P.D. Desai, J.
1. The Income-tax Appellate Tribunal has referred the following two questions of law for the opinion of this court under section 64 of the Estate Duty Act, 1953 :
'1. Whether, on the facts and in the circumstances of the case, the provisions of section 46 were attracted in respect of the sum of Rs. 50,000 being the amount thrown by the deceased in the common hotchpot of his HUF, and, therefore, the abatement of this amount from the liability claimed by the appellant is justified in law
2. Whether, on the facts and in the circumstances of the case, the reduction of the deceased's share in the profits of the firm M/s. Ratilal Lallubhai & Bros., as a result of corresponding increase in the shares of the sons in the partnership amounted to a gift of goodwill and the application of the provisions of section 10 were rightly upheld in regard to the inclusion of the value thereof by the Tribunal ?'
2. The reference arises out of proceedings in respect of assessment to estate duty of the estate of one Ratilal Lallubhai Shah (hereinafter referred to as 'the deceased') who died on March 9, 1968. It would be convenient to set out the relevant facts pertaining to each question separately while dealing with the said question.
3. Question No. 1 : The deceased was a member of a HUF consisting of himself, his wife, two sons and wives and children of the said two sons. In the beginnings of S.Y. 2021, that is to say, at the commencement of the period between November 5, 1964, and October 24, 1965, the deceased was a debtor of the HUF to the extent of Rs. 1,24,831. On December 15, 1964, the deceased threw Rs. 50,000 out of his self-acquired property in the common hotchpot of the HUF. For this purpose the deceased made a havala entry in his personal books of account. Be it noted that the HUF did not maintain any books of account and that the transaction in question was evidenced by the havala entry made by the deceased in his personal books in the aforesaid loan account. As a consequence of the aforesaid transaction, there was an increase in the extent of indebtedness of the deceased to the HUF during S.Y. 2021 and his liability to the HUF increased to Rs. 1,86,003. It appears that on the date of the death of the deceased, the liability had swelled further and he was indebted to the HUF in the total sum of Rs. 2,11,449.
4. The accountable person claimed a deduction in respect of the said debt and contended that in determining the value of the estate of the deceased for the purpose of estate duty, allowance should be made for the full amount of such debt under section 44 of the Act. The Assistant Controller of Estate Duty was of the view that the debt to the extent of Rs. 50,000 was artificially created by making a havala entry and that to that extent the provisions of s. 46 of the Act were attracted resulting in abatement of the debt to the extent of the said sum. Alternatively, he was of the opinion, that the amount of Rs. 50,000 amounted to gift by the deceased to the HUF and the provisions of s. 10 of the Act were attracted inasmuch as the gifted amount remained with the deceased and he was not entirely excluded from the possession and beneficial enjoyment of the same. The accountable person preferred an appeal against the aforesaid decision to the Appellate CED. The contention of the accountable person before the appellate authority was that after making the havala entry in his personal books regarding the throwing of Rs. 50,000 into the common hotchpot of the HUF, the deceased had made a declaration on the very day stating that he had transferred a sum of Rs. 50,000 to the HUF out of his self-acquired property and that he claimed no right, title or interest in the said property. A copy of the declaration was produced before the appellate authority. Besides, contended the accountable person, there was clear transfer of the sum of Rs. 50,000 by the deceased to the HUF as evidenced by the entries in his personal books of account and in that manner the deceased had clearly divested himself of the said amount in favour of the HUF. On these grounds it was urged by the accountable person that the transaction did not amount to gift and that the provisions of s. 10 were inapplicable. The finding of the Asst. CED to the effect that the provisions of s. 46 were attracted was also challenged before the appellate authority. The Appellate CED upheld the contention of the accountable person in so far as it related to the transaction in question being not one of gift. However, he concurred in the decision of the Asst. CED that the provisions of s. 46 of the Act were attracted and that the debt was liable to abatement to the extent of Rs. 50,000. On further appeal, the Income-tax Appellate Tribunal found that the modus operandi adopted by the deceased revealed that at a point of time when he was indebted to the HUF to the extent of Rs. 1,24,831 in S.Y. 2021, he credited a sum of Rs. 50,000 by way of havala entry on December 15, 1964, in the said loan account maintained by him in his own books of account and that, consequently, the debt of the deceased to the HUF swelled to Rs. 1,86,003 in the course of the same year. The whole transaction, in the opinion of the Tribunal, amounted to giving a sum of Rs. 50,000 to the HUF and then borrowing it back from the HUF and, under such circumstances, s. 46 was clearly applicable and it was rightly applied. The appeal of the accountable person was, therefore, dismissed. At the instance of the accountable person, however, a case was stated as to the first question for the opinion of the court.
