1. This is a reference under section 64(1) of the Estate Duty Act, 1953 (hereinafter referred to as ' the Act'), referring for our answer the following questions of law :
' (1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 27(1) of the Estate Duty Act, 'married daughters ' of the deceased are covered by the definition of ' relative' in Section 27(7)(i)(b) of the Act as being included in the term ' children ' used in that section ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the admission of the two married daughters to a share of profits of the business of the deceased under the style of M/s. Ramchandra Badri Prasad amounted to a ' gift' within the meaning of Section 27(1) of the Act ?
(3) Whether the share of profit earned by the daughters subsequent to November 17, 1963 (date of their admission as partners in the said business), constituted ' property ' within the meaning of Section 9 of the Act and deemed to pass on the death of the deceased ?
(4) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,01,716 (subject to modification in the light of the Tribunal's order) comprising Rs. 20,000 gifted to the married daughters by the deceased on November 15, 1963, and Rs. 81,716 profits accrued to them during the previous year, was rightly included in the estate of the deceased under sections 9 and 27 of the Estate Duty Act '
2. The reference arises in respect of the estate of one Badri Prasad Gour who died on 7th November, 1964. The deceased was carrying on the business of manufacture and sale of limestone under the name and style of M/s. Ramchandra Badri Prasad. The deceased had taken a quarry lease for a period of five years from 9th November, 1959. The business was carried on as a proprietary concern till 17th November, 1963, On 15th November, 1963, the deceased transferred sums of Rs. 10,000 each to his two daughters, namely, Smt. Shantibai and Smt. Durgabai, by transfer entries and crediting their personal accounts. A partnership deed was executed on 17th November, 1963, purporting to convert the proprietary business into a partnership concern. Under Clause 2 of the partnership deed, Badri Prasad was allotted a share of 50% in profits and losses. Smt. Shanti-bai and Smt. Durgabai were each allotted a share of 25% in profits and losses. Clause 3 of the deed provided that the daughters will contribute to the capital as per their volition and that the capital of Badri Prasad shall be the one existing in the books of account on the date of execution of the deed. Clause 4 of the deed provided that all the assets and liabilities of the business of M/s. Ramchandra Badri Prasad Gour as on 15th November, 1963, shall become the assets and liabilities of the partnership. Clause 5 of the deed provided that in terms of Section 14 of the Indian Partnership Act, the property of the firm including all property and rights and interest in property originally brought into the stock of the firm under the instrument of partnership or acquired by purchase or otherwise by or for the firm or for the purpose and in the course of the business of the firm including goodwill thereof, shall vest in Badri Prasad. Clause 6 of the deed provided that the daughters shall be entitled to withdraw from the firm only to the extent of the amounts standing to their credit. Clause 10 provided that the borrowing powers for carrying on the business shall vest only in Badri Prasad. Clause 11 provided that Badri Prasad alone will be competent to withdraw monies from banks under his signature. Clause 16 provided that in case of dissolution of the firm the assets and liabilities of the firm shall vest in Badri Prasad and the daughters will be entitled to claim only amounts standing to their credit in the books of the firm ; and in case any amounts are due from them, they shall have to pay the same to the firm. On the date of death of Badri Prasad, the account of the firm showed a credit balance of Rs. 50,408 in favour of Shantibai and Rs. 51,308 in favour of Durgabai. These amounts were worked out after crediting Rs. 37,334 to each of them as share of profits due to them.
3. The Assistant Controller held that the two daughters were neither entitled to the assets of the firm nor had any power in the management of the firm's business ; and that the admission of the two daughters into the partnership concern amounted to a disposition in favour of relatives within the meaning of Section 27 of the Act. The Assistant Controller, therefore, held that the entire amount shown to the credit of the daughters formed part of the estate of the deceased under section 9 of the Act. The sum of Rs. 1,01,716 was thus included in the estate of the deceased. The Appellate Controller was of opinion that the value of gift for purposes of Section 27 should have been taken to be one and a half times the average annual profits. He accordingly upheld the inclusion of Rs. 1,01,761 in the principal value of the estate. In appeal before the Appellate Tribunal, it was contended that only Rs. 10,000 each given to the daughters should have been included in the value of the estate and that the profits credited to the daughters could not have been included. It was submitted that the profits arose out of the contract of partnership and did not form part of the estate of the deceased. These submissions were negatived by the Tribunal which held that, on the facts and in the circumstances of the case, the admission of the two daughters to share the profits of the business (the deceased retaining the sole ownership of the assets of the business) amounted to gift within the meaning of Section 27(1). The Tribunal was also of the opinion that the right to share in the profits of the business was an asset which should have been valued in terms of the average annual profits. However, the Tribunal, considering the fact that it was the first year of the partnership business and death occurred on 7th November, 1964, before the close of the year, held that the share of profit of the daughters up to the date of death could alone be included in the estate of the deceased. In other words, the Tribunal directed that the amount to be included in the estate of the deceased would be the two sums of Rs. 10,000 each gifted to the two daughters together with the 50% share of profit of the firm which accrued due to them up to 7th November, 1964. At the instance of the accountable person, the questions of law set out in the beginning have been referred by the Tribunal for our answer.
