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Controller of Estate Duty Vs. S.V.M. Mohamed JalaluddIn (Accountable Person of S.V.M. Mohamed Jamaluddin) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 1277 of 1977 (Reference No. 903 of 1977)
Judge
Reported in[1985]153ITR470(Mad)
ActsEstate Duty Act, 1953 - Sections 17 and 17(2); Estate Duty (Controlled Companies) Rules, 1953 - Rule 11(3) and 11(9)
AppellantController of Estate Duty
RespondentS.V.M. Mohamed JalaluddIn (Accountable Person of S.V.M. Mohamed Jamaluddin)
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateT.V. Ramanathan, Adv.
Cases ReferredC) and Addanki Narayanappa v. Bhaskara Krishnappa
Excerpt:
.....(3) and 11 (9) of estate duty (controlled companies) rules, 1953 - rule 11 (9) suggests that both share benefit and non-share benefit of deceased alone should be taken into account and not benefit received by other directors - object of rule 11 (9) is to give relief in matter of liability and envisages that if share benefit as well as non-share benefit so inter-related then any increase in one kind of benefit might result in decrease in another kind of benefit - both share benefit and non-share benefit in rule 11 (9) can only be in relation to benefit received by deceased and not benefit got by others - held, excess remuneration received by deceased alone should be taken into account for purpose of rule 11 (9) and not excess remuneration received by all directors. - - 17 as well as..........remuneration which came to rs. 20,160. the benefit was thereafter worked out as follows : share benefit = 20160 x 795671 = 1,82,508--------------87,894non-share benefit = 2040 x 795671 = 18,467-------------87,894 6. since the value of 12,000 shares has been fixed at rs. 1,27,200 the benefit slice under rule 11(3) was worked out at rs. 55,308 (i.e., 1,82,508 minus 1,27,200). for the purpose of s. 17(2), the total amount of share benefit and non-share benefit includible was arrived at rs. 73,775 made up of rs. 55,308 plus rs. 18,467. 7. the accountable person appeal to the appellate controller who held against the appellant both on the application of s. 17 as well as the calculation of the sum includible under s. 17. the appellate controller, after holding that s. 17 is.....
Judgment:

Ramanujam, J.

1. This following question of law has been referred to this court under s. 64(1) of the E.D. Act, 1953 (hereinafter referred to as the Act), at the instance of the Controller of Estate Duty, Madras :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amount includible in the estate of the deceased under the provisions of section 17(2) of the Estate Duty Act was Rs. 12,415 only in terms of rule 11(9) of the Estate Duty (Controller Companies) Rules, 1953 ?'

2. One S. V. M. Mohammed Jamaluddin who died on August 9, 1963, owned 10,000 shares of Rs. 10 each in M/s. S. V. M. Mohammed Jamaluddin and Brothers (Ceylon) Limited. The deceased had also gifted 2,000 shares to his son within the statutory period of two years before his death. Therefore, the value of 12,000 shares had to be considered for purposes of estate duty.

3. The Assistant Controller proceeding on the basis that s. 17 of the Act is applicable, determined the value of one share at Rs. 10.60. Accordingly, the value of 12,000 shares was taken at Rs. 1,27,200. He found that the said company in which the deceased had shares is a controlled company within Explanation (a) to s. 17(4)(iii). The total income of the company as per books for the three years prior to the date of death had been worked out as under :

Rs.31-3-1961 15,59231-3-1962 15,24231-3-1963 1,260--------32,094--------

4. The Assistant Controller also found that the deceased was in receipt of salary and bonus along with the other directors, that for purposes of r. 11(8) of the Controlled Companies Rules, a sum of Rs. 9,000 per year per director would be reasonable as salary and bonus and that the reasonable remuneration for the four directors worked out to 4 X 9,000 X 3 = 1,08,000 as against a total claim of Rs. 1,63,800 under the head 'Salary and bonus'. Thus, a sum of Rs. 55,800 was held to be excessive remuneration. The details of the excessive remuneration in respect of each of the four directors were found as under :

Rs.1. Shri S. V. M. Mohammed Jamaluddin 13,200(deceased)2. Shri S. V. M. Abdul Majid 12,9503. Shri S. V. M. Ahmed Jallaluddin 18,4504. Shri S. V. M. Syed Casim 11,200

5. The Assistant Controller also found that the deceased had, during the three years prior to his death, received Rs. 9,000 as dividend. He then worked out the net value of the assets of the company as Rs. 7,95,671 and the income of the company as Rs. 87,894 (32,094 + 55,800). He then applied the provisions of r. 11(9) to find out what would have been received by the deceased as increase in dividend if such excess remuneration had not been paid. Since the deceased's shareholding was, 12,000 out of the total share of 60,000, he would have received 1/5 the of the excess remuneration by way of dividend which amounts to Rs. 11,160. He, therefore, worked out the benefit slice at Rs. 9,000 by way of dividends plus Rs. 11,160 being the deceased's share of excessive remuneration which came to Rs. 20,160. The benefit was thereafter worked out as follows :

