1. The deceased, Sri Sivanagere Subbiah, was partner in the firm of Messrs. S. Subbiah and Raja Ramakrishnaiah, Sira, under a partnership agreement dated November 28, 1947. The deceased had a half share in the said business. The capital standing to the credit of the deceased in the books of the firm as on June 30, 1954, was Rs. 1,07,148. On June 30, 1954, this amount was divided into three parts of four annas, two annas and two annas, respectively, and the two shares of two annas each in the capital were transferred to the accounts of the two sons of the deceased, viz., S. Aswathanarayana Setty and S. Venkateshiah. The shares so transferred to the accounts of the sons amounted to Rs. 28,796 each. With sons and Raja Ramakrishnaiah and his son, Raja Sanjiviah, the profit-sharing ratio being four annas for the deceased, two annas each for his two sons, and four annas each for Ramakrishnaiah and his son. A fresh partnership deed was duly drawn on this basis and this re-constituted firm continued to exist till the death of the deceased on November 16, 1957. A copy of the partnership deed dated July 1, 1954. together with a free English translation of the same is appendix 'A' and forms part of statement.
2. In the estate duty proceedings that followed upon the death of the deceased, the accountable persons contended that the capital of Rs. 57, 594 transferred by the deceased to the sons on June 30, 1954, was an absolute transfer and the deceased did not get any interest whatever in the capital transferred or in the profits. The Assistant Controller of Estate Duty, however, did not accept this contention and held that the amount transferred by the deceased to his sons came under the purview of gifts and that the gifts so taken by the sons were not retained by them to the entire exclusion of the deceased and that, therefore, this amount must be deemed to be the property that passed on the death of the deceased as per the provisions of section 10 of the Estate Duty Act. The order of the Assistant Controller is a appendix 'B' and forms part of the statement.
3. The accountable persons preferred an appeal before the Appellate Controller of Estate Duty against the said order of the Assistant Controller. It was contended by them that, since the right to the benefit of the partnership could not be referable to the gifts, the gifts were complete and the deceased did not retain any benefit. Reliance was placed upon the decision in Munro's case. The Appellate Controller rejected this contention and, relying upon the decision in Chick's case 2, held that the property gifted by the deceased to his sons was not retained by them to the entire exclusion of the deceased or of any benefit to him. He, therefore, confirmed the addition of the amount of Rs. 57,594 to the value of the estate of the deceased. The order of the Appellate Controller is appendix 'C' and forms part of the statement.
4. Against this order of the Appellate Controller, the accountable persons preferred an appeal before the Tribunal. It was contended on their behalf that the admission of the two sons of the deceased into the partnership which was already in existence merely increased the number of partners in the firm and that all partners in the enlarged firm were governed by the provisions of the Indian Partnership Act regarding their rights and obligations in respect of the firm; that all the partners were independent of one another and every one of the partners was the absolute owner of his share in the business of the partnership and that, therefore, the deceased could not be said not to have been excluded from the property gifted by him to his sons or from any benefit arising therefrom. On the other hand, it was contended by the department that by taking the sons into the partnership with the funds he had given, the deceased had brought back his money and so benefit accrued to the father. The Tribunal held that the transfer of Rs. 28,796 to each of the two sons was not tied with strings and that there were also no strings attached to the entry of the sons into the partnership with the father. The Tribunal further held that the firm and the individuals were different and, to the extent of the benefit derived by the father from the firm, he had his capital in it and only if any benefit was left over, after the sons had their share, could any go to the father. But that could not be so, because the benefit derived was proportionate to the money invested. The Tribunal held that the decision in Munro's case was more opposite of application than that of Clifford John Chick. The Tribunal finally held that there was nothing to show that the gifted property or any part of it came back to the deceased on July 1, 1954, and that, therefore, there was no ground for adding a sum of Rs. 57,594 in the computation of the estate left. The copy of order of the Tribunal is appendix 'D' and forms part of the statement.
5. This order of the Tribunal was subsequently rectified by substituting the figure of Rs. 73,695 for the figure Rs. 57,594. The order of the Tribunal in the Misc. Application in E. D. A. No. 77 of 1962-63 dated November 4, 1964, is appendix 'E' and forms part of the statement.
6. The following question is referred :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 73,695 is not to be included in the computation of the estate left by the deceased ?'
7. This is a reference under section 64(1) of the Estate Duty Act, 1953, to be hereinafter referred to as the 'Act'. This reference was made at the instance of the Controller of Estate Duty. The facts of the case are fully set out in the statement submitted by the Income-tax Appellate Tribunal.
8. There is no dispute about the truth or the validity of the gifts made by the deceased on June 30, 1954. It is not the case of the department that the deceased had any interest in the amounts gifted to his sons on June 30, 1954, after the gifts in question were made. Section 10 of the Act reads :
'Property taken under any gift, whenever made, shall be deeded 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 :
Provided that the property shall not be deemed to pass by reason only that it was, not as from the date of the gift, exclusively retained as aforesaid, it, by means of the surrender of the reserved benefit or otherwise, it is subsequently enjoyed to the entire exclusion of the donor or of any benefit to him for at least two years before the death. ' Once it is proved gift of property had been made by the deceased two years before his death the value of that property can be taken in determining the value of the property that has passed on the death of the deceased only when one of the two conditions are satisfied, namely :
(1) that bona fide possession and enjoyment of that property was not immediately assumed by the done; and
(2) thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise.
9. In the instant case, gifts made were shares in an existing firm. The firm in question continued to be in existence even after the gifts, till the date of the death of the deceased, Subbiah. It is not denied that ever since the gift, the profits accruing from the shares gifted to the two sons of Subbiah were being paid to the donees. All the partners of the firm including the deceased were in management of the firm as partners. In these circumstances, the possession that the donees could have taken in pursuance of the gifts mentioned earlier is only a legal possession. It was not possible for any one of the partners to take physical possession of any portion of the assets of the firm. It is established that the property gifted was in the management of the donees. On the facts of the case, it cannot be said that, after the gifts, the donees did not retain the property gifted to the entire exclusion of the donor or that the donor had any benefit by contract or otherwise in the property gifted. That in order that the property could deem to pass and estate duty could be leviable in such cases, the benefit of the donor must be a benefit referable to the gift and not a benefit referable to his won property. The view, that if it is once found that the deceased had some benefit in the property, that in itself was sufficient to bring the case within the ambit of section 10 irrespective of the question whether that benefit was referable or not referable to the gift, in our opinion, is erroneons.
10. For the reasons mentioned above, we are in agreement with the Tribunal that the gifts with which we are concerned in this case do not come within the ambit of section 10 of the Act. That being so, our answer to the question referred is that, on the facts and circumstances of case, the sum of Rs. 73,695 is not to be included in the computation of estate left by the deceased.
11. The assessee is entitled to his costs of these proceedings from the department. Advocate's fee Rs. 250.