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Controller of Estate Duty Vs. Estate of Late Omprakash Bajaj - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberEstate Duty Case No. 8 of 1975
Judge
Reported in[1977]110ITR263(AP)
ActsEstate Duty Act, 1953 - Sections 36, 36(1), 44 and 74(1)
AppellantController of Estate Duty
RespondentEstate of Late Omprakash Bajaj
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateY.V. Anjaneyulu and ;V.V. Subba Rao, Advs.
Excerpt:
direct taxation - deductibility of estate duty - sections 36, 36 (1), 44 and 74 (1) of estate duty act, 1953 - whether estate duty payable on estate deductible while computing estate duty payable on principal value of estate passing on death - estate duty payable on estate personal liability of owner - estate duty payable on estate neither charge nor debt against estate as per section 74 (1) of act - held, estate duty payable on estate not deductible while calculating estate duty payable on principal value of estate passing on death. - - so far as the rest of the deductions in part vi are concerned, they throw no light on this aspect of the case and, therefore, we will have to consider the question independently without any help being derived from the rest of the provisions of part.....b.j. divan, c.j. 1. in this reference, at the instance of the revenue, the following question has been referred by the tribunal for our opinion :'whether, on the facts and in the circumstances of the case, the estate duty payable on the estate was deductible while computing the estate duty payable on the principal value of the estate passing on the death under the estate duty act ?'2. the facts leading to this reference are as follows : the deceased, sri om-prakash bajaj, expired on june 4, 1971. his estate duty assessment was completed by the assistant controller of estate duty on july 29, 1972, and he computed the net principal value of the estate at rs. 3,68,518 as against rs. 3,45,420 admitted by the accountable person. on this it was computed that an estate duty of rs. 39,130 way.....
Judgment:

B.J. Divan, C.J.

1. In this reference, at the instance of the revenue, the following question has been referred by the Tribunal for our opinion :

'Whether, on the facts and in the circumstances of the case, the estate duty payable on the estate was deductible while computing the estate duty payable on the principal value of the estate passing on the death under the Estate Duty Act ?'

2. The facts leading to this reference are as follows : The deceased, Sri Om-prakash Bajaj, expired on June 4, 1971. His estate duty assessment was completed by the Assistant Controller of Estate Duty on July 29, 1972, and he computed the net principal value of the estate at Rs. 3,68,518 as against Rs. 3,45,420 admitted by the accountable person. On this it was computed that an estate duty of Rs. 39,130 way payable. The accountable person filed an appeal before the Appellate Controller and he contended that the estate duty payable should have been allowed as a liability in computing the net principal value of the estate. The Appellate Controller in his order rejected the contention of the accountable person and held that the estate duty payable could not be regarded as a debt existing on the date of the deceased's death for which a deduction would be permissible under Section 44 of the Estate Duty Act. He, accordingly, dismissed the appeal. Against this order of the Appellate Controller, the accountable person took the matter in further appeal before the Appellate Tribunal. The Appellate Tribunal, following its earlier decision in Estate Duty Appeal No. 84 of 1968-69, decided by it on December 30, 1972, held that the estate duty payable should be deducted while computing the principal value of the estate. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion. The Tribunal in the earlier judgment had held that under Section 44 of the Act, allowance has to be made for debts and incumbrances. According to the Tribunal, the estate duty payable was part of the debts and incumbrances and, therefore, it should be allowed as a deduction. It held that the estate duty payable in respect of the estate is a clear deduction from the value of the estate passing. It was held in the earlier decision that the allowance made should be restricted to the final estate duty quantified and held payable after all the appellate decisions.