Share benefit = 20160 X 795671 = 1,82,508--------------87,894Non-share benefit = 2040 X 795671 = 18,467-------------87,894

6. Since the value of 12,000 shares has been fixed at Rs. 1,27,200 the benefit slice under rule 11(3) was worked out at Rs. 55,308 (i.e., 1,82,508 minus 1,27,200). For the purpose of s. 17(2), the total amount of share benefit and non-share benefit includible was arrived at Rs. 73,775 made up of Rs. 55,308 plus Rs. 18,467.

7. The accountable person appeal to the Appellate Controller who held against the appellant both on the application of s. 17 as well as the calculation of the sum includible under s. 17. The Appellate Controller, after holding that s. 17 is applicable, deleted a sum of Rs. 1,61,582 added by the Assistant Controller under r. 2(v)(b) but added part of the liability disallowed under r. 10(1)(b) of the Controlled Companies Rules which came to Rs. 55,800. From this he deducted the value of the immovable properties exempt under s. 21 of the Act amounting to Rs. 1,55,000. Thus, he fixed the net value of the company's assets at Rs. 5,34,889 and on this basis he worked out the value of share benefit and non-share benefit as under :

Value of share benefit slice : Rs.9,000 + 2,460 X 5,34,889-------------------------87,894 = 70,836Deduct value of shares 1,27,200---------Balance includible under s. 17(2) NilValue of non-share benefit slice :10,560 X 5,34,889------------------87,894 = 64,264Total amount includible under s. 17(2) 64,264Amount included by the Asst. Controller 73,775Excess included 9,511

He thus granted the accountable person relief in a sum of Rs. 9,511.

8. The accountable person went on appeal to the Income-tax Appellate Tribunal against the order of the Appellate Controller. He, however, accepted the net value of the assets fixed at Rs. 5,34,889 and the total profits at Rs. 87,894 (Rs. 55,800 plus Rs. 32,094) worked out by the authorities below, but contended that the amount includible under s. 17(2) was only Rs. 12,435. The contention of the accountable person was that the Appellate Controller erred in taking the excess remuneration of the deceased alone into account without taking into account the entire excess remuneration paid to all the directors and that the entire excess remuneration of Rs. 55,800 would have to be distributed as dividend in which case the deceased would have received Rs. 11,160 as found by the Assistant Controller. The accountable person relied on the decision in Mamie Bhagwan Das Ahuja's case : [1968]70ITR439(MP) , as supporting his stand. He also put forward the plea that the provisions of s. 17 are not attracted to the facts of this case and in support of that plea, he relied on the decisions in B. M. Karwar's case : [1969]72ITR603(SC) and Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , as, according to him, the deceased did not transfer any property to the company as contemplated by r. 4 or r. 3(2) of the Controlled Companies Rules. The Tribunal disagreed with the contention of the accountable person that the provisions of s. 17 are not applicable but held that the entire excess remuneration paid to all the directors should have been taken into account for ascertaining how much of it would have been applied for purposes of dividend. Aggrieved by the said decision of the Tribunal, the Revenue has sought and obtained the above reference.

9. Though two question arose before the Tribunal, the question as to whether the provisions of s. 17 are applicable to the facts of this case does not arise as the Tribunal's finding on that question is in favour of the Revenue and there is no reference on that question. Thus, the only question that arises before us is whether the amount includible under s. 17(2) of the Act was Rs. 12,415 in terms of r. 11(9) of the Controlled Companies Rules or whether it is Rs. 64,264. At this stage we have to refer to the relevant statutory provisions which are applicable to the facts of this case.

10. Section 17 has been enacted to prevent the avoidance of estate duty by means of transfer of property to a controlled company and ss. 17(1) and 17(2) which are relevant are as follows :

'17(1). Where the deceased has made to a controlled company a transfer of any property (other than an interest limited to cease on his death or property which he transferred in a fiduciary capacity), and any benefits accruing to the deceased from the company accrued to him in the three years ending with his death, the assets of the company shall be deemed for the purpose of estate duty to be included in the property passing on his death to an extent determined in accordance with sub-section (2).

(2) The extent to which the assets of the company are to be deemed to be included as aforesaid shall be the proportion ascertained by comparing the aggregate amount of the benefits accruing to the deceased from the company in the last three accounting years with the aggregate amount of the net income of the company for the said years :

Provided that -

(a) Where, in any of the said accounting years, the company sustained a loss, the amount of that loss shall be deducted in ascertaining the said aggregated net income of the company;

(b) Where the company came into existence in the last year but one, or in the last of the said accounting years, the references in this sub-section to the said accounting years shall be construed as references to the last two, or, as the case may be, the last of those years.'

