1. This is a departmental appeal arising out of the order of ACED in respect of the estate of Shri Rebala Subbarami Reddy, who died on 15-10-1976.
2. The dispute relates to the decision of the first appellate authority that debts aggregating to Rs. 1,32,437 (Rs. 82,000 and Rs. 50,437 to S/Shri T. Pradyumna Kumar Reddy and T. Prabhaskumar Reddy) due to three persons from the deceased as on the date of death do not abate under Section 46(1) of the Estate Duty Act, 1953 ('the Act') and that, similarly, debts discharged aggregating to the extent of Rs. 55,647 (Rs. 33,318 and Rs. 22,329 to Smt. T. Sudarsanamma and Smt. T.Priyamvada, respectively) cannot be roped in under Section 46(2).
3. The deceased had settled agricultural lands and borrowed or repaid as on date of death on the following four donees, all grandchildren, as under:Sl. No.Name of Debt due Date of Value Value estimated donee discharged prior settlement estimated ingift-tax to two years by assessment1 2 3 4 5 61. T. Pradyumna 1,25,417 30-3-1958 23,00082,000 Reddy 50,437 2-4-1958 23,00081,5483. T. Sudarsana- 52,441 30-3-1958 11,000 33,3184. T Priyamvada 22,389 1958 50,000 Not available The settlements were made when the settlees were minors. There was a total partition in the family on 15-6-1960 and the first two settlees (grandsons) obtained substantial properties besides money-lending capital of Rs. 2.25 lakhs even at that time. It is not disputed that the agricultural income was invested with the deceased. The deceased used to borrow from other properties of the settlees. Such borrowings were against interest. This was going on with all the four settlees for a number of years. The accounts of the last two settlees (granddaughters) were settled in February and March 1976 within two years prior to death. The Assistant Controller disallowed the debts due to grandsons under Section 46(1) and added back the repayments to granddaughters under Section 46(2). He took the view that, to the extent, the debt or repayment is from the accretions, in other words, the income from the settled property, neither Section 46(1) or (2) could have any application. In coming to this conclusion, the authorities apparently followed the decision of Madras High Court in the case of Mrs. Ratnakumari Kumbhat v. CED  101 ITR 572 and of the Andhra Pradesh High Court CED v. P. Subramanyam  127 ITR 258.
It is for this reason, the Assistant Controller himself limited the addition to the value of the settled property even where the debt was higher than the value as at the time of gift in the case of first settlee, Shri T. Pradyumna Kumar Reddy, under Section 46(1) and the settlee, Smt. T. Sudarsanamma, under Section 46(2). It is for this reason, the dispute before us is limited to the question whether the additions made by the Assistant Controller could be restored without reference to the fact that their deposits with the deceased were, to a small extent, out of income from settled property. Since the settled properties were themselves available among the resources of the settlees, the Assistant Controller was of the view that Section 46(1) and/or Section 46(2) would apply to the extent of value of settled property. But, the first appellate authority found that the moneys lent were much larger than the income from settled property. The settled properties were themselves continued in possession and ownership of the donees. The moneys advanced to the deceased were substantially out of money-lending and/or other funds and had no 'nexus' with the property derived from the deceased in the settlements. It is for this reason that he deleted these additions. The learned departmental representative relied upon the orders of the Assistant Controller, while the learned Counsel for the assessee relied upon the order of the Appellate Controller.
3a. We have carefully considered the facts as well as arguments. The facts are not disputed. Certain agricultural lands had been gifted. It is quite possible that there was some nexus between the loans given by the donees (either outstanding or repaid within two years before death) and the income from these lands. But, the Assistant Controller himself had not taken the income part into consideration, apparently following the decision of the Andhra Pradesh High Court in P. Subramanyam's case (supra) which agreed with the decision of the Madras High Court in Mrs.
Ratnakwnari Kumbhat's case (supra). These two decisions have laid down that what abates under Section 46(1) out of deductions claimed, is only the consideration which consisted of the property derived from the deceased and not any accretion by way of earnings thereon. We have, therefore, to confine ourselves to the question whether the fact that the donees had in their possession the agricultural lands gifted to them, would attract Section 46 either in respect of outstanding loans (Sub-section 1) or amounts repaid within two years (Sub-section 2).
46. Further limitations.--(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 consideration given therefor which consisted of-- (b) consideration not being such property as aforesaid, but given by any person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased: Provided that if, where the whole or a part of the consideration given consisted of such consideration as is mentioned in Clause (b) of this sub-section, it is proved to the satisfaction of the Controller that the value of the consideration given, or of that part thereof, as the case may be, exceeded that which could have been rendered available by application of all the property derived from the deceased, other than such (if any) of that property as is included in the consideration given or as to which the like facts are proved in relation to the giving of the consideration as are mentioned in the proviso to Sub-section (1) of Section 16 in relation to the purchase or provision of an annuity or other interest, no abatement shall be made in respect of the excess.
(2) Money or money's worth paid or applied by the deceased in or towards satisfaction or discharge of a debt or incumbrance in the case of which Sub-section (1) would have had effect on his death if the debt or incumbrance had not been satisfied or discharged, or in reduction of a debt or incumbrance in the case of which that sub-section has effect on his death shall, unless so paid or applied two years before the death, be treated as property deemed to be included in the property passing on the death and estate duty shall, notwithstanding anything in Section 26 be payable in respect thereof accordingly.