3. In order to appreciate the rival contentions, it is necessary to refer to some of the Sections of the Estate Duty Act, 1953. Under Section 5, Sub-section (1) of the Act, in the case of every person dying after the commencement of the Act, there shall, save as therein expressly provided, be levied and paid upon the principal value ascertained as provided therein of all property settled or not settled including agricultural land, situate in the territories which immediately before the 1st of November, 1956, were comprised in the States specified in the First Schedule to the Act, which passes on the death of such person, a duty called 'estate duty' at the rates fixed in accordance with Section 35. Thus, estate duty is payable in respect of properties which pass on the death of the deceased provided it is after the commencement of the Act, and estate duty is payable in respect of all pro- perty settled or not settled including agricultural lands. Part VI of the Estate Duty Act consists of Sections 44 to 50B both inclusive and the entire Part deals with deductions. Section 44 says that 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 allowance shall not be made for the different types of debts such as those mentioned in Clauses (a) to (d) of the section. At this stage, it is worthwhile to refer to Section 36, Sub-section (1), which provides that the principal value of any property shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in the open market at the time of the deceased's death. Thus, the charge is on the property which passes on the death of the deceased, but the valuation of that property is of the time of the death of the deceased and in determining the principal value of that estate, allowance for the funeral expenses including allowance for debts and incumbrances has to be made. But it must be borne in mind that under Sub-section (1) of Section 36 what has to be taken into consideration is the time of the death of the deceased and not the time of passing of the property ; the incidence of estate duty or charge of estate duty as pointed out in Section 5(1) is on the property which passes on the death of the deceased, but by virtue of Sub-section (1) of Section 36, the value must be estimated on the basis of the price it would fetch if sold in the open market at the time of the death of the deceased. Clauses (a), (b), (c) and (d) which refer to debts which are not to be allowed under Section 44 are as follows :

Clause (a) provides :

'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.'

4. Under clause (b), allowance is not to be made for any debt in respect whereof there is right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained. Under Clause (c) no allowance is to be made more than once for the same debt or incumbrance charged upon different portions of the estate and under Clause (d) no allowance is to be made 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. We are not concerned with the Explanation of Section 44. It is true, as the learned counsel for the accountable person has urged, that Section 44, as it stands, does not contain any qualification in the main clause of Section 44 regarding debts and incumbrances. It is only by reference to the context and scheme of the sections of the Estate Duty Act that we can say as to what exactly the words 'debts' and 'incumbrances' occurring in the main part of Section 44 mean. At this stage, it is also necessary to refer to some other sections of Part VI, which, as stated above, relates to deductions. Section 48 provides that cost of realising or administering foreign property may be allowed for within certain limits. Under Section 49, allowance for duty paid in a non-reciprocating country is to be allowed as a deduction. Under Section 50, relief is granted from estate duty where court-fees have been paid for obtaining representation to the estate of the deceased. Now, these deductions under Sections 48, 49 and 50, it will be noticed, are in respect of payments made or costs incurred after the death of the deceased and not before the death of the deceased and to that extent the provisions of Sections 48 to 50 do not help us in any manner in interpreting the words 'debts' and 'incumbrances' occurring in the main part of Section 44. Sections 50A and 50B also provide for some deductions, but they are in respect of special cases where gift-tax had already been paid or tax had been paid on capital gains. Again, they refer to special situations other than a situation for a debt and incumbrance. Therefore, we will have to examine whether any other section of the Estate Duty Act is capable of throwing any light on the meaning of the words 'debts' and 'incumbrances'. Under Section 53, Sub-section (1):

'Where any property passes on the death of the deceased--

(a) every legal representative to whom such property so passes for any beneficial interest in possession or in whom any interest in the property so passing is at any time vested,

(b) every trustee, guardian, committee or other person in whom any interest in the property so passing or the management thereof is at any time vested, and

(c) every person in whom any interest in the property so passing is vested in possession by alienation or other derivative title,

shall be accountable for the whole of the estate duty on the property passing on the death but shall not be liable for any duty in excess of the assets of the deceased which he actually received or which, but for his own neglect or default, he might have received.'

5. We are not concerned with the proviso to Sub-section (1) nor with any of the other sub-sections of Section 53. Under sub-section (1) of Section 74, a first charge on property has been created in respect of estate duty, and it is in these terms ;

'74. (1) Subject to the provisions of Section 19, the estate duty payable in respect of property, movable or immovable, passing on the death of the deceased, shall be a first charge on the immovable property so passing (including agricultural land) in whomsoever it may vest on his death after the debts and incumbrances allowable under Part VI of this Act; and any private transfer or delivery of such property shall be void against any claim in respect of such estate duty.'