4. Section 2(15) of the Act defines ' property ' as including ' any interest in property, movable or immovable, the proceeds of sale thereof and any money or investments for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method '. There are two Explanations to this inclusive definition of ' property ' in Section 2(15) which enlarge its meaning. The first Explanation enacts that :
' The creation by a person or with his consent of a debt or other right enforceable against him personally or against property which he was or might become competent to dispose of, or to charge or burden for his own benefit, shall be deemed to have been a disposition made by that person, and in relation to such a disposition the expression 'property' shall include the debt or right created. '
5. The second Explanation provides that:
' The extinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression ' property ' shall include the benefit conferred by the extinguishment of the debt or right. '
6. The estate duty is levied, as provided in Section 5(1), upon the principal value ascertained of all property which passes on the death of a person. Under Section 9(1) of the Act, as it stood at the relevant time, property taken under a disposition made by the deceased purporting to operate as an immmediate gift, inter vivos, whether by way of transfer, delivery, declaration of trust, settlement upon persons in succession, or otherwise which shall not have been bona fide made two years or more before the death of the deceased shall be deemed to pass on the death. Section 10 provides that 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. It would be seen that a gift even though real and bona fide if made within two years before the donor's death is for the purpose of the duty regarded as not made. If a gift is not bona fide made, the time factor is not material. Property covered by such a gift passes on the death of the donor. Further, if a gift is made bona fide beyond the period mentioned in Section 9, property covered by it will still pass on the donor's death unless the possession and enjoyment of the subject of gift was not immediately assumed by the donee and retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise. These are the consequences flowing from Sections 9 and 10. Another section to be taken notice of is Section 27(1) which provides : Any disposition made by the deceased in favour of a relative of his shall be treated for the purposes of this Act as a gift unless-
'(a) the disposition was made on the part of the deceased for full consideration in money or money's worth paid to him for his own use or benefit; or
(b) the deceased was concerned in a fiduciary capacity imposed on him otherwise than by a disposition made by him and in such a capacity only; and references to a gift in this Act shall be construed accordingly :....... '
7. Section 27(7)(i) defines ' relative ' to mean (a) the wife or husband of the deceased, (b) the father, mother, children, uncles and aunts of the deceased, and (c) any issue of any person falling within either of the preceding Sub-clauses and the other party to a marriage with any such person or issue. Section 27(7)(ii) further provides that reference to ' children ' and ' issue ' include reference to illegitimate children and to adopted children. The effect of Section 27 is that any disposition in favour of a relative is treated as a gift unless the disposition was made for full consideration paid to the deceased for his own use or benefit or was made by the deceased as a trustee or in some other fiduciary capacity.
8. We have already set out the facts stated in the statement of the case. It is clear that the transfer of Rs. 10,000 each to his two daughters by the deceased on 15th November, 1963, was nothing but a disposition in the nature of a gift. If there be any doubt as to the nature ofthe disposition, it is removed by Section 27(1); the disposition being in favour of daughters who are ' relatives ' has to be deemed to be gift. The disposition was made within one year before the date of the death of the deceased and attracts Section 9 of the Act. Section 9 of the Act was interpreted by the Supreme Court in CED v. Kantilal Trikamlal : 105ITR92(SC) . As held in that case, if the disposition is made within the period mentioned in the section, there is no question of mala fides or bona fides and all such transactions are caught within the coils of Section 5 read with Sections 9 and 27. If the disposition is made by the deceased beyond the period mentioned in the section, the property covered thereby shall not pass on the death unless it shall not have been made bona fide, that is to say, even if the transaction were beyond the period mentioned in the section, if it were entered into in bad faith, estate duty will attach to that property, (See p. 108).
