Sambasiva Rao, C.J.
1. In this reference case, the problem relates to the impact of Section 46 of the E.D. Act on the interest payable by the deceased to the donees to whom he had earlier made cash, gifts. The question framed at the instance of the revenue by the Income-tax Appellate Tribunal reads thus :
' Whether, on the facts and in the circumstances of the case, the interest accrued on principal debt is allowable as deduction from the estate of the deceased '
2. We will now notice the material facts : The estate belonged to one Pasumarthi Subrahmanyam, who died on April 24, 1973. His wife, as the accountable person, rendered an account of the estate disclosing net principal value of Rs. 1,84,428. During the course of the assessment proceedings, the accountable person claimed deduction of a sum of Rs. 82,034.55, which represents the debts of the deceased. During the lifetime of the deceased, the deceased made certain cash gifts to his foster daughter, her husband, and his own wife. He gave cash gifts to his foster daughter of Rs. 5,000 each on April 1, 1954, and May 30, 1957. The interest on these amounts up to the date of the death of the deceased came to Rs. 14,355.89. With interest, the amount due to the foster daughter aggregated to Rs. 24,355.89. Likewise, the husband of the foster daughter was also given cash gifts by the deceased of Rs. 10,000, Rs. 5,000, Rs. 5,000 and Rs. 5,000 on four occasions. The interest on these amounts by the date of his death amounted to Rs. 12,863.70. With interest, the aggregate amount payable to the son-in-law was Rs. 37,863.70. To his wife, the deceased gifted a sum of Rs. 10,283.16 by making her the beneficiary under his life insurance polices. The interest on this amount by the date of the death of the deceased came to Rs. 9,432.27. The total amount due to the wife aggregated to 19,834.96 as on the date of the death of the deceased. All these amounts had aggregated to Rs. 82,034.55, which amount included not only the principal amounts, but also the interest accrued. These were claimed as deduction by the accountable person.
3. The Asst. Controller and the Appellate Controller of Estate Duty disallowed the totality of these debts claimed by the accountable person. On further appeal, the Tribunal held that the principle of Section 46 of the Act was applicable to the principal amount of the debts. However, it held that the interest accrued on the amounts totalling to Rs. 36,631.86 did not comewithin the mischief of Section 46. On the basis of these conclusions, the Tribunal allowed deduction to the extent of Rs. 36,631.86 and modified the decision of the authorities accordingly. The revenue succeeded in persuading the Tribunal to refer the above question for our opinion.
4. Before we take up for consideration the legal aspect of the case, we will have to note that there is no dispute at all about the bona fides of the transactions between the deceased on the one side and his wife, the foster daughter and foster daughter's husband on the other. The truth and genuineness of the gifts made by the deceased in favour of these three individuals are not doubted. It is also not doubted that the deceased utilised these amounts for his own purpose, as a consequence of which interest accrued on these amounts. The accounts disclosed that these three individuals were being credited with interest that accrued on these amounts periodically. In the light of these facts as found by the Tribunal, we will now consider the claim of the accountable person for deduction. Even at the outset, we must point out that the accountable person has not sought any reference in regard to the amounts of principal, which the Tribunal also held as coming within the ambit of Section 46(1). Consequently, the subject-matter of the reference before us, which calls for our opinion, is about the deduction of the amounts of interest which accrued on the principal amounts.
5. The two material provisions in the E.D. Act are Sections 44 and 46. They occur in Part VI of the Act and under the title ' Deductions '. Section 44 deals with reasonable funeral expenses, and, with some exceptions, debts and incumbrances to be allowed in determining the chargeable value of an estate. In so far as the present case is concerned, Clause (a) of Section 44 alone is material. It reads thus :
' 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. '
6. It is patent and Sri P. Rama Rao, learned standing counsel for the revenue, says that but for Section 46, which we will presently notice, these debts come within the later limb of Clause (a) because they were incurred bona fide for full consideration in money or money's worth wholly for the deceased's own use and benefit. Therefore, if we are to go on Section 44 alone, these debts will have to be taken out of the estate of the deceased to arrive at the charge-able value of his estate. However, Sections 45 and 46 impose certain limitations on debts deductible. Section 45 is not relevant for the purpose of consideration of the question referred to us ; only Section 46 is material. Its heading is ' Further limitations '. Sub-section (1)(a) is as follows :
'(1) Any allowance which, but for this provision, would be made under Section 44 for a debt incurred by the deceased as mentioned in Clause (a) of that section, or for an incumbrance created by a disposition made by the deceased as therein mentioned, shall be subject to abatement to an extent proportionate to the value of any of the considerations given therefor which consisted of--
(a) property derived from the deceased.'