6. The learned counsel for the accountable person has urged two contentions in the alternative and each contention is sought to be rested independently of the other. The first contention is that estate duty is a debt of the estate which passes on the death of the deceased and, hence, it is deductible under Section 44. That alternative argument is that even if it is not a debt, it is an incumbrance (a) by virtue of Section 74, Sub-section (1) of the Act, and (b) even if it is not an incumbrance under Section 74(1), independently of the provisions of Section 74, it is an incumbrance in the sense of being a burden on the estate which passes on the death of the deceased. We will deal with each of these contentions separately. But we must first appreciate the position as it prevails in the light of the provisions of Sections 5, 36 and 44. Under Section 5, the charge is on the property which passes on the death of the deceased. Under Section 36, Sub-section (1), the principal value of the property shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in the open market at the time of the death of the deceased, and, lastly, it is while determining the value of an estate, that is, under Section 36, that debts and incumbrances have to be allowed. It was contended on behalf of the revenue before us by Mr. Rama Rao, learned advocate for the revenue, that debts and incumbrances must be debts incurred by the deceased during his lifetime and incumbrances created by him in his lifetime, otherwise, they are not debts and incumbrances contemplated by Section 44. For this purpose, he has contended that there is a subtle distinction between the time of death of the deceased and the time when the estate passes on the death of the deceased, as pointed out by several authorities which we will notice shortly hereafter. The passing of the property may take place even a split-second after the death of the deceased, but the death of the deceased must precede even by a split-second the moment of passing of the property. Under Section 36(1) it is the moment of death which is material and not the moment when the property passes and, runs the argument of the revenue, under Section 44 it is while determining the value of the estate for the purpose of estate duty, that is, while estimating the price of the property which in the opinion of the Controller it would fetch if sold in the open market at the time of the deceased's death, which is distinct from the time of passing of the property, that debts and incumbrances have to be taken into account, and it is, therefore, contended that if debts and incumbrances have to be allowed as at the moment of death of the deceased then it must by necessary implication be debts and incumbrances incurred and created respectively by the deceased. So far as the rest of the deductions in Part VI are concerned, they throw no light on this aspect of the case and, therefore, we will have to consider the question independently without any help being derived from the rest of the provisions of Part VI or Section 44. Ever since the decision of the House of Lords in what is known as Graham's Trustee's case [1971] SLT 46 it is well settled that there is a distinction between the moment of death and the moment of passing of the property. The decision in Graham's Trustee's case [1971] SLT 46 has been followed by the High Courts of India, for example, in Bharatkumar Manilal Dalal v. Controller of Estate Duty : [1975]99ITR179(Guj) , at page 210, where the Gujarat High Court has pointed out the decision in Inland Revenue v. Graham's Trustees [1971] SLT 46. Lord Donovan, following the earlier decision in In re Magan [1922] 2 IR 208 observed that 'the death in contemplation of law must precede the passing' and In re Smith [1951] 1 Ch 360 ; 3 EDC 188 that 'it is only when the person in question has expired, after the last breath has left the body, that the property passes and the liability to estate duty arises'. In M.CT. Muthiah v. Controller of Estate Duty : [1974]94ITR323(Mad) the Madras High Court followed the distinction between the moment of death of the deceased and the moment of passing of the property, again the decision being based on the decision of the House of Lords in Graham's Trustee's case [1971] SLT 46. We respectfully agree with the decisions of the Gujarat High Court and the Madras High Court when they follow the principles laid down in the Graham's Trustee's case [1971] SLT 46 by the House of Lords and when they point out the subtle distinction between the moment of man's death which must precede even by a split-second the moment when that person's property passes.