9. The next question is whether the creation of partnership in favour of the daughters by the partnership deed, dated 17th November, 1963, was also hit by Section 9 read with Section 27 of the Act. The argument of the learned counsel for the accountable person is that the creation of a partnership is not a ' disposition ' and that the benefits arising to the daughters from the partnership agreement could not be included as property passing on the death of the deceased. We have already referred to the definition of ' property ' contained in Section 2(15) and the two Explanations which enlarge the meaning of the word 'disposition'. The meaning of the word 'disposition' under the estate duty law was considered by the Supreme Court in Kantilal's case : 105ITR92(SC) while holding that if the deceased took a lesser share than his entitlement in a partition, there was disposition in favour of relatives to the extent of the difference between the value of the deceased's share and what he actually received. The Supreme Court observed that, according to the normal meaning, ' disposition ' embraces ' the parting with, alienation of, or giving up property--a destruction of property'. It was further observed that the second Explanation to Section 2(15) gives an extended meaning to the word ' disposition ' and ' is made up of simple jural facts that modify and extinguish jural relations and create in their place new rights whereby one gives or gives up and another gains'. Kantilal's case : 105ITR92(SC) also explains that the word 'right' as used in the second Explanation is a word of the widest import. A review of the facts stated would show that the business carried on by the deceased in the name of M/s. Ramchandra Badri Prasad was the sole proprietary concern of the deceased. The deceased had the right to get the entire profits of this business. By the deed of partnership, dated 17th November, 1963, the two daughters were given 50% share of profits in this business. As provided in Clause 5, all the property of the firm, including the goodwill, vested in the deceased alone and not in the daughters. The daughters were not obliged to invest any capital in the business of the firm, for, according to Clause 3, the daughters were to contribute to the capital as per their volition. Thus, the 50% share in profits assigned to the daughters did not depend upon any contribution of capital made by them. In these circumstances, the partnership deed executed by the deceased amounted to ' disposition ' in favour of the daughters of 50% share in the profits of the business till then carried on by him as a proprietary concern. The right of the deceased to enjoy the entire profits of the business was extinguished to the extent of 50% and the daughters got the right to enjoy the same. The deceased gave up 50% share of profits in his exclusive business and the same was gained by the daughters. Even according to the normal meaning, without the aid of the Explanations, this was disposition. However, there can be no doubt that this was disposition within the second Explanation to Section 2(15). It is pertinent to note that, under the partnership deed, the daughters were not even bound to invest the amount of Rs. 10,000 which they each got by way of gift on 15th November, 1963, from the deceased. The transfer of 50% share in profits to them by the partnership deed was not supported by any consideration as they were not obliged to invest any sum towards the capital of the firm, not even Rs. 10,000 which they each got by way of gifton 15th November, 1963. We are clearly of opinion that the disposition of 50% share in profits to the daughters by the deceased in the business, which was converted from one of proprietary business into a partnership business, was nothing but a gift in the normal sense in favour of the daughters of 50% share in profits. Alternatively, as the daughters were relatives, Section 27(1) applied, and the disposition is to be deemed to be a gift for the purposes of the Estate Duty Act. Section 9 of the Act is immediately attracted as the disposition was made within the period of one year before the death.
10. In the case of CED v. R. V, Viswanathan : 105ITR653(SC) , the deceased transferred six-sevenths share in the business solely owned by him and retained only one-seventh share. The transfer was held to be a gift, but it did not attract estate duty as it was made beyond the period mentioned in Section 9 and as Section 10 was held to be inapplicable because the possession and enjoyment of the property gifted was assumed by the donee and retained to the exclusion of the donor or of any benefit to him. Viswanathan's case : 105ITR653(SC) , however, is relevant to support our view that the transfer of share to the daughters by the deceased in the instant case amounted to gift.
