Estate duty treatment of deceased partner's goodwill and profit share turns on partnership deed rights and devolution on death.

A partnership deed that gives surviving partners only an option to purchase a deceased partner's share does not automatically extinguish the deceased's rights on death. On the facts described, the deceased partner's interest in goodwill devolved on the legal representatives and was therefore includible in the principal value of the estate for estate duty purposes. The deceased partner's share of profits up to the date of death was also includible, because the firm credited and allocated those profits without invoking the clause limiting rights to the end of the preceding financial year. The estate valuation accordingly included both the relevant profit share and the goodwill interest.

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Issues: (i) Whether the deceased partner's share of profits for the period from the end of the last preceding financial year up to the date of death was includible in the principal value of the estate; (ii) whether the deceased partner's interest in the goodwill of the firm was includible in the estate duty valuation.

Issue (i): Whether the deceased partner's share of profits for the period from the end of the last preceding financial year up to the date of death was includible in the principal value of the estate.

Analysis: The partnership deed provided that on death the surviving partners could purchase the deceased partner's share on the terms applicable to retirement, under which only profits up to the end of the preceding financial year were relevant. However, the surviving partners did not work out the rights under that clause and instead credited the deceased's account with profits up to the date of death. The profits for the relevant period were also allocated to the deceased in the firm's income-tax assessment.

Conclusion: The share of profits for the period from 1-4-1978 to 11-12-1978 was passable on death and was rightly includible, though only the amount of Rs. 39,021 was accepted in place of Rs. 53,060.

Issue (ii): Whether the deceased partner's interest in the goodwill of the firm was includible in the estate duty valuation.

Analysis: Goodwill is property for estate duty purposes, and the effect of the partnership deed had to be examined to see whether the deceased's interest in it ceased on death or devolved on the legal representatives. The deed did not provide that a deceased partner had no right whatsoever in the goodwill. Rather, the surviving partners had only an option to purchase the deceased partner's share, and until that option was exercised, the deceased's rights, including goodwill, devolved on the legal representatives. The principle that title to an estate does not remain in abeyance supported this view.

Conclusion: The deceased partner's share in the goodwill was includible in the principal value of the estate.

Final Conclusion: The department's appeal succeeded and the accountable person's appeal failed, resulting in inclusion of the deceased's share of profits for the relevant period and his interest in goodwill in the estate duty valuation.

Ratio Decidendi: Where a partnership deed gives the survivors only an option to purchase the deceased partner's share and does not extinguish the deceased's rights in goodwill on death, the deceased's interests devolve on the legal representatives and are liable to estate duty; similarly, profits credited or allocated up to the date of death are includible if the contractual mechanism for limiting them is not invoked.

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