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PETITIONER: KHUSHAL KHEMGAR SHAH & ORS.

       Vs.

RESPONDENT: KHORSHED BANU DADIBA BOATWALLA AND ANR.

DATE OF JUDGMENT: 12/02/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 1147            1970 SCR  (3) 689  1969 SCC  (1) 415  CITATOR INFO :  RF         1986 SC1821  (35)  RF         1987 SC1412  (3)

ACT:      Partnership  Act  1932--Sections  14, 39,  42,  46  and 55--Goodwill--Nature of.      Legal  representatives  of a  partner--If  entitled  to share  in  good-will of a firm continuing after death  of  a partner.

HEADNOTE:      D  who  was one of eight partners in a  firm,  died  on February  20,  1957.   By  virtue  of  a  provision  in  the partnership deed, the business of the firm was continued  by the  surviving partners.  The respondents, being  the  widow and  son  of  D commenced an action for an  account  of  the partnership  between D and the surviving  partners,  praying for an order for the payment of the amount determined to  be due  to D at the time of his death.. A single judge  of  the High  Court  passed a preliminary decree directing  that  an account be taken of the partnership as on February 20, 1957. A  Division  Bench, in appeal, modified the  decree  holding that  the respondents were entitled only to interest at 6  % p.a.  on.  the  amount of D’s share in  the  assets  of  the partnership, including good-will.      In  appeal to this Court it was contended on behalf  of the appellants that the respondents as legal representatives of D were not entitled to a share in the value of the  good- will of the firm because good-will may be taken into account only  when  there is a dissolution and not  otherwise;  and. furthermore,  because D had agreed that his interest in  the good-will would cease after his death and the business shall be continued by the _surviving, partners.      HELD : Dismissing the appeal,      It  could  not be held that in interpreting a  deed  of partnership,  business. whereof, it is stipulated  shall  be continued  by the surviving I partners after the death of  a partner,   the   Court   will  not  award   to   the   legal representatives  of  the  deceased partner a  share  in  the goodwill  in  the absence of an express stipulation  to  the

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contrary.  The good-will of a firm is an. asset of the firm. In  interpreting  the deed of partnership,  the  Court  will insist  upon, some indication that the right to a  share  in the assets is, by virtue of the agreement that the surviving partners are entitled to carry on the business on the  death of  the partner, to be extinguished.  In the -absence  of  a provision expressly made or clearly implied, the normal rule that the share of a partner-in the assets devolves upon  his legal representatives will apply to the good-will as well as to other assets. [693 F-H]      There is no indication in s. 55 of the Partnership  Act that goodwill may be taken into account only when there is a general   dissolution  of  the  firm,.  and  not  when   the reprensentatives  of a partner claim his share in the  firm, which  by  express  stipulations is  to  continue  not  with standing  the death of a partner.  Nor do ss. 39, 42 and  46 of the Act support such a contention.[691 F]      Hunter  v.  Dowling,  [18951 2 Ch.  D.  233;  Smith  v. Nelson 96 Law Times Reports 313; Bachubai and L. A.  Watkins v. Shamji Jadowji, I.L.R. 9 Bom. 536; referred to. Sup.Cl/70-14. 690