7. However, this distinction between the moment of death and moment of passing of the property for the practical purpose of administering the Estate Duty Act is hardly of any value particularly when considering the question of 'debts' and 'incumbrances'. In our opinion, it is only in the light of the interpretation of the provisions of Sections 36(1), 53 and 74 which indicate the intention of the legislature that the question before us can be solved. Under Section 36(1), it is the principal value of the property which in the estimation of the Controller is the price it would fetch if sold in the open market at the time of deceased's death which is the material figure. The words 'fetch in open market' have been construed by the Supreme Court in Pandit Lakshmi Kant Jha v. Commissioner of Wealth-tax : [1973]90ITR97(SC) . The Supreme Court while interpreting Section 7(1) of the Wealth-tax Act pointed out that the provisions of Section 7(1) of the Wealth-tax Act and Section 36 of the Estate Duty Act are in pari materia and it has been pointed out that the value of an asset, other than cash, for the purpose of Section 7(1) of the Wealth-tax Act, should be the same as its value for the purpose of Section 36(1) of the Estate Duty Act. It is also pointed out that Section 36, Sub-section (1) of the Estate Duty Act was based upon Section 7(5) of the U.K. Finance Act, 1894, and Section 60, Sub-section (2) of the U. K. Finance Act, 1910, while Section 48 of the Estate Duty Act was based upon Section 7(3) of the U.K. Finance Act, 1894. The following passage from Green's Death Duties, page 393, sixth edition, has been cited with approval by Khanna J., speaking for the Supreme Court, at pages 104, 105 :

'The price which property 'fetches' is the gross price paid by the purchaser, without deduction for the vendor's costs and expenses. This is so, even where the property is subject to a trust for sale. But if the property to be valued is merely a share in an unadministered estate, or in the proceeds of sale of trust property which must be realised for the purpose of distribution, the expenses of the executors or trustees under the old title should be taken into account.'

8. The following passage from Dymond's Death Duties, fourteenth edition, page 569, has also been cited by Khanna J. (page 105) :

'The price which the property fetches is the gross sale price, without deduction for the costs of sale, except that, if the property is part of an unadministered estate or a share of property subject to a trust already in operation which involves conversion, or if the property consists of certified chattels of national, etc., interest, allowance for costs may be made.'

9. The Supreme Court in Pandit Lakshmi Kant Jha's case : [1973]90ITR97(SC) approved of the following passage from the speech of Lord Reid in Duke of Buccleuch v. Inland Revenue Commissioners [1967] AC 506

' I an confirmed in my opinion by the fact that the Act permits no deduction from the price fetched of the expenses involved in the sale (except in the case of property abroad under Sub-section (3)).'

10. The Supreme Court also approved the following passage from the speech of Lord Morris in the same case of Duke of Buccleuch [1967] 1 AC 506 :

'The value of a property is to be estimated to be the price which it would 'fetch' if sold in the open market at the time of the death of the deceased. This points to the price which a purchaser would pay. The net amount that a vendor would receive would be less. There would be costs of and incidental to a sale. It would seem to be harsh or even unjust that allowances cannot be made in respect of them. But the words of the statute must be followed.'

11. It was pointed out that similar observations were made by Lord Hodson and Lord Guest. The Supreme Court accepted these observations as laying down the correct law.

12. It is, therefore, clear that when Section 36(1) of the Estate Duty Act uses the words 'the price which in the opinion of the Controller it would fetch if sold in the open market at the time of the deceased's death' what has to be taken into consideration is the gross amount without any deduction which the purchaser would pay in respect of the property, and it is contended on behalf of the revenue by Mr. Rama Rao that the purchaser would pay the open market value for the property and deduction for estate duty would be the deduction out of the total value thus estimated, namely, what the purchaser would pay in respect of the property. Mr. Anjaneyulu has in this connection relied upon the decision of the Gujarat High Court in Commissioner of Wealth-tax v. Smt. Shirinbanoo : [1976]102ITR735(Guj) . The question before the Gujarat High Court was regarding the value of a property which was subject to a mortgage and the question was what was the net value of the particular property which was under consideration. B. K. Mehta J., delivering the judgment of the Gujarat High Court, observed at page 742 :

