Srinivasa Iyengar, J.
1. This reference arises out of the order of the Income-tax Appellate Tribunal, Bangalore, in Estate Duty Appeal No. 277 of 1967, dated January 10, 1969.
2. The questions referred for decision by this court are :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire property could not be deemed to have passed on the death of the decease
(2) Whether the deficit of Rs. 4,88,235 computed in respect of the 'free estate' of the deceased can be set off against the balance of the estate
(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 33,952 is entitled to the rebate envisaged in section 33(1)(f) of the Estate Duty Ac The first question has been referred at the instance of the department and the other two at the instance of the accountable person.
3. The proceedings related to the computation of estate duty consequent on the death of Sri R. Rama Setty, who passed away on April 28, 1963. He was the owner of a building known as 'Maruthi Mansion' at Davangere. He gifted the same to his grandson, R. S. Hanumantharaj, under a registered deed of gift dated December 27, 1956. The donee was a minor and was represented by his father, R. R. Srinivasa Murthy, as his natural guardian. On December 28, 1956, a lease deed was executed on behalf of the minor in favour of R. Rama Setty and R. R. Srinivasa Murthy in respect of portions of this property. The portion given on lease to Rama Setty was described in schedule 'B' to that lease deed and that leased out to R. R. Srinivasa Murthy was described in Schedule 'C'. Schedule 'D' specified certain portions as having been given for the common use of both the lessees. The lease deed was for a period of eleven months. Each of the lessees had to pay Rs. 300 per month as rent to the lessor. Though the lease deed was only for a period of eleven months, it is an admitted fact that it continued to be effective even thereafter.
4. While computing the value of the estate passing on the death of Rama Setty, the Assistant Controller of Estate Duty valued the entire property at Rs. 4,75,000 and brought that value to charge of estate duty under section 10 of the Estate Duty Act. He observed :
'The deceased gifted 'Maruthi Mansion' to his grandson but stayed in the house till the date of death. The fact that he stayed in one room only and that he was paying Rs. 300 per month to his grandson does not alter the position that the donee did not enjoy the gifted property to the entire exclusion of the donor till his death. Hence, the house and furniture have to be added under section 10 of the Estate Duty Act'.
5. It is on this reasoning that he included the value of this property in the computation of the property passing on death.
6. This was contested in appeal before the Appellate Controller of Estate Duty by the accountable person. It was contended that the provisions of section 10 of the Estate Duty Act were not attracted in regard to this property. Alternatively, it was urged that the value of the whole property could not be included under section 10. It was urged that the donor was in occupation of only a part of the property and the value of the property in the occupation of the other tenant could not be included as having passed on the death of Rama Setty. Emphasis was laid on the words 'to the extent' in section 10. In these circumstances, it was contended that, if at all, only the value of that portion of the property that was in the occupation of the deceased could be included in the charge for estate duty. Reliance was placed on Rash Mohan Chatterjee v. Controller of Estate Duty.
7. The Appellate Controller did not accept the contention of the accountable person that section 10 was not attracted. He, however, upheld the alternative contention that only the value of that portion of the property taken on lease by Rama Setty could be considered to be in the possession of the donor and to that extent the leased property would be liable to charge of duty. On the basis of the floor area which was in the occupation of the deceased as tenant and the rents paid by the two tenants being equal, the Appellate Controller was of opinion that the deceased could be said to have been in possession and enjoyment of about one-half portion of the property. Accordingly, he held that the value of that portion would work out to Rs. 2,37,500 and sustained the inclusion of that value in the amount chargeable for estate duty.
8. This reduction was contested in appeal by the department to the Tribunal. The accountable person also contested the inclusion of Rs. 2,37,500.
9. But, during the course of the argument before the Tribunal, it seems to have been submitted that the ruling of the Supreme Court in George Da Costa v. Controller of Estate Duty was against the contention sought to be put forth on behalf of the accountable person. The Tribunal held that the contention of the accountable person that no portion of the value of the property could be included under section 10 was untenable. It thus upheld the finding of the Appellate Controller in this behalf.
10. On behalf of the department it was urged that the bona fide enjoyment of the property did not vest in the donee at any time and the rent stipulated at Rs. 300 only was ridiculously low and the donee had no freedom in the matter of fixation of rent. It appears to have been suggested on behalf of the department that the gift itself was not a genuine one. The Tribunal, however, held that this was a new case that was sought to be put forth and that neither the Assistant Controller nor the Appellate Controller had questioned the bona fides of the transaction. In these circumstances, the new case that was sought to be put forth was not permitted by the Tribunal. It was urged before the Tribunal that the principle enunciated by the High Court of Calcutta in Rash Mohan Chatterjee v. Controller of Estate Duty was no longer good law and that by implication it had been overruled by the ruling of the Supreme Court in the case of George Da Costa. The Tribunal did not accept this submission.
