order dated
23.01.1990, the ITAT dismissed the appeals holding that the global method of
valuation for the purpose of valuing partnership property has to be adopted
while determining the value of the estate that passed on to the A.P. on the
death of the estate holder.      The Revenue then sought the reference
unsuccessfully.  Thereupon they approached this Court by filing I.T.C.No.1 of
1991.  By an order dated 16.10.1995, this Court directed the ITAT to refer the
question quoted supra for the opinion of this Court.
        The Junior Counsel for Income Tax submits that the decision in Controller
of Estate Duty v Mrudula Nareshchandra1 relied on by the ITAT was only concerned
with the issue of valuation of interest of the deceased person in the goodwill
and therefore in applying the ratio therein the ITAT went wrong.  He would
contend that Section 36 of the Act enables the Assistant Controller to determine
the principal value according to market price at the time of the deceased's
death and therefore the global method of valuation applied to valuation of the
assets of the firm is not applicable.
        In spite of service of notice, none appears for the respondents.
Therefore, the matter is decided ex parte.
        The point that would arise for consideration is whether the principal
value that passed on the deceased's death cannot be fixed by taking cognizance
of the firm's balance sheet which reflects the share of each partner in the
assets and liabilities.
        Section 36 of the Act to the extent relevant reads as under.
                36. Principal value how to be estimated.- (1) The principal value of
any property shall be estimated to be the price which, in the opinion of the
Controller it would fetch if sold in the open market at the time of the
deceased's death.

        (2)  In estimating the principal value under this section the Controller
shall fix the price of the property according to the market price at the time of
the deceased's death and shall not make any reduction in the estimate on account
of the estimate being made on the assumption that the whole property is to be
placed on the market at one and the same time:

        Provided that where it is proved to the satisfaction of the Controller
that the value of the property has depreciated by reason of the death of the
deceased, the depreciation shall be taken into account in fixing the price.
       
  (sub-section (3) with its two explanations is omitted as not relevant)

        Section 2(15) of the Act defines "property" as to include any interest in
property, movable or immovable, the proceeds of sale thereof and any money or
investment for the time being representing the proceeds of sale and also
includes any property converted from one species into another by any method.
Section 5 which is a charging section mandates that estate duty shall be levied
and paid upon "the principal value" ascertained as provided in the Act.  Section
36(1) of the Act elucidates that the principal value of any property shall be
estimated to be the price which in the opinion of the Controller would fetch if
sold in the open market at the time of the deceased's death.  In case of a
partner of an on-going firm, the property of the firm or the interest of the
deceased in the property may or may not be available to sale.  It is well
settled that a firm has no legal existence and the partnership property will
vest in all the partners.  No partner having interest can deal with his/her
portion as separate nor can assign such interest/share in the partnership
property.   Therefore, what is the principal value of the share of a deceased
partner in the properties of the firm cannot be assessed.  In such an event, the
general rule adumbrated under Section 36 i.e., fixing the price of the property
according to the market price at the time of the deceased's death may not be a
fair method.
        On the death of the partner of a firm, the firm itself would not get
dissolved.  Even when the firm is deemed to have been dissolved; for instance on
the death of a partner, the remaining partners as well as the legal heirs of the
deceased partner can have equitable distribution of the assets after making
provisions for the debts of the firm.  In such a case or in the case of death of
a partner can the person who inherits the share of a deceased partner or to whom
the share is assigned be made to pay the tax by notionally fixing the market
price of the interest of the deceased partner?  The answer must be in the
negative.
        The tax on inheritance is levied on the person who inherits the property,
but estate duty is not an inheritance tax.  It is levied on the property on the
occasion when it passes hands, the occasion being the death of a person.  The
approach must be not to find out who are the beneficiaries of any part of the
property of the deceased including the partnership interest, whether it is a
heir or legatee of the deceased.  The approach must be to find out whether the
property passes and then proceed to evaluate the market value of the property or
the interest therein which passes (see Mrudula Nareshchandra).  Thus, if the
property of the deceased actually passes to a heir or legatee, there may be some
acceptability for fixing the market price of the property or the estate that
would pass.  In case of a firm where only the partnership interest would pass to
the heir of the deceased, it may not be always safe to fix the market price of
such interest for the simple reason that as on the date of the death, the parted
soul did not have any proprietary interest to deal with the property.  He had
only a common interest in the property without any right to assign his interest
or to independently deal with it.  Therefore, the Appellate Controller and ITAT
were right in relying on the balance sheet to determine the principal value of
the interest of deceased Gangappa for the purpose of estate duty.  In Mrudula
Nareshchandra, the Supreme Court observed as under.
        ...     Where a partnership was dissolved by the death of a partner, his
share in the firm passed on his death to his legal representatives.  Where a
partnership was not dissolved on the death of a partner but the surviving
partners became entitled to continue the partnership business, the deceased
partner's share passed to his surviving partners subject to their making payment
to the legal representatives of the deceased partner of the amount of the value
of his share in accordance with the provisions of the deed of partnership.  A
partner does not have a defined share in the goodwill of the firm and the estate
duty authorities could not regard it as a separate property by itself apart from
the other assets and liabilities of the firm and include its value in the estate
of a deceased partner under section 5.  ...
                                                         (emphasis supplied)
        It was further held as under.
        ...     In the aforesaid view of the matter, we are of the opinion that
the share of the deceased in the partnership did not evaporate or disappear.  It
went together with the other assets and should be valued in the manner
contemplated under rule 7(c) of the Estate Duty Rules as indicated in the
judgment of the High Court of Calcutta in CED v Annaraj Mehta and Deoraj Mehta
(1979) 119 ITR 544.
                                               

        The Junior Counsel invites the attention of this Court to Controller of
Estate Duty v Estate of Late V.Guruvaiah Naidu2.  We do not think that they
would assist him.  On the contrary, the following observations would support the
view which we have taken above.
        ...     Nor can we accept Mr.Subramaniam's  submission that for arriving
at the market value of the deceased's share, it is not open to the assessing
authority to take up the valuation of individual assets of the partnership.  In
pure theory, which does not take note of practicalities, it would be correct to
say that a valuer of a partnership interest should not see before him anything
other than the partnership interest as such.  Since a partnership interest is a
property in itself, it has got to be evaluated on its own terms.  However, it
would not be practicable to arrive at the market value of an interest in a
partnership by completely ignoring the position that the interest is an interest
in a partnership.  We have, therefore, necessarily to take stock of the net
worth of the partnership and then proceed to deduce therefrom each partner's
interest as but a fractional share thereof.  To arrive at the net worth of the
partnership, we have perforce to take note of the individual items of assets
which go to make up the assets side of the partnership, as well as the
outstanding debts and liabilities of the partnership.  These are but necessary
steps in order to arrive at the final result, namely, the valuation of the
interest of the partner in the partnership.   ...
                                                                 (emphasis supplied)

        In the result, for the above reasons, we answer the question in the
affirmative against the Revenue and in favour of the assessee/accountable
person.
        The Referred Case shall stand disposed of accordingly.


_______________  
(V.V.S.RAO, J)

_____________________  
(B.N.RAO NALLA, J)

05.01.2012