'The ambit of Section 2(m) of the Wealth-tax Act had come up for consideration in Spencer & Co. Ltd. v. Commissioner of Wealth-tax : [1969]72ITR33(Mad) , where the Madras High Court was concerned with the question of deduction, under Section 2(m) of the Wealth-tax Act, of Rs. 31,26,000, being the amount the assessee, Spencer & Company, agreed to pay by way of consideration for purchase of sundry assets of another company..... This decision of the Madras High Court has been confirmed by the Supreme Court in Commissioner of Wealth-tax v. Spencer & Co. Ltd. : [1973]88ITR429(SC) . Mr. Kaji, the learned advocate on behalf oi the revenue, therefore, attempted to persuade us that the exception in Section 2(m) of the Wealth-tax Act indicates that debts even though secured would go to increase the aggregate value of the debts and not reduce the aggregate value of the assets. We are of the opinion that Mr. Kaji has while urging this contention lost sight of the pertinent point that what is to be evaluated is not the assets simpliciter but the asset which is encumbered. In our opinion where an asset which has been brought to the charge of wealth-tax is an encumbered asset, for purposes of determining the value of such asset, the amount of debt which is charged on that property has to be excluded for purposes of evaluating the said asset. It is no doubt true that net wealth, according to Section 2(m) of the Act, is the amount by which the aggregate value of assets of a person exceeds the aggregate value of his debts. However, according to Section 7, subject to any rules made in that behalf, the value of any asset, other than cash, would, for purposes of the Act, be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. It is, therefore, clear to us that while aggregating the value of all assets it is the valuation of a particular asset which is to be estimated and in estimating such valuation what the taxing officers have to bear in mind is that price which such asset would fetch if sold in the open market on the valuation date. It is no doubt true that for purposes of determining the net wealth which is the basis of the liability of wealth-tax, the amount by which the aggregate value of an asset of a person exceeds the aggregate value of the debt is to be looked into. But none the less, while estimating the valuation of an encumbered asset, the price which such asset would fetch, if sold in the open market, is first to be ascertained and the only method of evaluating an encumbered asset is to consider the valuation of the asset less the valuation of encumbrance thereon.'

13. It is the last sentence on which considerable reliance has been placed by Mr. Anjaneyulu on behalf of the accountable person.

14. In our opinion, the decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) , delivered in the context of wealth-tax for the purpose of considering whether income-tax payable wsa a debt owed within the meaning of the relevant Section of the Wealth-tax Act and the decision of the Supreme Court in H.H. Setu Parvati Bayi v. Commissioner of Wealth-tax : [1968]69ITR864(SC) , also delivered in the context of the Wealth-tax Act which says that the wealth-tax payable by the assessee is also a debt within the meaning of the same Section of the Wealth-tax Act, are hardly of any assistance in considering the problem before us, because what has been observed in the context of the Wealth-tax Act and what has been laid down for the purpose of that Act is hardly of any assistance for the purpose of deciding as to whether the estate duty payable in respect of an estate which passes on the death of the deceased is part of the debts and incumbrances within the meaning and plain object of Section 44 of the Estate Duty Act. It is true that in Kesoram Industries' case : [1966]59ITR767(SC) , which was followed in Setu Parvati Bayi's case : [1968]69ITR864(SC) , the Supreme Court has made observations regarding what is a debt and how the courts should approach the question of what amounts to a debt, generally speaking, in the language of the law. In Kesoram Industries' case : [1966]59ITR767(SC) , Subba Rao J. (as he then was), delivering the judgment of the majority of the learned judges of the Supreme Court who decided the case, summarised the position thus (page 780):

'We have briefly noticed the judgments cited at the Bar. There is no conflict on the definition of the word 'debt'. All the decisions agree that the meaning of the expression 'debt' may take colour from the provisions of the concerned Act: it may have different shades of meaning. But the following definition is unanimously accepted :

'A debt is a sum of money which is now payable or will become payable in future by reason of a present obligation : debitum in praesenti solvendum in futuro.' The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But if there is a debt the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount. In short, a debt owed within the meaning of Section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.'

