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Controller of Estate Duty Vs. Estate of Late V. Ramaiah Sreshti - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 21 of 1974
Judge
Reported in[1976]104ITR195(AP)
ActsEstate Duty Act, 1953 - Sections 10
AppellantController of Estate Duty
RespondentEstate of Late V. Ramaiah Sreshti
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao and ;M.J. Swamy, Advs.
Excerpt:
.....10 to be invoked where donee acquires immediate exclusive and bonafide possession and enjoyment of gift property - property under question in possession and enjoyment of doner - held, under circumstance property under consideration cannot be exempted from duty. - - swamy, the learned counsel for the accountable person, relies on several decisions and contends that the tribunal was perfectly justified in excluding the value of the properties from the estate passing. 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 us aforesaid, if, 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..........in the absence of explanation is inconsistent with the gift......the lease, however, gave to the donor possession and enjoyment of the land itself, which is a simple negation of exclusion, and brings the case within the statutory liability. it was argued that as the rent was full value, the lessee's possession and occupation were not a benefit. the argument is unimportant because the lease, at whatsoever rent, prevents the entire exclusion of the donor.'7. this reasoning of issacs j. was considered and approved by the judicial committee in the oft-cited case in clifford john chick v. commissioner of stamp duties, [1958] ac 435, [1959]37 itr (ed) 83 which held that:'where the question is whether the donor has been entirely excluded from the subject-matter of the gift, that is the single.....
Judgment:

Jayachandra Reddy, J.

1. A saying goes 'the manner of giving shows the character of the giver more than the gift itself'. To this if we add that keeping something back by the donor makes it no gift, for there is no grace in the benefit that sticks to the fingers, then the rigour of Section 10 of the Estate Duty Act becomes understandable. It is the scope of this provision that falls for our consideration in the question referred by the Income-tax Appellate Tribunal for our decision, which is as follows:

'Whether, on the facts and in the circumstances of the case, the value of the properties gifted to the wife, daughter and foster-daughter was liable to be included in the principal value of the estate passing under Section 10 of the Estate Duty Act ?'

2. The essential facts necessary for deciding the question may briefly be stated. One Sri V. Ramaiah Sreshti, who died on June 6, 1965, made a gift of 21 acres of casuarina tope and 5 acres of wet land to his wife. The deceased likewise gifted 6 acres of wet land to his daughter and another six acres of wet land to his foster-daughter.

3. The agricultural income from these properties was being credited to the account of the deceased for several years. He was using the amounts credited for his own business and other uses and as stated by the Assistant Controller of Estate Duty the donees were not paid interest. The Assistant Controller, therefore, held that the properties gifted were covered by Section 10 of the Estate Duty Act in view of the possession and enjoyment not having been assumed by the donees to the entire exclusion of the deceased and included them in the estate of the deceased passing. On appeal the Appellate Controller agreed with the Assistant Controller on this aspect. He, however, found that the gift of 5 acres of wet land to the wife and 6 acres of wet land to the daughter were made originally by the deceased as karta of the Hindu undivided family consisting of himself and his nephew and hence the interest of the nephew in these two gifts should be kept out of consideration for the purpose of estate duty. The matter was carried to the Appellate Tribunal by the accountable person and the Tribunal held that the addition of Rs. 54,600 on account of gifts to the wife, daughter and foster-daughter should be deleted. It further held that by a mere deposit of amounts with the deceased in his business as a loan, the amounts could not be regarded as not having been excluded from the enjoyment of the deceased. The Tribunal, referred to several decisions and reached the conclusion that if at all anything was taxable in the case, the money available to the deceased and utilised in the business could alone be included. But again the Tribunal following a decision of the Gujarat High Court in Controller of Estate Duty v. Chandravadan Amratlal Bhatt : [1969]73ITR416(Guj) held that even these amounts credited in the books by way of income or interest cannot also be included in the estate. Thus, according to the Tribunal, neither the value of the lands nor the amounts representing the income from the lands could be included in the estate passing. The Controller of Estate Duty required the Appellate Tribunal to refer theaforementioned question to the High Court for its decision and accordingly it has come up before us.