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 1201  of 1966.     Appeal  by  special leave from the  judgment  and  order dated  June 24, 1965 of the Bombay High Court in Appeal  No. 79 of 1963.     F.  S.  Nariman, K. D. Mehta and 1. N. Shroff,  for  the appellants.     M.  C. Chagla and A. K. Verma, for the respondents.     The Judgment of the Court was delivered by     Shah, J. Dadiba Hormusji Boatwalla was one of the  eight partners  of  Messrs  Meghji Thobhan &  Company  a  firm  of Muccadams  and cotton brokers.  Boatwalla died  on  February 20, 1957.  By virtue of cl. 8 of the deed of partnership the business  of  the  firm  was  continued  by  the   surviving partners.  Khorshed and Nariman--widow and son  respectively of  Boatwalla--obtained  letters of  administration  to  the estate  of  Boatwalla and commenced an action  in  the  High Court  of Bombay for an account of the  partnership  between Boatwalla and the surviving partners and for an order paying to  the  plaintiffs  the  amount determined  to  be  due  to Boatwalla  at the time of his death.  The suit was  resisted by  the surviving partners-who will hereinafter be called  ‘ the defendants’.  Tarkunde, J., passed a preliminary  decree declaring   that   qua  Boatwalla  the   partnership   stood ’dissolved  on February 20, 1957, but not in respect of  the surviving partners, and directed that an account be taken of the partnership upto February 20, 1957.  Against that decree the defendants appealed under cl. 15 of the Letters  Patent. In appeal the High ’Court modified the decree.  The  learned Judges  held  that the plaintiffs were not  entitled  to  an account  in  the profits and losses of the  firm  after  the death of Boatwalla, nor to exercise an option under s. 37 of the  Partnership Act, but that the plaintiffs were  entitled only  to interest at six per cent. per annum on  the  amount found  due  as  Boatwalla’s  share  in  the  assets  of  the partnership including .the goodwill.  They further  declared that  the  interest  of  Boatwalla in  the  firm  ceased  on February 20, 1957, and deleted the direction with regard  to the  dissolution  of the firm as between Boatwalla  and  the

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defendants.  With special leave, this appeal has been  filed by the defendants.      The  defendants  contend that the plaintiffs  as  legal representatives of Boatwalla were not entitled to a share in the  value of the goodwill of the firm because the  goodwill of  a  firm may be taken into account only when there  is  a dissolution  of the firm and in any event because  Boatwalla had agreed that his interest in the goodwill shall cease  on his death and the business shall 691 be  continued by the surviving partners.  The defendants  do not  challenge the decree of the High Court awarding to  the plaintiffs Boatwalla’s share in the assets of the firm other than goodwill -icy contend that in the goodwill of the  firm the plaintiffs had to share.     By  section  14  of the Partnership  Act,  1932,  it  is enacted that                   "Subject to contract between the partners,               the property of the firm includes all property               and rights and interest in property originally                             brought into the stock of the firm or acquired,               by  purchase or otherwise, by or for the  firm               or  for the purposes and in the course of  the               business  of the firm, and includes  also  the               goodwill of the business." Goodwill  of  the  firm is -expressly  declared  to  be  the property of he firm.      Counsel  for  the defendants relied upon s. 55  of  the Partnership Act which makes a provision with regard to  sale of goodwill after dissolution.  It is provided by sub-s. (1) of s. 55 that :                    "In settling the accounts of a firm after               dissolution,  the goodwill shall,  subject  to               contract between the partners, be included  in               the   assets,  and  it  may  be  sold   either               separately or along with other property of the               firm. But  it  is not enacted thereby that goodwill may  be  taken into account only when there is a general dissolution of the firm,  and not when the representatives of a  partner  claim his  share in the firm, which by express stipulation  is  to continue notwithstanding the death of a partner.  Nor do ss. 39,  42  and 46 which were relied upon by  counsel  for  the ’defendants  support  that  contention.   Under  s.  39  the dissolution  of  partnership between all the partners  of  a firm is called the "dissolution of the firm"; and by s. 42 a firm is said to be dissolved subject to the contract between the  partners  on the happening  of  certain  contingencies. Section 46 provides that on the dissolution of a firm  every partner or his representative is entitled as against all the other  partners  or  their  representatives,  to  have   the property  of  the firm applied in payment of the  debts  and liabilities of the firm, and to have the surplus distributed among  the  partners or their representatives  according  to their  rights.  These provisions deal with the  concept  and consequences of dissolution of the firm : they do not either abrogate  the  terms of the contract  between  the  partners relating  to the consequences to ensue in the event  of  the death  of a partner when the firm is not to stand  dissolved by 692 such  death, nor to the right which the partner has in  the, assets  an( property of the firm.  The Partnership Act  does not  operate  to extinguish the right in the assets  of  the