15. Again, at page 784 of the report, the position has been summarised in the following words by Subba Rao J. (as he then was), delivering the majority judgment:

'.....A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is ^quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a ' debt' are present. It is a present liability of an ascertainable amount.....'

16. However, what has been pointed out at page 780 of the report as to what amounts to 'debt' in the context of the statute, has to be borne in rnind, viz., that the meaning of the expression 'debt' may take colour from the provisions of the concerned Act. The provisions of Sections 53 and 74 are the relevant provisions of the Estate Duty Act, in the light of which we have to determine as to what amounts are 'debts' and what amounts are 'encumbrances' within the meaning of Section 74. Mr. Anjaneyulu for the accountable person has rightly contended that the principal section which is before us is Section 44. It is under that section that deductions or allowances have to be made; but, we cannot overlook the fact that the meaning of the words 'debts' and 'encumbrances' --particularly in the context of the controversy before us--has to be judged in the light of the other provisions of the Act.

17. Section 53 of the Estate Duty Act, as pointed out above, provides for the liability of the accountable person. The accountable person may be either a legal representative, or a trustee, guardian, committee or other person, in whom any interest in the property so passing, or the management thereof at any time, is vested ; or every person in whom any interest in the property so passing is vested, or who is in possession by alienation or other derivative title. Such legal representative or other person is accountable for the whole of the estate duty on the property passing on the death, but such accountable person is liable only to the extent of the assets of the deceased which he actually received, or which but for his neglect or default, he might have received. The provisions of Section 53 were considered by a Division Bench of the Gujarat High Court (consisting of Bhag-wati C.J. and myself) in Commissioner of Income-tax v. Mrs. Indumati Ratan-lal : [1968]70ITR353(Guj) . The principal question before the Division Bench of the Gujarat High Court in that case was whether interest paid on a loan borrowed for the purpose of payment of estate duty was deductible for the purposes of income-tax. The amount had been borrowed by the assessee on her own behalf and on behalf of her minor son, for payment of the estate duty on the death of her husband. While considering the liabilities of the legal representatives, etc., the provisions of Section 53 of the Estate Duty Act came up for consideration before the Division Bench. After considering the provisions of Section 53, Bhagwati C.J., delivering the judgment of the Division Bench, observed, in so far as the provisions of Section 53 are concerned (pages 357, 358):

'The liability of every accountable person is thus a personal liability, though it is limited in extent to the assets of the deceased actually or constructively received by him ; qualitatively it is a personal liability and not a liability payable only out of the assets of the deceased : the assets of the deceased actually or constructively received merely constitute the limit of the liability.'

18. Thus, so far as the liability for payment of estate duty is concerned, it is a personal liability of the accountable person and we respectfully agree with the interpretation placed by the Gujarat High Court on Section 53 of the Estate Duty Act. In the light of that decision--particularly in view of the fact that the liability for payment of estate duty is a personal liability of the accountable person--it cannot be said that it is a 'debt' contemplated by Section 44. Estate duty being a liability not of the estate itself, which passes to the accountable person or which the accountable person comes into possession of, but a personal liability of the accountable person himself, it is difficult to accept the contention urged on behalf of the accountable person before us that estate duty is 'debt' contemplated by Section 44 of the Act.