4. The learned standing counsel for the revenue contends that the Tribunal did not correctly interpret the provisions of Section 10 of the Act and erred in excluding the value of the lands gifted from the estate passing. He relies on Controller of Estate Duty v. Smt. Parvati Ammal : [1974]97ITR621(SC) and contends that the donor was not entirely excluded from possession and enjoyment of the properties gifted and that the donees did not retain the properties 'to the entire exclusion of the donor or of any benefit to him by contract or otherwise', and hence, the properties as such should be deemed to pass on the death of the deceased, thereby attracting the levy of estate duty. Sri M.J. Swamy, the learned counsel for the accountable person, relies on several decisions and contends that the Tribunal was perfectly justified in excluding the value of the properties from the estate passing.

5. Before we proceed to deal with these rival contentions, it is useful to refer to Section 10 of the Estate Duty Act, which reads as under :

'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:

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 us aforesaid, if, 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 dealth :

Provided further that a house or part thereof taken under any gut made to the spouse, son, daughter, brother or sister, shall not be deemed to pass on the donor's death by reason only of the residence therein of donor except where a right of residence therein is reserved or secured directly or indirectly to the donor under the relevant disposition or under any collateral disposition.'

6. From a plain reading of this section it is clear that the intention of the legislature was to include certain categories of gifts and to exclude certain other categories of gifts in respect of liability to estate duty. To understand the object underlying a provision of this nature, it is useful to refer to certain observations made by Issacs J. in the case of John Lang v. Thomas Prout Webb, [1912] 13 CLR 503 (Aus) :

'Apparently gifts may be genuine, or colourable, and experience has shown that frequently the process of ascertaining their genuineness is attended with delay, expense and uncertainty--all of which are extremely embarrassing from a public revenue standpoint.

With a view to avoiding this inconvenience, the legislature has fixed two standards, both of them consistent with actual genuineness, but prima facie indicating a colourable attempt to escape probate duty, One is the standard of time. A gift, however real and bona fide, if made within twelve months before the donor's death, is for the purpose of duty regarded as not made. The other is conduct which at first sight and in the absence of explanation is inconsistent with the gift......

The lease, however, gave to the donor possession and enjoyment of the land itself, which is a simple negation of exclusion, and brings the case within the statutory liability. It was argued that as the rent was full value, the lessee's possession and occupation were not a benefit. The argument is unimportant because the lease, at whatsoever rent, prevents the entire exclusion of the donor.'

7. This reasoning of Issacs J. was considered and approved by the Judicial Committee in the oft-cited case in Clifford John Chick v. Commissioner of Stamp Duties, [1958] AC 435, [1959]37 ITR (ED) 83 which held that:

'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 this non-exclusion has been advantageous or otherwise to the donee.'

8. Chick's case has been regarded as one of great persuasive value for the purpose of British Estate Duty though the underlying harshness in certain situations was felt and which could be mitigated only by incorporating suitable provisions in the Finance Act. In India the personal laws impose moral duties on the donees to look after and permit the donors to reside with them in the residence gifted which do create certain hardships in the matter of levy of estate duty. To get over some of these hardships suitable amendments to Section 10 were also made, as we find in the 2nd proviso, by the Finance Act, 1965, but applied prospectively.

9. At this stage it is necessary to refer to a judgment of the Supreme Court in George Da Costa v. Controller of Estate Duty : [1967]63ITR497(SC) , wherein the Supreme Court held as follows:

'The crux of Section 10 of the Estate Duty Act, 1953, lies in two parts : (i) the donee must bona fide have assumed possession and enjoyment of the property, which is the subject-matter of the gift, to the exclusion of the donor, immediately upon the gift, and (ii) the donee must have retained such possession and enjoyment of the property to the entire exclusion of the donor or of any benefit to him, by contract or otherwise. Both these conditions are cumulative; Unless each of these conditions is satisfied, the property would be liable to estate duty under Section 10 of the Act....

The second part of Section 10 has two limbs : the deceased must be entirely excluded, (i) from the property, and (ii) from any benefit by contract or otherwise. The words 'by contract or otherwise' in the second limb of the section will not control the words 'to the entire exclusion of the donor' in the first limb. The first limb 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. In other words, in order to attract the section, it is not necessary that the possession of the donor of the gift must be referable to some contractual or other arrangement enforceable in law or in equity, even if the donor is content to rely upon the mere filial affection of his sons with a view to enable him to continue to reside in the house which he has given to them, it cannot be said that he was 'entirely excluded from possession and enjoyment' within the meaning of the first limb of the section, and, therefore, the property will be deemed to have passed on the death of the donor and will be subject to levy of estate duty.'