11. Another point that was urged on behalf of the department was that the Appellate Controller was not correct in determining the value of the property which was deemed to pass under section 10 at only half the value of the entire property. It was pointed out that certain portions of the property, viz., common passage, staircase and apartments and other items described in schedule 'D' of the lease deed, were in common use of both the lessees. It was accordingly urged that the full value of those common portions should be included under section 10. The Tribunal accepted the submission of the department in this behalf. The Tribunal estimated the total value of the property includible under section 10 at Rs. 2,50,000 taking into account the portions in common use of the two lessees.
12. The first question above referred to relates to the restricted inclusion of the value of the property as having passed on death under section 10. It was urged by the learned standing counsel for the department that though in terms of the lease deed R. R. Srinivasa Murthy was entitled to be in possession of the portion described in schedule 'C', having regard to the location of the several portions and the common use of certain other portions, it could not be said that the donor was completely excluded from that portion. He argued that the entire premises were one compact building and the introduction of the lease must be ignored and having regard to the close relationship between the parties, however small the portion in the enjoyment of the donor, he could not be said to be excluded from the entire premises. Reliance was sought to be placed on certain observations of the Supreme Court in George Da Costa's case.
13. For the accountable person it was urged that the property deemed to pass on death must be ascertained as on the date of death, that it was clear from the lease deed that the 'C' schedule property was in the possession of R. R. Srinivasa Murthy and that merely on the ground of relationship it could not be said that the donor was either in possession of it or was not excluded from the possession thereof. It was also urged that the portions leased out and described in schedules 'B' and 'C' were each separate units and under the normal principles applicable to landlord and tenant even portions of a property could be let out as separate units and that, therefore, the contention sought to be put forth by the standing counsel was not tenable. It was further pointed out that the specific finding of the Tribunal was that the deceased occupied only a portion of the entire premises and that this is a finding of fact which cannot be challenged before this court. It was further pointed out that the specific finding of the Tribunal was that the deceased occupied only a portion of the entire premises and that this is a finding of fact which cannot be challenged before this court. It was urged that the facts and circumstances of this case were similar to those in Rash Mohan Chatterjee v. Controller of Estate Duty and the principle enunciated therein would apply to the case on hand and that only to the extent the donor had not been excluded from the property, value thereof could be included under section 10. It was pointed out that this principle had been recognised in at least two other cases in Mohammed Bhai v. Controller of Estate Duty. and Parvathi Ammal v. Controller of Estate Duty.
14. The relevant provision under section 10 of the Estate Duty Act is as follows :
'10. Gifts whenever made where donor not entirely excluded. - Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extent that bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise......'
(The rest of the section is not relevant).
15. Invoking the provisions of this section presupposes that certain property has been taken under gift made by the donor. It is clear that the Assistant Controller accepted the gift as true and genuine. The only reason given by him to include the entire value of the property was that the donor stayed in the property till his death. He virtually ignored the effect of the lease deed. The lease deed stipulated payment of rent by the two lessees. He accepted that the donor had paid rent in terms of the lease deed. The mere fact that R. R. Srinivasa Murthy was the father of the donee does not mean that the lease was ineffective. The property, by virtue of the gift, belonged absolutely to the donee. The father was only acting as his guardian. The portions to be in the occupation of the two lessees exclusively were specified in the lease deed; the portions that were to be in common use were also specified. The Appellate Controller did not doubt that possession had been assumed by the donee. There was no contest in this behalf before the Appellate Controller. Only before the Tribunal an attempt was made to dispute this aspect of the matter. In our opinion the Tribunal rightly refused to entertain such a new stand.