19. Under Section 74(1) of the Estate Duty Act, a charge of estate duty on property, passing on the death of the deceased, is created. We have already set out Section 74(1) hereinabove. But it has to be noticed that it is a first charge on the immovable property, passing on the death of the deceased, in whomsoever the property may vest on his death. The property so passing may be movable or immovable; it may include agricultural land as well. But the words about which some controversy has been raised before us in the context of Section 44 are 'after the debts and encumbrances allowable under Part VI of this Act' occurring in Section 74(1) of the Act. It has been contended on behalf of the revenue that the words 'after the debts and encumbrances allowable' go to qualify the words 'shall be a first charge on the immovable property so passing', occurring earlier ; whereas, it has been contended by Mr, Anjaneyulu, on behalf of the accountable person, that these words, which are under immediate consideration before us, qualify the words 'immovable property so passing'. It is obvious that, if estate duty has to be the first charge on the immovable property passing on the death of the deceased--if provision is not made for the debts and encumbrances which the deceased had either incurred or created on his own property--the person in whose favour such debts' or encumbrances are created, would be at a disadvantage and, therefore, the debts and encumbrances which are allowable under Part VI of the Act, rank in priority over the payment of estate duty. It is for this purpose that Section 74(1) which creates a first charge in respect of the estate duty, so far as the immovable property is concerned, also provides that the first charge must rank in priority 'after the debts and encumbrances' allowable under Part VI of the Act. If it ranks in priority 'after the debts and encumbrances' allowable under Section 44, then, it is obvious that it cannot form part of those debts and allowances, after which it ranks in priority. It is not possible for us to accept the contention advanced on behalf of the accountable person that the words 'after the debts and encumbrances allowable under Part VI of this Act' qualify the words 'immovable property so passing' occurring in the earlier part of Section 74(1). There is no reason to place such an interpretation on those qualifying words, so far as immovable property passing on the death of the deceased is concerned. Section 74(1) of the Act clearly provides that, for the purpose of payment of estate duty, first charge on the immovable property so passing, shall rank in priority 'after the debts and encumbrances' allowable under Part VI of the Act. It is, therefore, obvious that estate duty can never form part of the debts and encumbrances allowable under Part VI of the Act, after which alone it ranks in priority. Section 44, which deals with debts and encumbrances to be allowed while determining the principal value of an estate which passes on the death of a deceased, is one of the Sections in Part VI of the Act, and, therefore, so far as Section 44 is concerned, the debts and encumbrances mentioned therein can never include estate duty payable on the estate which passes on the death of the deceased.

20. We may point out that this interpretation which has appealed to us had also appealed to the Division Bench of the Mysore High Court in V. Pramila v. Controller of Estate Duty : [1975]99ITR221(KAR) , where a Division Bench, consisting of Govinda Bhat C.J. and Srinivasa Iyengar J., has held that estate duty payable on the death of a deceased person is not liable to be deducted under Section 44 of the Act and, in arriving at this conclusion, the Division Bench has relied upon the interpretation of Section 74(1) of the Act. The reasoning which appealed to the learned judges of the Mysore High Court is practically on the same lines as the reasoning which has appealed to us, though there is a slight difference between our respective approaches. What is more important is that Govinda Bhat C.J., delivering the judgment of the Mysore High Court, has pointed out at page 225 :

'The Act (Estate Duty Act) is modelled after its counterpart in the United Kingdom and not infrequently do we refer to the English law and practice on most of the issues arising under the Act. Section 5(1) of the Act corresponds to Section 1 of the U. K. Finance Act, 1894 (57 & 58 Vict. c. 30). Section 44 of the Act corresponds to Section 7(1) of the U. K. Finance Act, 1894. The language of Section 44 of the Act and of Section 7(1) of the U. K. Finance Act, 1894, are identical. Although estate duty has been in force in the United Kingdom since 1894, it was never contended under the said Act that estate duty is liable tto be deducted in determining the principal value of the estate of a deceased person.'

21. A perusal of the standard text books, like Green's Death Duties, seventh edition, and Dymond's Death Duties, fourteenth edition, confirms this conclusion of the learned judges of the Division Bench of the Mysore High Court. It is, therefore, clear that, at least so far as the practice in England is concerned, in determining the principal value of an estate, which passes on the death of a deceased person, estate duty is never deducted as one of the debts and encumbrances on the estate which so passes. If English practice or procedure is to be of any guide, the question referred to us must be decided against the accountable person. However, we are not deciding the said question merely on the basis of practice and procedure in England, but on an interpretation of the provisions of the Estate Duty Act before us.