10. In this case the Supreme Court after referring to Chick's case held that the words 'by contract, or otherwise' in the second limb of the section do not control the words 'to the entire exclusion of the donor' in the first limb and that in order to attract Section 10, it is not necessary that the possession of the donor of the gift must be referable to some contractual or other arrangement enforceable in law or in equity.

11. This view was again considered and followed by the Supreme Court in its recent judgment in Controller of Estate Duty v. Smt. Parvati Ammal. The facts in this case are: the deceased owned two buildings including a lodge and other properties and he was carrying on the business of boarding and lodging in that lodge. On March 11, 1955, the deceased executed a document described as a partition deed, whereby he gave the lodge to his five sons in equal shares and retained for himself the other properties. On June 25, 1955, the deceased entered into an agreement with his sons by which he took lease of the lodge and continued to carry on the business as he was doing previously. Later on, the deceased gave the boarding house on sublease to a third party. The deceased died on April 6, 1957. The Assist-ant Controller took into account certain amounts on the basis of the value of the lodge. The accountable person claimed that the lodge should be excluded from the assessment on the ground that the property was transferred on March 11, 1955, itself and that the sons let out the building to the deceased who did not derive any special benefit. The Assistant Controller rejected these contentions and held that the lodge was liable to be taken into account for assessing estate duty. When the matter went up to the High Court it was held that the lodge was gifted and cannot be subjected to estate duty. The revenue filed an appeal to the Supreme Court. Their Lordships of the Supreme Court, after referring to Chick's case, observed thus:

'The following six points emerge from Chick's case:

(1) The deceased was not in fact excluded from the property, but as a partner enjoyed rights over it.

(2) There was an initial outright gift of the property--not of the property shorn of certain rights,

(3) It was immaterial that the partnership agreement was later than the gift, since the section required that possession and enjoyment should 'thenceforth' be retained to the exclusion of the donor.

(4) It was also immaterial that the partnership was 'an independent commercial transaction', and that the donor gave full consideration for his rights. If a donor gives a donee a freehold and the donee gives the donor a lease, even at a full rent, the donor is not excluded from the property.

(5) The question whether the partnership agreement was 'related' or 'referable' to the gift did not arise; the question is relevant only to the second limb of the clause.

(6) It was immaterial that the donee could make no better use of the property. 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 this non-exclusion has been advantageous or otherwise to the donee.'

12. Applying these principles to the facts of the case before them, their Lordships held:

'The present case, in our opinion, clearly falls within the purview of the dictum laid down by the High Couriof Australia in the case of John Lang and of the Judicial Committee in the case of John Chick. As already mentioned, the High Court has found that the property which was the subject-matter of the gift under the deed of March 11, 1955, was the entirety of Mayavaram Lodge with all the rights and that the gift was not subject to any claim or reservation. It has also been found that on the execution of the aforesaid deed the donees assumed possession and enjoyment of the entirety of the house. On June 25, 1955, the donor took the aforesaid house on lease from the donees. These facts would show that the possession and enjoyment of Mayavaram Lodge was not subsequent to the gift retained by the donees 'to the entire exclusion of the donor or of any benefit to him by contract or otherwise--Mayavaram Lodge as such shall be deemed to pass on the death of the deceased under Section 10 of the Act.'

13. It can thus be seen that the Supreme Court followed the principles laid down in Chick's case, wherein emphasis was laid on the entire exclusion of the donor from the gifted property and it was said that 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.

14. From the above discussion, it emerges that a gift of immovable property under Section 10 wilt be dutiable unless the donee assumes immediate exclusive and bona fide possession and enjoyment of the subject-matter of the gift and the donor should not have any beneficial interest reserved for himself by contract or otherwise. The word 'otherwise' is construed ejusdem generis and held to mean some kind of legal obligation or some transaction enforceable at law or in equity which though not in the form of a contract may confer a benefit on the donor. It is also not necessary that possession of the gifted properties by the donor must be referable to some contractual or other arrangement enforceable in law or in equity. Even if the donor continued to reside by more filial affection, in a house gifted by him to his sons, it is said that he was not entirely excluded from possession and enjoyment within the meaning of the first limb of the section. If the donor has not been so excluded, the eye need look no further to see whether this non-exclusion has been advantages or otherwise to the donee.