5. The contention on behalf of the assessee before us was two-fold. First, that since the transaction or series of transact commencing from the throwing of the sum of Rs. 50,000 into the common hotchpot of the HUF and ending with the borrowing of the like amount from the HUF was or were evidenced merely by havala entries and it was not shown that the consideration, if any, given for the debt had, in fact and in reality, proceeded from the deceased, the debt was not hit by s. 46(1), and, secondly, that neither clause (a) nor clause (b) of s. 46(1) applied inasmuch as no nexus between the loan transactions and the property derived from the deceased was established. In order to appreciate the validity of this contention, it would be necessary to refer to the relevant provisions of the Act.
6. Section 5 charges the principal value of the property which passes on the death of the deceased with estate duty. The group of sections commencing from s. 6 prescribes what property shall be deemed to pass. Part VI relates to deductions to be made in determining the value of an estate for the purpose of estate duty. Section 44, which is the first section in this part, in so far as it is material for the purposes of the present case, provides that in determining the value of an estate for the purpose of estate duty, allowance shall be made for debts and incumbrances, subject to the condition that such debts were incurred or circumstances were 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. Section 46 imposes certain limitations in the matter of allowance of debts. As the question arising for determination in this case turns upon the true construction of the said section, it is necessary to set it out in full :
'46. (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 -
(a) property derived from the deceased; or
(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 years before the death, be treated as property deemed to be included in the property passing on the death and the 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 the purpose of that section.'
7. By virtue of sub-s. (3) of s. 46, the provisions of sub-s. (2) of s. 16 become relevant and they too may be set out :
'(2) In this section the following expressions have the meanings hereby assigned to them respectively, namely :- (a) 'property derived from the deceased' means any property which was the subject-matter of a disposition made by the deceased, either by himself alone or in concert or by arrangement with any other person, notwithstanding that the disposition was made for full consideration in money or money's worth paid to him for his own use or benefit, or which represented any of the subject-matter of such a disposition, whether directly or indirectly, and whether by virtue of one or more intermediate dispositions and whether any such intermediate disposition was or was not for full or partial consideration :
Provided that where the first - mentioned disposition was for full consideration in money or money's worth paid to the deceased for his own use or benefit and it is proved to the satisfaction of the Controller that the disposition was not part of associated operations which included -
(a) a disposition by the deceased, either by himself alone or in concert or by arrangement with any other person, otherwise than for full consideration in money or money's worth paid to the deceased for his own use or benefit, or
(b) a disposition by any other person operating to reduce the value of the property of the deceased; then, in consideration whether estate duty should be charged, the said first - mentioned disposition shall be left out of account as if this provision did not apply in relation to it;
(b) 'disposition' includes any trust, covenant, agreement or arrangement; and
(c) 'subject-matter' includes, in relation to any disposition, any annual or periodical payment made or payable under or by virtue of the disposition.'
8. On an analysis of this group of sections, the following position emerges. In determining the value of an estate for the purpose of estate duty, allowance has to be made, inter alia, for debts incurred and incumbrances created by the deceased. In order, however, that such allowance may be made, it must be shown, amongst other things, that such debts or incumbrances were incurred or created bona fide for full consideration in money or money's worth and that such consideration in money or money's worth was for the deceased's own use and benefit. Any allowance which is otherwise to be made for a debt incurred or incumbrance created by the deceased as aforesaid is, however, subject to abatement in two cases :- (a) where the whole or a part of the consideration for the debt or incumbrance considered of the property derived from the deceased, and (b) where the consideration did not consist of the property derived from the deceased but such consideration was paid by a person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased. It is apparent that in order that a case may fall in category (a), the property derived from the deceased must itself constitute the whole or part of the consideration for the loan. It must, therefore, be shown that such property was in existence on the date on which the debt or incumbrance was created or incurred and that it was derived from the deceased prior to or as part of the arrangement of the transaction of loan. For a case to fall within the ambit of category (b), the consideration must not consist of the property derived from the deceased but it must have been paid by a person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased. It is immaterial as to at what point of time such person became entitled to or as to when his resources were augmented by derivation of any property from the deceased. Derivation of the property of the deceased by the person providing the consideration could be at any point of time prior to the death of the deceased. The transaction of loan and payment of consideration need not, therefore, necessarily be subsequent to the creditor becoming entitled to or augmentation of his resources by the property derived from the deceased. In both the cases, however, there has got to be a clear nexus between the transaction of loan and derivation of the property of the deceased by the person providing the consideration for the loan. Furthermore, in both the cases, the abatement will be only to the extent of the value of the property derived from the deceased and any excess of consideration would be outside the purview of abatement.
