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May 18, 2021

How to Transfer Goodwill in case of death of a Chartered Accountant?

by Mahesh Mara in ICAI

How to Transfer Goodwill in case of death of a Chartered Accountant?

Due to current situation of COVID 19 many professional fraternity like CA, CS, CWA etc is shocked by sudden demise of members of the respective institute due to COVID 19 Pandemic. Many members of the fraternity has lost their live during this pandemic. Many local fraternity members tried to help the affected persons family by raising the funds. The ICAI benevolent fund also came forward tp extend some help by providing a lump sum monetary assistance to the affected family and a pension for some period of time.

The members of the respective institute as professionals should not left any unresolved issues, in case they want to see affected families happy and content without us and try to help the family of deceased member by way of transfer of goodwill or share of profit in his own CA firm.

Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists. In this article we will analyse How to Transfer Goodwill in case of death of CA.

Recently one of a partner from a firm of CA expired during the pandemic. The firm wants to help his family by continuing share the fee from audit work including works procured by the partner when he was alive.

The concern raised by the firm is:

1) Whether such transfer of goodwill allowed under code of conduct of the ICAI?

2) Whether such transfer is tax deductible under Income Tax Act, 1961?

3) In case answer to any of these is “no”, what is the way out?

In the above case the only way is to purchase the goodwill of the firm. In case the firm want to pay for lump sum amount in favour of family of deceased partner they can do it. The rules prescribe that the family can sale / transfer goodwill of the firm if the same is provided in the deed.

In the above case, the deed was carrying a clause that GOODWILL DO NOT BELONG TO ANY OF PARTNER. So they cannot transfer the goodwill, thus attention must be given for such clause while drafting the partnership deed.

Whether goodwill of a Chartered Accountant firm can be purchased?

As per the Council of The Institute of Chartered Accountants of India the issue of whether the goodwill of a firm of a Chartered Accountant can be sold/ transferred to another eligible member of the Institute, after the death of the proprietor was raised and the institute came to the view that the same is permissible. Accordingly, the Council passed the Resolution that the sale/transfer of goodwill in the case of a firm of Chartered Accountants to another eligible member of the Institute, shall be permitted.

What are the conditions to be fulfilled for purchase of goodwill of a Chartered Accountant firm?

Transfer of goodwill of the firms of Chartered Accountants are permitted by the Institute subject to fulfilment of the following procedures:-

1. An application in writing should be forwarded by a member, holding Certificate of Practice, intimating his intention to purchase goodwill.

2. The application should be made within 1year from the date of death of the member.

What are the details required for transfer Goodwill of Chartered Accountant Firms?

The application for transfer Goodwill of Chartered Accountant Firms should be sent along with the following details:-

a. Death Certificate’ of the deceased member; and

b. (i) A draft sale deed for sale/transfer of goodwill entered into between the legal heir/s of the deceased and the member intending to purchase goodwill.

(ii) The sale of goodwill deed must be very clear as to the amount of consideration and payment thereof in one or more instalment(s) to be paid within a specified period. The consideration should not be contingent upon future profit.

2. Documents, such as, succession certificate or will, legal Heir Certificate or an affidavit sworn by all legal heir/s stating that there is/are no other legal heir to the deceased member.

3. Legal heir, in this context, means spouse, child/children and parents.

4. If the agreement is entered into by one of the legal heirs, ‘No Objection’ from the other legal heirs, except those minor, are also required to be submitted. In case of minor, ‘No Objection’ is to be obtained from the guardian.

5. The member intending to purchase the goodwill should give an advertisement about his intention to purchase such goodwill, and the advertisement should spell out that anyone having objection thereto should send the objection directly to the respective DCO (address of which shall be indicated in the advertisement). A copy of the advertisement so published should be sent by the intending purchaser to the concerned DCO.

6. Within 30 days of the receipt of the approval, for transfer of goodwill, Form ’18’ should be filed by the member purchasing the goodwill.

The members are requested to comply with the above procedure and submit documents mentioned above, while applying for transfer of goodwill of a Chartered Accountant Firm.

Below is the Extract of Rules and Regulation with respect to Transfer of Goodwill and Share of Profit in case of Death of a Chartered Accountant: As per ICAI Code of Ethics

When there are two or more partners and one of them dies, the widow of the deceased partner can continue to receive a share of the profit of the firm. A legal representative, say widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner his widow or legal representative would be entitled to such payment for goodwill by way of sharing of fees or otherwise for some specified period.

There could not be any sharing of fees between the widow or the legal representative of the proprietor of a single member firm and the purchaser of the goodwill of the firm on the death of the Sole proprietor of the firm. Payment of goodwill to the widow is permissible in such cases only for the goodwill of the firm and to enable such payments to be made in installments provided the agreement of the sale of goodwill contains such a provision. These payments even if they are spread over the specified period should not be linked up with participation in the earnings of the firm. The widow of a partner when the partnership agreement does not contain a provision entitling her to share in profits, would not be entitled to such profits.

The Council has taken the view, in a case referred to it that it is not permissible for the widow of a deceased member, whose professional work consisted mainly of income-tax representation, to receive a monthly lump-sum payment for a period of five years or a specified percentage of income.

The Council of the Institute considered the issue whether the goodwill of a proprietary firm of Chartered Accountant can be sold/ transferred to another eligible member of the Institute, after the death of the proprietor concerned and came to the view that the same is permissible. Accordingly, the Council passed the following resolution with a view to mitigating the hardship generally faced by the families after the death of such proprietors:

“RESOLVED THAT the sale/transfer of goodwill in the case of a proprietary firm of Chartered Accountant to another eligible member of the Institute shall be permitted

a. In respect of cases where the death of the proprietor concerned occurred on or after 30.8.1998

Provided such a sale is completed/effected in all respects and the Institute’s permission to practice in deceased’s proprietary firm name is sought within a year of the death of such proprietor concerned. In respect of these cases, the name of the proprietary firm concerned would be kept in abeyance (i.e. not removed on receipt of information about the death of the proprietor as is being done at present) only upto a period of one year from the death of proprietor concerned as aforesaid:

b. In respect of cases where the death of the proprietor concerned occurred on or after 30.8.1998 and there existed a dispute as to the legal heir of the deceased proprietor

Provided the information as to the existence of the dispute is received by the Institute within a year of the death of the proprietor concerned. In respect of these cases, the name of proprietary firm concerned shall be kept in abeyance till one year from the date of settlement of dispute.

c. In respect of cases where the death of the proprietor concerned had occurred on or before 29th August, 1998 (irrespective of the time lag between the date of death of the proprietor concerned and the date of sale/transfer of goodwill completed/to be completed)

Provided such a sale/transfer is completed/effected and the Institute’s permission to practice in the deceased’s proprietary firm name is sought for by 28th August, 1999 and also further provided that the firm name concerned is still available with the Institute.” In case of a partnership firm when all the partners die at the same time, the above Council decision would also be applicable.

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