7. The rest of Sub-section (a) is not necessary for the consideration of this question. A plain reading of this part of Section 46 reveals that there is a limitation put on the deduction permissible under Section 44 in respect of debts incurred by the deceased. A debt, if it is a debt created by a disposition made by the deceased, will be subject to abatement to an extent proportionate to the value of any of the considerations given therefor which consisted of property derived from the deceased. So the limitation imposed by Section 46 on deductible debts is that the debts incurred by the deceased by way of disposition made by him, to an extent proportionate to the value of the consideration given therefor in respect of the property derived from him, is subject to abatement and to that extent the amount, though forming part of a debt, is not permitted to be deducted from the estate for the purposes of determining the chargeable value of the estate. Thus, Section 46 creates a fiction by laying down that the liability of the deceased person which has been created by his own disposition from out of his own property is not allowed to be deducted from the estate. But this abatement of fiction, as created by Section 46 is in stated terms and is specifically limited to an extent proportionate to the value of any of the considerations given therefor which consisted of property derived from the deceased. If the debt consists of more than the extent proportionate to such value of the consideration given from the property of the deceased, then it does not abate and is not subject to the fictional abatement. This is clearly brought out by Section 46 itself. Therefore, only the consideration which consisted of property derived from the deceased abates and nothing else. If that has gained interest or dividend or profits, they cannot be brought within the scope of Sub-section (1) of Section 46, for the obvious reason that they did not represent the value of any of the considerations given by the deceased from out of his property. Therefore, Section 46 limits the fictional abatement only to the actual amount which has been the subject-matter of the disposition from the property of the deceased and not the income derived therefrom.
8. In the light of the above understanding of Section 46, it becomes clear that only the actual amounts of cash gifts which emanated from the property of the deceased are subject to abatement by virtue of Section 46. The interest accrued thereon does not abate, because it is not proportionate to the value of the consideration given by the deceased from his property. As we have already pointed out, the gifts and their genuineness are not in doubt. They have been gaining interest because the deceased himself had been utilising them. Had he contracted debts to the same extent from outsiders, he would have been equally liable to pay interest on those amounts to others and such interest would certainly not abate under Section 46 and would clearly come within Section 44(a). Likewise, if the donees advanced these amounts to others, they would have gained interest and the amounts of interest thus gained could not have been subject to abatement under Section 46. Therefore, the interest does not abate under Section 46.
9. At the same time, Sri Rama Rao, revenue's learned standing counsel, refers us to Sub-section (3) of Section 46 which lays down that the provisions of Sub-section (2) of Section 16 shall have effect for the purpose of this section as they have effect for the purpose of that section. But Section 16 is concerned only with annuities or other interest purchased or provided out of property derived from the deceased. By no stretch of imagination could the interest accrued and the principal amounts be called annuities or other interests provided out of the property of the deceased. Particular emphasis is laid by Sri Rama Rao on the definition contained in Section 16(2)(c) of the expression ' subject-matter '. It is an inclusive definition and says that in relation to any dispute, any annual or periodical payment made or payable under or by virtue of the disposition is also a ' subject-matter ' within the meaning of Section 16. It is argued that by virtue of Sub-section (3) of Section 46, the same meaning has to be adopted for the purpose of Section 46 as well. The periodical interest which accrued to the donees are not annual or periodical payments made or payable by virtue of the dispositions, so that the inclusive definition of ' subject-matter ' could be applied to the interest accrued on the gifted amounts. ' Interest' accrued in favour of the donees not by virtue of any disposition made by the deceased but by virtue of his borrowing those amounts from the donees and utilising them for his benefit. Therefore, Section 16 and the definition of the ' subject-matter ' contained in Section 16(2)(c) are of no use to the revenue's contention. The answer to the question referred to us, therefore, is that the interest accrued on the principal amounts of the debts is allowable as deduction from the estate of the deceased.
10. In this view, we are supported by the decision of the Madras High Court in Mrs. Ratnakumari Kumbhat v. CED : 101ITR572(Mad) .
11. For the foregoing reasons, the question is answered against the revenue and in favour of the accountable person. Having regard to the circumstances of the case, there will be no order as to costs.