15. The next question is what then are the circumstances in the case before us and how far the above-said principles are attracted. As already stated, the donor was in possession of the gifted properties and was managing them. The income derived was being credited to the accounts of the donees. As we find in the orders of the Assistant Controller and the Appellate Controller, no interest was paid to the donees. From 1952 to 1960, the income was appropriated by the deceased himself and it was only later on March 27, 1960, a sum of Rs. 2,000 was credited to his wife's account. The deceased continued to manage the lands and was debiting the expenses to the accounts of the donees. The amounts credited to the account of the donees were used by the deceased for his own business. It is thus apparent that the deceased was not excluded from the property and the donees did not retain the possession and enjoyment of the property to the entire exclusion of tire donor, or of any benefit to him by contract or otherwise as contemplated under the law. So, we have no hesitation in holding that the propsrties gifted to the wife, daughter and foster-daughter were liable to be included in the principal value of the estate passing under Section 10 of the Estate Duty Act.

16. Sri M.J. Swamy, the learned counsel for the accountable person, contends that the donor by executing the registered gift deeds parted with the properties and the donees should be deemed to have taken possession of the lands and retained them to the entire exclusion of the deceased. According to him the mere fact that the deceased was managing the properties does not warrant the conclusion that he was not excluded from the properties or from any benefit by contract or otherwise. He relics on Suggala Veera, Raghaviah v. Controller of Estate Duty : [1970]75ITR714(AP) . In that case the deceased executed a partition deed on July 15, 1951, in favour of himself and his three sons, dividing the agricultural lands and also the money-lending business which was his self-acquired property. The Assistant Controller, after the death of the deceased, invoked Section 10 of the Estate Duty Act with regard to the lands as well as the money-lending business. On a reference, a Division Bunch of this court held that the deceased did not retain possession or enjoyment or derive any benefit from the properties partitioned and that merely because the moneys were being utilised by the lather for his money-lending business, it did not follow that the sons had no bona fide possession or enjoyment of the properties to the entire exclusion of the deceased. It can thus be seen that the facts here are different from those in the case before us. The deceased in our Case continued to be in possession of the properties, and derived some benefit which is a very vital circumstance.

17. Nextly, the learned counsel strongly relies on Controller of Estate Duty v. C.R. Ramachandra Gounder : [1973]88ITR448(SC) . In that case the deceased who was a partner in a firm owned a house property let to the firm. He executed a deed of settlement under which he transferred the house property to his two sons and the firm paid the rent to the donees by crediting the amount in the accounts of the donees in equal shares and the deceased continued to be partner of the firm. After his death the question arose whether the value of the house could be included in the estate passing. Their Lordships of the Supreme Court held that there was an unequivocal transfer of the property by a settlement deed and the possession which the donor could give was the legal possession which the circumstances and the nature of the property would admit and this the donor had given. Hence, the property should not be deemed to pass under Section 10. According to the learned counsel, in the instant case also by executing the registered sale deed the donor had given away the possession. This contention has no force. The gift of property shorn of certain rights belonging to the partnership stands on a different footing. In H.R. Munro v. Commissioner of Stamp Duties, (1) [1934] AC 61 ; 2 EDC 462 (PC) the donor transferred by six registered transfers by way of gift, all his right and interest in portions of his land to each of his four sons and to his two daughters and their children. Prior to this transfer there was an agreement whereby his sons and daughters were treated as the partners of the business carried on by him as grazier of the land. The transfers were taken subject to the partnership agreement and on the understanding that any one partner could withdraw and work on his land separately. On the death of the donor the land transferred was included in the estate passing. Finally, it was held by the court that the property comprised in the transfers was the land separated from the rights therein belonging to the partnership and was excluded by the terms of Section 102, Sub-section (2)(d), from being dutiable, because the donees had assumed and retained possession thereof, and any benefit remaining in the donor was referable to the partnership agreement and not to the gifts. In Controller of Estate Duty v. Parvati Ammal their Lordships of the Supreme Court after referring first to H.R. Munro v. Commissioner of Stamp Duties and then to Controller of Estate Duty v. C.R. Ramachandra Gounder, (3) : [1973]88ITR448(SC) and the facts thereunder, observed as follows :

'The question was whether the value of the house property and the sum of Rs. one lakh could be included in the principal value of the estate of the deceased as property deemed to pass under Section 10 of the Estate Duty Act, 1953. This court held that neither the house property nor the sum of Rs. one lakh could be deemed to pass under Section 10. The first two conditions of the section were satisfied because; there was an unequivocal transfer of the property by a settlement deed and of the sum of Rs. 1 lakh by crediting the amount in each of the son's accounts with the firm which thenceforward became liable to the sons for payment of that amount and the interest thereon. The possession which the donor could give was the legal possession which the circumstances and the nature of the property would admit and this the donor had given. The benefit the donor had as a member of the partnership was not a benefit referable in any way to the gift but was unconnected therewith.'

