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2012 DIGILAW 22 (AP)

Controller of Estate Duty, Andhra Pradesh – II v. Late Sri M. Gangappa, by A/P. Sri M. Ramana

2012-01-05

B.N.RAO NALLA, V.V.S.RAO

body2012
Judgment :- V.V.S. Rao, J. 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© 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. 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 Nareshchandra (1986) 160 ITR 342 (SC)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. 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. 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 MrudulaNareshchandra). 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. 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 MrudulaNareshchandra, 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 Naidu (1984) 147 ITR 342). We do not think that they would assist him. On the contrary, the following observations would support the view which we have taken above. The Junior Counsel invites the attention of this Court to Controller of Estate Duty v Estate of Late V.Guruvaiah Naidu (1984) 147 ITR 342). 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.