Considerable Issues after the Death of Practicing CA

CA Amresh Vashisht

The whole of CA fraternity got shocked by a recent news about a young chartered accountant dies after being electrocuted. Last month a young Chartered accountant of Lucknow died in an accident. The fraternity loose more than hundred members a year. Local fraternity tried to help out by raising the funds for the family. The ICAI benevolent fund also extends a lump sum monetary assistance to the grieved family and a pension for some of the years. There is no open formula for monetary assistance but there should be an open policy and formula for such assistance and that should be based on the balance professional life of a deceased member. There should be an online calculator for the eligible grant in case of any untoward incident resulted in death. Moreover there should be firmness in the policy especially in the cases of young chartered accountants.

Though, it is death and It’s always hard to discuss about death but the reality is that death is the most nearest to any living person because it may reach with in a seconds to anyone. This is reality and part of everyones life.

Our concern and love for our family members do rise in our mind time to time. Our concern, love and care do not end with death. We as professionals should not left any unresolved issues, if we want to see them happy and content without us. Recently, one of my friends has asked me following question-

Sir, we are a firm of CAs and one of our partners expired recently. The firm wants to help his family and has decided to continue sharing the fee from audit work including works procured by him when he was alive.

Our apprehension is

1) Is it allowed under code of conduct?

2) Is it tax deductible?

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

I have tried to find the answers and got that the only way is to purchase the goodwill of the firm in case you want to pay for lump sum amount in favour of family of deceased partner. The rules prescribe that the family can sale / transfer goodwill of the firm if the same is provided in the deed. In this particular case, the deed was carrying a clause that GOODWILL DO NOT BELONG TO ANY OF PARTNER. So they were helpless. Attention must be given for such clause while drafting the partnership deed. Partners of chartered accountants professional firm must sometimes look around and wonder where all their hard work has ended up. The value they’ve created can’t necessarily be seen in bigger buildings or expanding factories. Most of the value of their firms is in goodwill – the people, the future profits, the brand, and the systems. The valuation of this goodwill has significant implications for professionals.

WHAT ABOUT SHARING OF FUTURE INCOME WITH THE FAMILY OF DECEASED PARTNER?

Unfortunately, it attracts the professional misconduct and we are debarred to share the firm future earnings. ICAI should allow the partners to share the future earnings of the firm for the limited purpose of sharing the profits with the family members of the deceased member. What’s the wrong in it? The biggest obstacle to share the future earning is attracting professional misconduct for the rest of the partners.

Clause (2): pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India.

Now the ICAI literature prescribes the following about the goodwill and its related issues. :

GOODWILL OF THE PARTNERSHIP OR SOLE PROPRIETARY FIRM

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 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 a view 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 up to 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. Procedure to be fulfilled to transfer the goodwill of Firm of Chartered Accountants

THERE ARE SET OF RULES FOR SALE/TRANSFER OF GOODWILL OF A FIRM

The members are to comply with the given procedure and submit following documents, while applying for transfer of goodwill of a Chartered Accountant Firm. The same is permitted by the Institute subject to fulfillment of the following procedure:-

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 one year from the date of death of the member.

3. The application 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 members 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 installment(s) to be paid within a specified period. The consideration should not be contingent upon future profit.

4. 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/s to the deceased member.

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

6. 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.

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

8. Within 30 days of the receipt of the approval for transfer of goodwill, the member purchasing the goodwill should file necessary forms.