11. The argument of the learned counsel for the accountable person that the profits earned by the daughters in the business were earned by virtue of the partnership agreement and could not constitute property within the meaning of Section 9 of the Act cannot be accepted. The transfer of share by the deceased in favour of the daughters to constitute the partnership was itself a gift within the meaning of Section 9. All benefits arising from such a gift must constitute property covered by Section 9. According to the Tribunal's view, the profits earned by the daughters up to the date of death of the deceased would constitute proper valuation of the share transferred to the daughters in the business by the deceased. The valuation so made is quite lenient to the accountable person. It was also half-heartedly contended that ' married daughters ' were not ' children ' within the definition of ' relatives ' contained in Section 27(7)(i)(b), There is absolutely no merit in this contention. The word ' children ' has been used in a comprehensive sense as is clear from Clause (ii) of Section 27(7) which specifically says that the word ' children ' shall include illegitimate children and also adopted children. Unmarried and married daughters will both fall within the description of , ' children ' and will be covered by the definition of ' relative ' as given in Section 27(7)(i) of the Act.
12. The learned counsel for the accountable person in support of his submission relied upon the following cases: CIT v. Jwalaprasad Agarwala : 66ITR154(SC) , CIT v. Prem Bhai Parekh : 77ITR27(SC) and CGT v. Karnaji Lumbaji : 74ITR343(Guj) . In Jwalaprasad's case : 66ITR154(SC) a sum of Rs. 74,721 was gifted by the assessee to his minor son who was admitted to the benefits of a partnership of which the assessee was a partner. The partnership deed did not make it a condition precedent that the partner should contribute any capital. There was no evidence on record that the minor son had been admitted to the benefits of the partnership only because of the introduction of the capital of Rs. 74,721 gifted to him by the assessee. On these facts it was held that the share income of the minor son was not liable to be included in the total income of the assessee under section 16(3)(a)(iv) of the Indian I.T. Act, 1922, as it could not be held that 'the share income arose from assets transferred to the minor ' by the assessee within the meaning of the said provision. The case of CIT v. Prem Bhai Parekh : 77ITR27(SC) was also on Section 16(3)(a)(iv) of the Indian I.T. Act, 1922. The facts of this case were similar to those in Jwalaprasad Agarwala's case : 66ITR154(SC) and the same view of law was taken. Both these cases which are on the construction of Section 16(3)(a)(iv) of the Indian I.T. Act, 1922, have no relevance here and cannot be used for construing the provisions of Sections 2(15), 9 and 27 of the E.D. Act and for deciding the question whether an assignment of a share in the profits of a business by a partnership deed in favour of a relative, which was till then solely owned by the deceased, could amount to 'disposition' attracting the aforesaid provisions. As regards the case of CGT v. Karnaji Lumbaji : 74ITR343(Guj) , it was held in that case that when on the reconstitution of a firm a partner's share was reduced and was given to his sons, the transaction did not amount to a ' gift ' within the G.T. Act, 1958. The case being under the G.T. Act, is not of any assistance to us. We may, however, point out that the Madras High Court took a contrary view in CGT v. V.A.M. Ayya Nadar : 73ITR761(Mad) . We have earlier referred to Kantilal's case : 105ITR92(SC) in which the Supreme Court pointed out that the expression 'transfer of property' as denned in Section 2(xxiv) of the G.T. Act is much narrower than the language used in Section 2(15), Expln. 2, of the E.D. Act. The Supreme Court, therefore, in KantilaVs case : 105ITR92(SC) , while dealing with the question of estate duty, did not accept its decision in CGT v. N. S. Getti Chettiar : 82ITR599(SC) , a case under the G.T. Act, that a mere partition with unequal allotment not being a transfer cannot be covered by Section 2(xxiv) of the said Act. We have earlier stated that in Kaniilal's case : 105ITR92(SC) it was held that when the deceased took lesser share than that to which he was entitled, there was a disposition in favour of relatives to the extent of the difference between the value of the deceased's share and what was actually received by him and that this disposition attracted estate duty under section 9 read with Section 27. Kantilal's case : 105ITR92(SC) thus establishes that cases under the G.T. Act are not of assistance while deciding a question of disposition or gift under the E.D. Act. The learned counsel for the accountable person also referred to some cases under section 10 of the E.D. Act. We do not think it useful to refer to these cases because we have already referred to R. V. Viswanathan's case : 105ITR653(SC) , which is the latest case of the Supreme Court to our knowledge on the applicability of Section 10. This case refers to the earlier cases and hence it is unnecessary to burden the judgment by referring to the earlier cases.
13. For the reasons given above, all the questions referred to us are answered in the affirmative and in favour of the revenue. There shall be no order as to costs.