(3) The provisions of Sub-section (2) of Section 16 shall have effect for the purpose of this section as they have effect for purpose of that section.
The Madras High Court in the case of Ismail Mulla Gulamally v. CED  143 ITR 669, no doubt, pointed out that there need be no contemporaneous intention to get the loan at the time of bequest so as to attract Section 46. However, in the case of CED v. Smt. S.T.B. Ameen Khaleeli  143 ITR 679 (Mad.), it also required that there should be some nexus between the asset gifted and the loan/repayment of loan so as to attract Section 46. It repeated the earlier view expressed by the same High Court in A. Kandaswami Pillai v. CED  73 ITR 564 as under: ...'debt' to come within the ambit of Section 46(1)(a) should be a debt which satisfies Section 44(a). That means it must be a debt bona fide, for full consideration; and such consideration; in money or money's worth should be for the deceased's own use and benefit.
If for such a debt consideration constitutes property derived from the deceased, to the extent of such consideration, allowance of the debt will not be made. In other words, there should be a nexus between a debt which falls under Section 44(a) and the consideration, which must consist of property derived from the deceased....
The Madras High Court proceeded to observe in the case of Smt. S. T.B.Ameen Khaleeli (supra): The difference between the provisions of Section 46(1)(a) and Section 46(1)(b) may be broadly stated as the difference between a direct nexus and a nexus which is somewhat less direct. In cases to which Clause (a) applies, the debt is to be abated because the consideration for the debt incurred by the deceased happens to be directly and undisguisedly property derived from the deceased. In the cases provided for by Section 46(1)(b), however, the consideration is not directly any property derived by the creditors from the deceased. The debt to be abated under this clause is one which a person who was at some time entitled to, or amongst whose resources there was at some time included, any property derived from the deceased. In the present case, the contention of Mr. Jayaraman, learned Counsel for the Controller of Estate Duty, was that the person from whom the deceased obtained the loan, namely, his son, Afsur, was the person to whom the deceased had earlier given the gift of the vacant land in 1963. Learned Counsel was quite aware of the considerable time lag between the gift in 1963 and the loans taken in 1969 and 1970. He also granted that there was no direct relation between the gifted property on the one hand and the debt on the other, each of which could be regarded as providing a mutual consideration for the other. Yet since the gift of the vacant site by the deceased to his son can be regarded as property derived from the deceased and since that property was held by the son at least from the date of the gift, namely, August 29, 1963, up to the date of sale by him after raising a superstructure over it, namely, in January, 1966, learned Counsel for the department urged that this property derived from the deceased must be held as part of the resources of the person from whom the debt was incurred by the deceased, rendering it necessary to abate the debt to that extent under Section 46(1)(b) of the Act.
...We have earlier referred to the grounds on which the Tribunal had come to the conclusion that there was no nexus whatever between the disposition of the property by the deceased in favour of his son in 1963 and the borrowing effected by the deceased from his son after an interval of six or seven years. The house site was certainly not one of the resources from which the deceased's son could have advanced the loan to his father. It was not one of the properties available to him which the son could look to for the recoupment of the loan. There was no other kind of relation which could be established between the outstanding debt of Rs. 30,000 and the gift of the house site 7 years earlier.
In coming to the conclusion, the High Court referred to the English decision in McDougal's Trustees v. IRC  143 ITR 698 (Appendix) dealing with analogous provisions in the Finance Act, 1984, and the Finance Act, 1939 (UK). Great stress had been laid by the learned departmental representative on the words 'at any time entitled to' and 'at any time included' in Section 46(1)(b). In McDougal's Trustees' case (supra) it was, with reference to these words, pointed out as under: This is how I think a just construction should run. For over forty years all charge of estate duty was only legitimate on net assets, i.e., against every solid asset, owned in whole or in part by the deceased, there should be set the debts, and it is still the law, unless, in relation to some particular debt, the words used in Section 31 be found fatally to strike. Moreover, to allow to the Crown using the conception of a property, which by its mere existence 'at any time' has this remarkable effect, the Crown must point the finger to the very property which either alone, or in cumulo with other like properties, is or could be made 'available' and be 'applied'. It is a wholly ineffective form of pleading just to echo the general terms of the somewhat obscure sub-section, and give the party and the Court no aid as to how each phrase applies to the facts of this composite transaction....
The Madras High Court, while referring to this case, also pointed out to Dymond's Death Duties for this view. We find that the same view was taken by the Madras High Court in an earlier decision in CED v. N.Balaji  116 ITR 534, where there was no nexus to show between the fact that the donees had brought the gifted amounts to the firm in which the donees were partners and the fact that the deceased was indebted to the same firm, there could be no abatement under Section 46. Though this decision turned partly the fact that it was not the firm which was the donee, the 'nexus' test had also its application in this decision. On the facts found by the authorities and not in dispute before us, no such nexus between the assets gifted and the loans (either advanced or repaid). Hence, the order of the first appellate authority has to be confirmed. In the view we have taken, it is not necessary to consider the alternative arguments relating to the value of the land at the time of disposition into consideration.