11. Section 17 brings to charge the transfers made by the deceased to a controlled company and the measure of liability depends on the benefit derived by the deceased from the controlled company. The said section states that the taxable portion of the assets of the company shall be determined according to sub-s. (2). Sub-s. (2) says that the extent to which the assets of the company are to be deemed to be included under sub-s. (1) shall be the proportion ascertained by comparing the aggregate amount of the benefits accruing to the deceased from the company in the last three accounting years with the aggregate amount of the net income of the company for the said years. Thus the dutiable slice of the assets is ascertained by the following formula :

Dutiable slice Total benefits accruingof assets to the deceased The assets----------------------- X of theTotal net income of the companycompany.

12. The amount of benefits accruing to the deceased from the company for purposes of s. 17(2) should be determined as per r. 7 of the Estate Duty (Controlled Companies) Rules, 1953. The benefit consists of share benefit and non-share benefit. The share benefit is the amount of dividend received by virtue of the deceased's shareholding or the interest received on debentures which the deceased had held. Non-share benefit is the benefit which the deceased was entitled to receive by virtue of the transfer but did not receive. In this case the value of the share benefit slice includible under s. 17(2) has been determined to be nil and there is no dispute between the parties in that regard.

13. The dispute is only with regard to the non-share benefit slice which according to the accountable person is only Rs. 12,145 but according to the Revenue it is Rs. 64,264. For determining the non-share benefit slice, the scope of r. 11(9) of the E.D. (Controller Companies) Rules has to be considered. That rule is to the effect that the non-share benefit slice has to be found out after taking into account how much of it should have been applied in increasing the share benefit. In this case it has been found that excess remuneration has been received by all the four directors and the deceased's share of excess remuneration was Rs. 13,200. Therefore, for the purpose of r. 11(9), one has to find out what would have been received by the deceased as increase in dividend if such excess remuneration had not been paid. Since the total remuneration amounted to Rs. 55,800, the deceased's share therein works out to Rs. 11,600 worked out in the proportion of 12,000/60,000.

14. The Appellate Controller, however, took the excess remuneration received by the deceased alone into account for working out the non-share benefit slice. The Tribunal has taken the view that the monies out of which the non-share benefit came should be considered as whole and there is no basis for limiting it only to what the deceased had received. According to the Tribunal, the reasonable view to take is in ascertaining the total income of the company for three years and also the amount which would have been received by the deceased if the excess remuneration were to be distributed as dividend and, therefore, the entire excess remuneration of all the directors should have been taken into account and not only the excess remuneration received by the deceased.

15. On a due consideration of the matter, we are of the view that the excess remuneration received by the deceased alone should be taken into account for the purpose of rule 11(9) and not the excess remuneration received by all the directors. The deceased in this case is found to have received excess remuneration of Rs. 13,200 and the excess remuneration received by all the directors has been determined as Rs. 55,800. The said sum of Rs. 55,800 paid as excess remuneration to all the directors had already gone to increase the income of the company. No doubt if it had been distributed as dividend, the deceased by virtue of his shareholding would have received Rs. 11,160. But if the total receipts by the deceased alone is to be taken into account for determining his share benefit and non-share benefit and as such the excess remuneration received by the deceased alone is taken into account as the amount which would have been distributed as dividend, then the deceased would have received 1/5 this of the same as dividend and the balance of 4/5 the would have come as non-share benefit. In this view, the total non-share benefit slice would have come to Rs. 64,264. This is how the Appellate Controller has proceeded. The Tribunal has accepted contention of the accountable person that the entire excess remuneration should have been taken into account to ascertain the non-share benefit. A reading of r. 11(9) suggests that both the share benefit and non-share benefit of the deceased alone should be taken into account and not the benefit received by the other directors. The object of sub-r. (9) is to give relief in the matter of liability and envisages that if share benefit as well as non-share benefit may be so inter-related, then any increase in one kind of benefit might result in a decrease in another kind of benefit. Therefore, both the share benefit and non-share benefit referred to in sub-r. (9) can only be in relation to the benefit received by the deceased and not the benefit got by others. In this case, the deceased received a sum of Rs. 13,200 as excess remuneration of which 1/5 th has to be taken as the amount which he has receive as share benefit if the excess remuneration had been distributed as dividend. The balance of the excess remuneration received by the deceased should be taken to be as non-share benefit. Therefore, while applying r. 11(3), we are concerned only with the excess remuneration received by the deceased and not with the excess remuneration received by the other directors. We have to, therefore, hold that the calculation made by the Appellate Controller is correct and that the Tribunal is in error in interfering with the same. We, therefore, answer the question in the negative and in favour of the Revenue. The Revenue will be entitled to its costs which we fix at Rs. 500.


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