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firm  of a partner who dies when the  partnership  agreement provides  that on death the partnership is to continue.   In the absence of a term in the deed Of partnership to that effect, it cannot be inferred that  a term  that  the partnership shall  continue  notwithstanding the,  death  of  a partner will operate  to  extinguish  his proprietary right in the assets of the firm.     Clause 8 of the deed of partnership reads as follows                   "This  partnership shall not be  dissolved               or  determined  by the death of  any  of  _the               parties hereto but the same shall be continued                             as between the surviving part:ners on the  same               terms  and conditions but with such shares  as               shall then be determined." Mr.  Nariman says that goodwill is nothing but the right  to the  name, the place of business and the reputation  of  the firm, and when all these components of the right by  express agreement  between the partners devolve upon  the  surviving partners’.  it  follows  that.- the share  of  the  deceased partner  in  the  goodwill of the firm  devolves  -upon  the surviving  partners and not upon his legal  representatives. The  goodwill of a business is however an  intangible  asset being the whole advantage of the reputation and  connections formed  with the customers together with  the  circumstances which make the connection durable.  It is that component  of the total value of the undertaking which is attributable  to the ability-of the concern to earn profits over a course  of years   because  of  its  reputation,  location  and   other features.  An agreement between the partners that the  name, the place of business and the reputation -of the firm are to be  utilised by the surviving partners will not  necessarily warrant an inference -that it was intended that the heirs of the deceased partner -will not be entitled ’to a s -hare  in the goodwill.     Our attention was invited to Hunter v. Dowling(’); Smith v.  Nelson(2);  and Bachubai and L. ’A.  Watkins  v.  Shamji Jadowji(3).The   first   two   cases   proceed   upon    the interpretation Of certain clauses in partnership  Agreements It  was  inferred  in  those cases from  the  terms  of  the agreement  that the right in the goodwill of a partner in  a firm  dying  or  retiring shall not survive  to’  his  legal representatives.  Bachubai and L. A. Watkin’s case(")  arose out of a case in which in the partnership -agreement it  was provided that (1)  [1895] 2 Ch.  D. 223. (2)  96 Law Times Reports. 313. (3)  1. L. R. 9 Bom . 536. 694 the  firm  shall  be the agents of a  company:  carrying  on business as a manufacturer of cotton textiles so long as the firm carries on business in Bombay, or until the firm should resign.  The firm were appointed the agents of the Corn  any and continued to act as agents.  One of the, partners  died, and a representative of the partner filed a suit,.  claiming a  certain  share in the assets of the firm   including  the goodwill.  It was observed by Sargent, c.J,in rejecting  the claim  of  the plaintiff to a share in the goodwill  of  the business as an asset of the firm, that--                  "Assuming_ (which may well be doubted) that               the   term  "goodwill"  is  applicable  to   a               business  of this nature, it is plain that  it               is attached to the name of the firm which,  by               the partnership agreement itself is to be used               by  the  surviving partners,  or  partner  for

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             their   own  benefit.   Such  an   arrangement               between the partners must take away  all-value               from  the goodwill; even if it be not,-as  Mr.                             Justice Lindley in his Treatise on Par tnership,               p.   887,  (3rd  ed.),  considers  it  to   be               inconsistent. with its being an asset at all"     The, learned Chief Justice expressed a  doubt-presumably relying upon old.  English decisions--that the goodwill of a firm may not be an asset at all.  These observations do  not set   out  any  rule,  of  interpretation  of  a  deed   ’of partnership.   But the question is now settled by  statutory enactment.  Under the Partnership Act, 1932, it is expressly declared  that  the goodwill of a business is’ an  asset.  - Whether  the  goodwill  has any  substantial  value  may  be determined on the facts of each case.     We  are  unable  to  agree  with  Mr.  Nariman  that  in interpreting  a deed of partnership, business whereof it  is stipulated  shall  be continued by  the  surviving  partners after  the death of a partner, the Court will not  award  to the legal representatives of the deceased partner a share in the goodwill in the absence of an express stipulation to the contrary.   The  goodwill  of  a  firm  is  an  asset.    In interpreting the deed of partnership,- the Court will insist upon some indication that the right to a share in the assets is,  by virtue of the agreement that the surviving  partners are  entitled to carry on the business on-the death  of  the partner, to be extinguished.  In the absence of a  provision expressly made-or clearly implied, the normal rule. that the share  of  a partner in the assets devolves upon  his  legal representatives  will  apply to the goodwill as well  as  to other assets.     The appeal therefore fails and is dismissed with costs.                                           Appeal dismissed. R.K.P.S. 694