16. The finding of the Tribunal is that the donor had taken on lease a portion of the property. This is a finding of fact and is supported by the recitals in the lease deed which has been acted upon. Finding to this effect that only portion described in schedule 'D' to the lease deed was set apart for common use of the two lessees and that the portion described in schedule 'C' was in the occupation of R. R. Srinivasa Murthy cannot be challenged in these proceedings. Srinivasa Murthy having been entitled to be in possession of the portion described in schedule 'C' and the portion exclusively let out to Rama Setty having also been specified in the same lease deed, it is clear that they were entitled to possession of specified portions exclusively and this implies that each one was excluded from being in occupation or being entitled to such specified portions allotted to the other. Mere relationship between the parties cannot justify the inference that the donor was in occupation of the portion allotted to Srinivasa Murthy or that he was not excluded therefrom without any specific and tangible evidence in this behalf. It is not the case of the department that there was any such evidence and that it had been ignored by the Tribunal. When two portions, even in one building, are let out to two persons separately, it is impossible to hold that each one of them is not excluded from the enjoyment or being in occupation of the portion let out to the other. The mere circumstance that Rama Setty and Srinivasa Murthy were related as father and son would not alter the position. In the facts and circumstances, it is clear that the portion described in schedule 'C' to the lease deed was in the occupation of R. R. Srinivasa Murthy and the donor, Rama Setty, was not entitled to be in occupation of the same. The donee had assumed bona fide possession and thereafter let out portions to Rama Setty and Srinivasa Murthy. On the facts of the case it cannot be said that Rama Setty was not excluded from 'C' schedule portion described in the lease deed or that he was in occupation and enjoyment of the same subsequent to the deed of gift and till his death.
17. Section 10 is specific that a property taken under gift should be deemed to pass on the donor's death to the extent bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise. The effect of this provision is to bring to charge to estate duty property which though was not actually owned by the donor had passed away from him to another in certain circumstances. There are two circumstances specified in the section, namely, bona fide possession and enjoyment not being immediately assumed by the donee and it not being retained to the entire exclusion of the donor. In the case on hand the first condition, namely, the assumption of bona fide possession and enjoyment by the donee has been satisfied. The second condition was not satisfied in so far as the portion taken on lease by Rama Setty was concerned. This included the portion of the property described in schedule 'B' of the lease deed as also the common portions described in schedule 'D'. But so far as schedule 'C' was concerned, on the facts and circumstances, it is clear that the donor had been excluded from the possession thereof and the possession was with R. R. Srinivasa Murthy as lessee from the donee. Therefore, the value of the property which was in the possession of Srinivasa Murthy and from which Rama Setty had been excluded could not be included under section 10 as it cannot be said that it had not been retained to the entire exclusion of the donor.
18. The learned standing counsel laid emphasis on the following observations of the Supreme Court in George Da Costa's case :
'It appears from all these cases that the first limb of the section may be infringed if the donor occupies or enjoys the property or its income, even though he has no right to do so which he could legally enforce against the donee. `Where the question is whether the donor has been entirely excluded from the subject-matter of the gift, that is the single fact to be determined. If he has not been so excluded, the eye need look no further to see whether his non-exclusion has been advantageous or otherwise to the donee''. (The last two sentences were extracts from the judgment in Chick v. Commissioner of Stamp Duties)
19. The argument was that the building was a compact one and the donor was occupying a portion and, therefore, he was not entirely excluded from the subject-matter of the gift. This cannot be accepted in the light of the facts in the case on hand. The observation of the Supreme Court was in the context where the gift of the property had been made and the donor continued to stay in the house till his death. There was no question of any lease of a portion of property from the donee to the donor. The observation was in the light of the particular facts of that case and cannot be made applicable to cases where the facts and circumstances are different. The Supreme Court had no occasion to consider the effect of the words 'to the extent' in section 10, as on the facts of the case before them, such a question did not arise. This aspect of the matter has been considered specifically in the ruling of the Calcutta High Court in Rash Mohan Chatterjee v. Controller of Estate Duty. It was pointed out therein that the wording of section 10 of the Estate Duty Act, 1953, was different from the provisions in the British and Australian Acts. The expression 'to the extent' introduced in the Indian statute was a departure from the provisions in the British and Australian Acts. In that case also the deceased was in occupation of a portion of the property as lessee. It was held that the value of only that portion can be included under section 10. The learned judges of the Calcutta High Court also referred to the statement of objects and reasons at the time of the introduction of the Act in this behalf.
20. A plain reading of the section leaves no doubt that what is intended to be brought to charge is the value of the property to the extent to which the donor is not excluded from possession and enjoyment and not in regard to any property from the possession and enjoyment of which he is excluded.
21. In the ruling of the Andhra Pradesh High Court in Mohammed Bhai v. Controller of Estate Duty, the principle that only to the extent to which the donor was not excluded, the property could be deemed to have passed on death was applied and it was observed that the facts in the case before the Supreme Court in George Da Costa's case were different. Similar view has been adopted in the ruling in Parvathi Ammal's case.