9. Let us now proceed to examine the contentions advanced on behalf of the assessee in the light of the aforesaid legal position. As regards the first contention, suffice it to say that it is not right to say that the entire transaction consisted merely of havala entries and that no cash at any time passed from the deceased to the deceased to the HUF. The Tribunal has taken note of the declaration made by the deceased on the very day on which Rs. 50,000 were thrown into the common hotchpot of the HUF by making the havala entry and it has observed that, according to the said declaration, the deceased had on the same day transferred a sum of Rs. 50,000 to the HUF out of his self-acquired property. It would thus appear that there was a clear transfer of the sum of Rs. 50,000 by the deceased to the HUF and that it could not, therefore, be said that the entire transaction commencing from the throwing of the aforesaid amount into the HUF hotchpot and ending with the borrowing of loan remained in the realm of mere havala entries.
10. As regards the second submission advanced on behalf of the assessee, we are of the view that it is difficult to hold, in the facts and circumstances of the case, that there was no nexus between the loan transaction and the property derived from the deceased by the HUF. The Tribunal has found as a matter of fact that the whole transaction amounted to giving a sum of Rs. 50,000 to the HUF and then borrowing it back from the HUF. In other words, the finding is that the sum of Rs. 50,000, which was the property derived from the deceased, itself constituted the consideration for the loan advanced by the HUF to the deceased and that this was a part of the arrangement of the transaction of loan. The case would, therefore, seem to fall within the purview of s. 46(1)(a). In any case, the Tribunal's finding clearly amounts to saying that the resources of the HUF were augmented by derivation from the deceased of the property in the shape of Rs. 50,000 at some point of time prior to his death and that such disposition was made by him with view to enabling or facilitating the provision of the consideration for the debt. Even if, therefore, it is held that the property of the deceased did not itself constitute the consideration for the debt incurred by the deceased to the HUF so as to attract the applicability of clause (a) of s. 46(1), there is no manner of doubt that there is sufficient nexus established so as to bring the case within clause (b) of s. 46(1).
11. In our opinion, therefore, neither of the contentions has any merit and the Tribunal was right in making an abatement to the extent of Rs. 50,000, in the facts and circumstances of the present case.
12. In the view which we are taking, we are supported by the decision of the Madras High Court in A. Kandaswami Pillai v. CED : 73ITR564(Mad) . In that case, one of the questions related to the applicability of s. 46(1)(b). The facts were these : The deceased had gifted to each of his two sons Rs. 70,000 on July 31, 1952, by drawing the amount from the credit balance in his favour in a firm in Bombay in which the sons and four other persons were partners. The sons invested the amount gifted to them in a different firm in which they alone were partners. The deceased died on November 20, 1957. As a result of the continuous operation of his account with the Bombay firm, the deceased had incurred liability to that firm and the liability was to the tune of Rs. 1,29,068. The sons discharged the said liability of their father and claimed the sum of Rs. 1,29,068 as a debt due from their father to them. When this debt due from the deceased was sought to be deducted as an allowance under section 44(a), the estate duty authorities disallowed the claim on the ground that the debt clearly fell within the purview of s. 46(1)(b). Upon reference, the Madras High Court observed (p. 570) :
'........ it is indisputable that the sons of the deceased having received the gift of Rs. 1,40,000 and discharged the father's debt due to the firm, section 46(1)(b) would be attracted. The sons answer the description of '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'. The two sons were entitled to the sum of Rs. 1,40,000 which came from their father as gift, and that sum is certainly amongst the resources of the two sons. Either way, section 46(1)(b) would be applicable.'
13. The decision in A. Kandaswami Pillai's case : 73ITR564(Mad) was referred to and the interpretation of the provisions of s. 46(1)(b) therein made was approved in a subsequent decision of the Madras High Court in Mrs. Ratnakumari Kumbhat v. CED : 101ITR572(Mad) .
14. Both the aforesaid decisions of the Madras High Court, which have made reference to the relevant case law under the English Estate Duty Act, support the construction of s. 46(1) adopted by us.
15. The first question referred to us must, therefore, be answered in the affirmative, that is to say, in favour of the revenue and against the assessee.
16. Question No. 2. - The deceased was the proprietor of a business run in the name and style of M/s. Ratilal Lallubhai & Bros. up to S.Y. 2004. On and with effect from S.Y. 2005, the proprietary firm was converted into a partnership firm comprising of the deceased and his son, Yashvantrai. There was a further change in the constitution of the firm between S.Y. 2005 and S.Y. 2019 and yet another son of the deceased, namely, Bipinchandra was taken up as a partner. After the said change was effected, the deceased had 44% share and his two sons between themselves had 56% share in the firm. In S.Y. 2020, that is to say, in the year commencing from October 18, 1963, a further change was effected in the respective shares of the deceased and his two sons. The deceased's 44% share was reduced by 20% in favour of his two sons. The result, therefore, was that the deceased continued to have 24% share, whereas his two sons each had 38% share. In S.Y. 2021, that is to say, in the year commencing from November 5, 1964, a still further change took place as a result of which the deceased's share was reduced to 10% and the share of each of the two sons was increased to 45% each.
