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Judgment
U.L. Bhat, C.J.—The following question has been referred by the Income Tax Appellate Tribunal, at the instance of the Revenue, u/s 26(1) of the Gift-tax Act, 1958 (for short, "the Act") :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the minors who were admitted to the benefits of partnership could not claim his/her share of goodwill on reconstitution of the firm by excluding the minors and consequently are not liable to gift-tax ?"
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 u/s 13(2) of the Act. No return was filed. Notice u/s 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 :
"The firm came into existence during the year 1971-72 and it had earned substantial profit only during the years 1972-73 and 1973-74, that is, up to the date of reconstitution it had earned profit in the low, that for 1972-73 being minimal. Aside from this, a consideration of the various aspects do not point to the accretion of goodwill owing to efforts, if any, put in by the appellant, whose continuance as it appears, was dependent on the major partners."
In further appeals to the Tribunal by the Revenue, the orders of the Appellate Assistant Commissioner were affirmed by the Tribunal.
u/s 11, Indian Contract Act, 1872, only a person who is of the age of majority and who is of sound mind and is not otherwise disqualified is competent to contract. Sub-section (1) of Section 30, Indian Partnership Act, 1932, states that a person who is a minor may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of the partnership. Contract by a minor is void ab initio. A minor can come into the picture only by being admitted to the benefits of partnership with the consent of all the partners. Admission of a minor to the benefits of partnership is dealt with by Section 30 of the Partnership Act. Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon. He may have access to, and inspect and copy any of the accounts of the firm.
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 and Others Vs. Khorshed Banu Dadiba Boatwalla and Another,
It is thus clear that the rights of partners are those indicated in the provisions of the Partnership Act. But, generally speaking, these provisions are subject to contract between the parties. A minor may be admitted to the benefits of partnership, but he cannot become a partner. He cannot sue the partners for an account or payment of his share of the property or profits of the firm except in the context of severing his connection. He has a right to such share of property or the benefits of the firm, as may be agreed upon. A minor admitted to the benfits of partnership need not contribute any capital to the firm though a guardian of a minor may invest such capital. See Commissioner of Income Tax, Mysore Vs. Shah Mohandas Sadhuram, The order of the Gift-tax Officer does not indicate that he had perused the partnership agreement or the later partnership agreement or the agreement by which the minors were admitted to the benefits of the partnership. The order does not disclose that any investment was made in the firm on behalf of the minors by their guardians. The Officer proceeded on the assumption that the minors had a right to a share of the assets of the partnership and the further assumption that such right included a share in the goodwill.
Whether the minors had a share in the assets or a share in the goodwill is a matter to be decided entirely on the terms of the agreement admitting them to the benefits of partnership. That could not be a matter of assumption or presumption. On this conclusion alone, it has to be held that the decisions of the Appellate Assistant Commissioner and the Tribunal are correct, even without going into the reasoning adopted by them.
In the result, we answer the question in the affirmative, that is, in favour of the assessee and against the Revenue. A copy of this judgment under the signature of the Registrar and the seal of the High Court will be transmitted to the Appellate Tribunal. There will be no direction as to costs.