22. It is clear that the facts and circumstances in George Da Costa's case were different from those in the case on hand. That was a case in which the donor had not been excluded from any portion of the property which had been gifted. The observation of the Supreme Court cannot be applied to a case where there has been exclusion of the donor in regard to a portion of the property. The plain meaning to be given to the expression 'to the extent' in section 10 does not support the argument advanced by the standing counsel for the department and the three decisions referred to above are clearly to the effect that only to the extent the donor was not excluded, the value of the property can be included under section 10.
23. The charge to estate duty under section 10 is only in respect of property that is deemed to pass on death and not on the subject-matter as such of the gift. The section is clear that to the extent of the property that the donor is not excluded from enjoyment it shall be deemed to pass on his death. Therefore, to the extent the donor is excluded it shall not be deemed to pass on his death. The argument of the learned standing counsel would amount to that even though the donor is excluded from a portion of the property, because the gift included that portion also, he must be deemed to be not excluded from the enjoyment of that portion also. There is no warrant or justification to make such an assumption or create a fiction to that effect. The fiction created under the section is restricted and there is no justification to extend it. We, therefore, answer the first question in the affirmative, i.e., on the facts and circumstances of the case, the Tribunal was right in holding that the entire property could not be deemed to have passed on the death of the deceased.
24. The facts out of which questions Nos. 2 and 3 arise lie in a narrow compass. The Assistant Controller, in the computation to be made of the principal value of the estate, treated the share, cash and other items of movable property under the heading free estate. The total value thereof amounted to Rs. 5,15,670. The liabilities amounted to Rs. 10,37,905. Taking into account the funeral expenses and the value of the agricultural lands, the Assistant Controller arrived at the net value of the movables as a minus figure of Rs. 4,88,735. (This deficit was subsequently reduced to Rs. 4,80,929 by the Assistant Controller). Observing that the deficiency in the free estate cannot be allowed to be set off against the value of the rest of the estate, he took the value of the free estate as nil. The value of the properties passing on death was thus taken under three heads, viz., those passing under section 9, section 10 and section 17 of the Estate Duty Act, in the sums of Rs. 6,44,000, Rs. 4,75,000 and Rs. 71,705, totalling up to Rs. 11,90,705. One of the items considered under the free estate was the value of insurance policy of Rs. 33,952. In the appeal before the Appellate Controller it was claimed that the deficit in the free estate should have been set off against the value of the properties passing under other heads. The Appellate Controller did not accept the contention, but followed the principle enunciated in the ruling in In re Barnes. It was also contended before the Appellate Controller that in regard to the insurance policy, Rs. 33,952 should have been allowed under section 33(1)(f). The Appellate Controller rejected that contention also noticing that the value of the policy had been wiped out by the deficiency occurring in the free estate and that in view of this the value of the policy could not be taken for purposes of aggregation under section 34(1) or grant of rebate under section 34(2). Before the Tribunal it was urged that there was no justification for carving out a free estate and that the estate had to be taxed as a unit and, under section 44, the debts and encumbrances were to be deducted. The Tribunal did not accept the contention and observed that it was well-settled that an allowance could be made for debts only against the value of the estate out of which the debt were to be met. It was of opinion that the principle enunciated in the case of Barnes where the free estate of the deceased was insufficient to pay the debts incurred by him the deficit could not be adjusted against the value of the gifted properties, applied to the case on hand. In regard to the rebate in respect of the insurance policy, the Tribunal held that as the free estate resulted in a minus figure and was ultimately ignored in arriving at the principle value of the estate and the insurance money did not enter into the final computation, the authorities were justified in declining to grant the rebate.
25. It is argued on behalf of the accountable person that section 34 of the Estate Duty Act contemplates the levy of estate duty on the estate at the rate or rates applicable in respect of the principal value thereof and section 36 provides for the estimation of the principal value. The argument is that as the estate has to be considered as one, the liabilities also would have to be taken into account and set off against the value of items of property passing on the death. In our opinion the contention urged is not sound. Though all properties passing on death have to be aggregated to form one unit, it is seen that, in order to evaluate, the estimate of individual property is contemplated under the Act.