17. According to the accountable person, the firm had no goodwill and it did not, therefore, show the deceased's share of goodwill in the firm in the return. The Asst. CED held that the firm had a goodwill and he computed it at Rs. 1,44,540. The deceased's share of 10% in the said goodwill was determined at Rs. 14,454 and it was held to have passed on the death of the deceased and charged to estate duty under s. 5. Besides, according to the Asst. CED, as a result of the changes effected from time to time in the share of the deceased in the firm in question, there was a disposition totalling up to 34% (20% plus 14%) of the share of the deceased in the firm and as a net result thereof, there was gift of the goodwill to the extent of 34% to the sons who were also partners of the firm at the time of his death. The Asst. CED applied the provisions of s. 10 and thereunder added to the principal value of the estate the amount of Rs. 51,623 determining it to be the aggregate value of the gift of the goodwill as aforesaid. In appeal, the Appellate CED upheld the action of the Assistant Controller as regards the inclusion of 10% plus 34% of the deceased's share in the goodwill of the firm in the principal value of the estate of the deceased. On further appeal, the Tribunal upheld the decision of the lower authorities. It held that the firm in question had goodwill. It also held that the inclusion of the sum of Rs. 51,623 as value of the goodwill in respect of the share relinquished by the deceased in favour of his sons in the principal value of the estate was justified under s. 10. At the instance of the accountable person, however, a case was stated as to the second question for the opinion of this court.
18. Now, the point which arises for decision under this question is covered by the decision of the Supreme Court in CED v. R. V. Viswanathan : 105ITR653(SC) . In that case, the deceased was the sole proprietor of two business concerns. With a view to converting the business of the two concerns into a partnership with his four major sons, the deceased transferred a sum of Rs. 45,000 from his personal account to the credit of each of the four sons on September 12, 1955. A partnership deed was executed on September 15, 1955, and the sum of Rs. 45,000 transferred to each of the sons was treated as their share capital. On September 18, 1955, two minor sons of the deceased were also admitted to the benefits of the partnership and the deceased similarly transferred a sum of Rs. 45,000 from his personal account in the firm to each of his minor sons. Upon the death of the deceased on November 18, 1960, the question arose whether the sum of Rs. 2,70,000 being the aggregate of the amounts transferred by the deceased from his personal account to the credit of his six sons could be included in the estate passing on his death under s. 10 of the E.D. Act, 1953. The matter went ultimately to the Supreme Court and it was held that the transfer of Rs. 45,000 by book entries in favour of each of the four major sons and in favour of each of the minor sons, the execution of the partnership deed and the admission of the minor sons to the benefits of the partnership were all parts of one integrated transaction, the object of which was to bring about transfer of six-sevenths share of the deceased in his business in favour of his sons so that he and his sons might have each one-seventh share therein. In view of the fact that the deceased after having effected the said transfer, still retained one-seventh share in the firm, no question could possibly arise of the inclusion of the six-sevenths share or of the amount of Rs. 2,70,000 in deceased under s. 10. It was further held that if the gift of property be made without reservation or qualification or condition, or where the gift carries the fullest right known to the law of exclusive possession and enjoyment, any subsequent enjoyment by the donor of the benefit of that property in the nature of possession or otherwise would attract the levy of estate duty on the death of the donor according to s. 10 of the Act. Where, however, the gift is subject to certain rights or the subject-matter of the gift is property shorn of certain rights and the possession or enjoyment of some benefit in that property by the donor can be ascribed to those rights, i.e., rights subject to which the gift is made or rights shorn of which the property is gifted, then in such cases the subject-matter of the gift shall not be deemed to pass on the death of the deceased donor. The principle is that by retaining something which he has never given, a donor does not bring himself within the mischief of that section, nor would the provisions of the section be attracted because of some benefit accruing to the donor on account of what was retained by him. It was conceded on behalf of the revenue that this decision completely clinches the issue in favour of the assessee and that, accordingly, the second question referred to us for our opinion will have to be answered in the negative, that is to say, in favour of the assessee and against the revenue.
19. In the result, we answer the question referred to us as under :
Question No. 1 : In the affirmative.
Question No. 2 : In the negative.
20. There will be no order as to costs of this reference.