18. It will thus be seen that the decision in Controller of Estate Duty v. C.R. Ramachandra Gounder cannot come to the rescue of the accountable person. The learned counsel also relies on Controller of Estate Duty v, R. Kanakasabai : [1973]89ITR251(SC) . In that case the deceased executed in June, 1951, separate deeds in favour of his sons, grandsons, daughter and wife settling his properties. In the deed in favour of the wife the settlor expressed the hope that she would maintain him during his lifetime. In respect of other deeds he did not reserve any interest. Considering the applicability of Section 10 to the facts their Lordships of the Supreme Court held that no interest in the properties was reserved to the deceased during his lifetime and in the deed in favour of the wife he merely expressed a hope or expectation and no enforceable right was created and so properties cannot be included in the estate passing. So this case is also of no assistance to the accountable person. Sri M.J. Swamy also relies on Behari Lal Matanhelia v. Controller of Estate Duty : [1972]86ITR346(All) and Commissioner of Income-tax and Controller of Estate Duty v. N.R. Ramarathnam, (2) : [1973]91ITR1(SC) . In both these cases the gifts relate to certain rights in a partnership firm and the facts are distinguishable.

19. The learned counsel next contended that the deceased was only managing the properties gifted to his wife, daughter and foster daughter and it would be rather harsh to apply the provisions of Section 10 to a case like this. This contention has no force. As pointed out by the Supreme Court in Controller of Estate Duty v. Parvati Ammal and George Da Costa v. Controller of Estate Duty 'even if the donor is content to rely upon the mere filial affection of his sons with a view to enable him to continue to reside in the house, it cannot be said that he was 'entirely excluded from possession and enjoyment' within the meaning of the first limb of the section and, therefore, the property will be deemed to pass on the death of the donor and will be subject to levy of estate duty'. When that is the view taken by the Supreme Court about the scope of Section 10, the accountable person in the instant case cannot complain of any harshness. As already stated, the donor was undisputedly in possession of the properties and for some years even used the income from his wife's share in his own business as stated supra. Thus he was not entirely excluded from possession and enjoyment of the gifted property. A similar contention of the learned counsel is that the provisions of Section 10 should not be so construed to be against the public policy. In Mrs. Shamsun Nehar Mansur's case, [1969 ITR 301 (Cal) P.B. Mukharji J. picturesquely put the same proposition by stating:

' ............ no construction should be put on Section 10 of the Estate Duty Act so as to be against the public policy to the extent that whenever a husband makes a gift of a property to his wife, he should lose both the property and the wife.'

20. But, as pointed out by Issacs J. in John Lang v. Thomas Prout Webb, 'The owner of property desiring to make a gift of it to another may do so in any manner known to law. Apparently gifts are genuine and colourable............ If the parties to the transaction choose to act so as to be in apparent conflict with its purport, they are to be held to their conduct.' So, ultimately, the facts and circumstances in each case have to be taken into account for a proper application of Section 10 But it has to be remembered that it is the heart of the giver that makes the gift dear and precious and the donor gives the most when he gives the best. If all these aspects are borne in mind, the object of Section 10 becomes appreciable. Though at a glance the provisions of Section 10 may appear to be rigorous, they are not so when they are tested on the anvil of the object of the Act which is intended to rectify the unequal distribution of wealth. The gift can be genuine as well as colourable. The intention of the Legislature is to include the gifted properties to the estate passing in cases where the donee does not assume bona fide possession and enjoyment of the gifted properties and where the donor is not excluded from the property and from any benefit by contract or otherwise, and if in a given case these provisions become applicable, it cannot be contended that they are harsh and are being interpreted against public policy.

21. For the aforesaid reasons, we answer the question in the affirmative and in favour of the department. No costs. Advocate's fee of Rs. 250.


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