22. We do not want to decide the question before us on a mere metaphysical approach--as it is called--to the problem as to what is meant by 'moment of death of the deceased' and the moment at which the estate passes on the death of a deceased person. There may be a little difference between the two; but, for all practical purposes, it is very difficult to arrive at a conclusion with almost a metaphysical distinction, as drawn in Graham's Trustee's case [1971] SLT 46. In our opinion, therefore, in the light of the provisions of the Estate Duty Act, it must be held that, at least in the light of Section 74(1) of the Act, the debts and encumbrances which are spoken of in Section 44 are not the debts and encumbrances referred to in Section 74v.

23. The only point which now requires to be considered is whether, apart from the provisions of Section 74(1) of the Act, estate duty can be said to be an encumbrance in the sense of a burden on the estate which passes on the death of a deceased person. It is true that, under Section 53, the liability of an accountable person is to the extent of the estate received by the accountable person, either actually or constructively; but that, as pointed out by Bhagwati CJ. in Indumati Ratanlal's case : [1968]70ITR353(Guj) limits the personal liability of the accountable person under Section 53(1). A charge by way of further security to the revenue, is created on such immovable property which passes on the death of the deceased. It is undoubtedly true that estate duty is a burden on the estate which passes on the death of a deceased person. In that sense, on a broader interpretation of the word 'encumbrance ', it can be said to be an encumbrance subject to which the 'estate passes on the death of the deceased. But, in this case, we are not concerned with encumbrances in general; we are concerned only with the expressions 'debts' and 'encumbrances 'occurring in Section 44 of the Act.

24. The next question relates to the determination of the principal value which a property would fetch if sold in the open market at the time of the deceased's death, as contemplated by Section 36 of the Estate Duty Act. It is, no doubt, true that estate duty would be a burden on the estate, but it is not the type of encumbrance which is contemplated by a mortgage created under the provisions of the Transfer of Property Act, or a charge created under Section 100 of the Transfer of Property Act. It is a burden of the type which has to be discharged by the accountable person, because the principal liability for payment of estate duty is that of the accountable person. In the notional sale which is contemplated by Section 36(1) of the Act, for the purposes of ascertaining the market value of the property as at the moment of the passing of the property on the death of a deceased person, what is to be taken into consideration is, what the property would fetch if sold in the open market, as explained by the Supreme Court in Pandit Lakshmikant Jha's case : [1973]90ITR97(SC) . If the payment of estate duty is a liability cast on the accountable person and if it is not an encum- brance within the meaning of Section 44 of the Act but a first charge on the immovable property passing on the death of a deceased person as contemplated by Section 74(1), then, the market value of the property, i.e., in the sense what a willing purchaser would offer to pay for the property which passes oa the death of a deceased person, would be the total value which it would fetch, viz., including estate duty, and not excluding estate duty, as would be the case if there had been a mortgage or any other charge contemplated under the Transfer of Property Act, or Section 74(1) of the Estate Duty Act. In Shirinbanoo's case : [1976]102ITR735(Guj) , the court was concerned with a regular mortgage to which the property was subject; but, if an encumbrance in the sense of the broader meaning of that term is to be considered, a willing purchaser of the property who is not liable to pay estate duty himself, would not pay a price less estate duty payable on the estate. Under these circumstances, even the alternative meaning of the word 'encumbrance', for which Mr. Anjaneyulu for the accountable person has contended, cannot help the accountable person in this case.

25. Our conclusion, therefore, is that estate duty is neither a debt nor an encumbrance and is not an encumbrance either within the meaning of Section 74(1) of the Act, or within the broader meaning of the word 'encumbrance' referred to above. In view of this conclusion, it must follow that estate duty payable on the estate was not deductible while computing the estate duty payable on the principal value of the estate passing on the death under the Estate Duty Act. The question referred to us is, therefore, answered in the negative, i.e., in favour of the revenue and against the accountable person. The accountable person will pay costs of this reference to the Controller of Estate Duty. Advocate's fees Rs. 250.


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