26. Section 44 of the Estate Duty Act makes provision for deductions It reads :
'44. Reasonable funeral expenses and, with some exceptions, debts and encumbrances to be allowed for in determining chargeable value of estate. - In determining the value of an estate for the purpose of estate duty, allowance shall be made for funeral expenses (not exceeding rupees one thousand) and for debts and incumbrances; but an allowance shall not be made -
(a) for debts incurred by the deceased, or incumbrances created by a disposition made by the deceased, unless, subject to the provisions of section 27, such debts or incumbrances were incurred or created bona fide for full consideration in money or money's worth wholly for the deceased's own use and benefit and take effect out of his interest, or
(b) for any debt in respect whereof there is right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained, or
(c) more than once for the same debt or incumbrance charged upon different portions of the estate, or
(d) for debts incurred by or on behalf of the deceased by way of dower, to the extent to which such debts are in excess of rupees five thousand,
and any debt or incumbrance for which an allowance is made shall be deducted from the value of the property liable thereto.
Explanation. - For the purposes of this section 'funeral expenses' include all expenses which may have to be incurred in connection with the sraddha or barsi ceremonies of the deceased for a period of one year from his death'.
27. It is clear that in regard to certain debts no allowance can be made and in respect of debts and encumbrances for which allowance has to be made, they should be deducted from the value of the property liable thereto. In the case on hand the gifted properties are admittedly not liable for the debts. From the mere fact that the estate has to be treated as one unit, it does not follow that deduction in regard to debts has to be made from it. Section 44 of the Estate Duty Act is in identical terms with section 7(1) of the English Act of 1894. In the case in In re Barnes, and the appeal in In re Barnes, it was argued on behalf of the accountable person that as gifted properties were deemed to be property passing on death for purposes of estate duty they should be treated as though they were liable for debts also. But this contention was not accepted. It was held that the section contemplated liabilities of the estate which were to be met out of the estate and the last three lines of section 7(1) in their natural meaning were inconsistent with the contentions of the accountable person. Lawrence J. observed :
'I do not see how, in determining the value of an estate, allowance can be made for debts beyond the value of the assets out of which the debts are to be met. It is an unnatural use of words, in my view, to speak of making an allowance for a minus quantity in determining value.'
28. The learned counsel for the accountable person submitted that he would pursue the same line of arguments as was advanced by the counsel for the accountable person in the case of In re Barnes. He argued that as the property is deemed to pass on death and thus a fiction was created so also in regard to the debts a fiction should be created that they would be payable out of those properties. The fiction that certain properties shall be deemed to pass on death is created by the statute and it is not permissible to add another fiction which the statute does not indicate and in the absence of any such necessity to do so. The provision in section 44 is clear and against the creation of any such fiction.
29. The free estate in the case on hand resulted in a deficit and no part of its value has been taken for the computation of the principal value of the estate, that is, the value of the free estate has not been made liable to any estate duty at all. In such circumstances, the claim for setting off of the deficit against the other assets is neither allowable nor warranted. In these circumstances the view taken by the Tribunal with regard to the deficit of Rs. 4,88,735 is correct. Accordingly, we answer question No. 2 in the negative, i.e., the deficit of Rs. 4,88,735 computed in respect of the free estate of the deceased cannot be set off against the balance of the estate.
30. The third question relates to the insurance policy amount of Rs. 33,952. Section 33(1)(f) is as follows :
'33. Exemptions. - (1) To the extent specified against each of the clauses in this sub-section, no estate duty shall be payable in respect of property of any of the following kinds belonging to the deceased which passes on his death - ...
(f) moneys payable under one or more policies of insurance effected by the deceased on his life for the purpose of paying estate duty or assigned to the Government for the said purpose, to the extent of the amount of duty payable'.
31. From the facts noticed above, it is seen that the amount of the insurance policy has not been taken into account in computing the principal value of the estate as it was considered as an item of free estate and the value of the free estate resulted in a minus figure. Therefore, no duty has in fact been made payable in regard to that amount. The claim made was in regard to rebate under section 34. The rebate is in respect of such property which is exempt from estate duty but yet is included in the computation of the principal value of the estate under section 34(1). In the case on hand as the free estate was a minus figure, it was not considered for purposes of aggregation and in these circumstances allowing rebate under section 34(2) would not arise. The view taken by the Tribunal in regard to this aspect of the matter is in our opinion correct.
32. In question No. 3 as framed, reference is made to section 33(1)(f) but really the point involved is with regard to relief under section 34(2). We, therefore, reframe the question substituting section 34(2) for the words section 33(1)(f) and answer the same in the negative, i.e., on the facts and in the circumstances of the case, the sum of Rs. 33,952 is not entitled to the rebate envisaged in section 34(2) of the Estate Duty Act.
33. As both the parties have failed in their contentions in regard to the respective questions referred at their instance, they shall bear their own costs in this reference.