(1) This reference raises a question of interpretation and application to the facts and circumstances of this case of S. 10 of the Estate Duty Act, 1953. Janab S. Ibrahim Rowther was the owner of the premises bearing Nos. 90, 91 and 92 East Avani Moola St. Madurai. On 2-4-1956, he made a gift of a 7/8th share in the premises to his children, and reserved the remaining one-eighth share for himself. There was no division of the premises by metes and bounds in accordance with the relative shares. There is no dispute that a part of the premises had been let out on a monthly rent of Rs. 350 to Messrs. Ibrahim and Co., a firm of partnership of which Janab S. Ibrahim Rowther and his sons were partners. The deceased shared and appropriated to himself a one-eighth share out of the rent received in respect of the portion so let out. Janab S. Rowther died on 23-5-1959.
In assessing his estate under the provisions of the Estate Duty Act, 1953, the Assistant Controller of Estate Duty was of the view that in view of the provisions of S. 10, the entirety of the premises Nos. 90 to 92 should be included in the estate of the deceased and duty levied on that basis. This is on the ground that the entire exclusion of the donor envisaged in S. 10 was absent in respect of the property gifted and so the gift in its entirety fell squarely within the ambit of Sec.
10. The Appellate Controller of Estate Duty concurred with him and added in support of his view that the deceased enjoyed a part of the rental income of Rs. 350 per month received from letting out a portion of the premises to Ibrahim and Co., in which the deceased himself was a partner. According to his understanding of the scope of S. 10, it was not necessary for its application that possession and enjoyment of the benefit by the deceased should extend to the whole of the property and it was sufficient if the deceased was having possession and enjoyment of the gifted property since the date of the gift.
The Tribunal did not, however, accept the view of the revenue. It held that the deceased had reserved for himself the one-eighth share and was in reception of only the rent referable to that share and it followed, therefore, that only the donees had possession and enjoyment of the remaining 7/8th share, the remaining subject matter of the gift to the entire exclusion of any benefit to the deceased in respect thereof. The Tribunal, however, held that the mere enjoyment of the building by the deceased as a partner of the firm which paid rent for it, would not bring the deceased within the mischief of S. 10. In the circumstances, at the instance of the revenue, the following question under S. 64(1) of the Estate Duty Act has been referred to us:
"Whether the 7/8th share in the house property in Nos. 90, 91 and 92 East Avani Moola St. Madurai, gifted away by the deceased on 2-4-1956 is liable to estate duty as property deemed to pass on the death of the deceased under the provisions of S. 10 of the Estate Duty Act of 1953?"
The substantial question is, therefore, as to the application of S. 10 to the facts of this case.
(2) S. 5 in Part II of the Act is the charging section. It says that estate duty shall be levied on the principal value of the estate of every person dying after the commencement of the Act. The principal value of the estate is to be ascertained as provided by the Act. A number of sections follow which relates to the property which is deemed to pass on death and one of such sections is S. 10. It reads:
"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;
Provided that the property shall not be deemed to pass by reason only that it was not, as from the date of the gift exclusively retained as aforesaid, if, by means of the surrender of the reserved benefit or otherwise, it is subsequently enjoyed to the entire exclusion of the donor or of any benefit to him for at least two years before the death".
The period of one year has been substituted for two years by Central Act 10 of 1965. We are however, not concerned with the proviso. From a plain reading of the section, it is manifest that it will have application only where, notwithstanding a gift made by a donor, he continues to derive benefit either wholly or partly out of the subject matter of the gift and to that extent.
The section speaks of property taken under any gift, which in other words is the subject matter of the gift. The second aspect is that the donee bona fide does not assume possession or enjoyment of the subject matter of the gift the moment it is made and retain it to the complete exclusion of the donor or of any benefit in respect of it to him either by a contract or otherwise. It may also be observed that a donee may take possession or assume enjoyment of a part of the subject matter of a gift leaving the remaining part under the domain and for the benefit of the donor. In such a case, to the extent the donee does not assume possession and enjoyment and leaves the corresponding benefit of it to the donor, Sec. 10 will be attracted. It is clear from the phraseology employed in S. 10 that property or any part of it which is not the subject matter of gift is not within its ambit and the section entirely confines itself to the subject matter of the gift, whatever it may be, and to the extent the donor even after the gift continues in possession or enjoyment or to have its benefit.
(3) Where property gifted happened to be in the exclusive ownership of a donor, no difficulty may arise. But if a part of such property is the subject matter of a gift and the remaining part continues to be in the ownership of a donor and thus the entirety of the property comes to be owned by the donor and the donee as co-owners in possession and enjoyment, without their relative shares being defined by metes and bounds, the question may arise as to the effect and application of S. 10 to such circumstances.
Once it is clear, as we mentioned earlier, that the section is exclusively confined to the subject matter of the gift, that should clear any confusion or difficulty in the way of its application to such set of facts. Notwithstanding the fact that the donor and the donee are in possession and enjoyment of the entirety of the property as co-owners, the application of the section will have to be determined by asking whether the donor, so far as the subject matter of the gift is concerned in such a case, has had any benefit from out of or in respect of it. If the answer is in the negative, the section will have no application. The test for application of the section in such a case will not be whether the donor as a co-owner was in possession of the entirety of the property, for, where property is owned in tenancy-in-common, each is in law deemed to be in possession of the whole. But where, however, the donor appropriates rent derived from the entire property more than what he is entitled to according to his share in the cotenancy, to the extent of such benefit, Section 10 will have application.
(4) In the present case, the revenue would appear to have taken for granted that the entirety of the premises must be taken as a unit for purposes of S. 10 and that as the donor happened to be a partner of the firm which was in possession of a portion of the property in tenancy, the donor should be deemed to be in possession of the entirety of the property and, therefore, the donor not being excluded from the property, Sec. 10 would be attracted. On the view we have expressed as to the scope of the section, it is clear that the approach made by the revenue to the application of that section cannot be supported.
As we already mentioned, the letting out was to a firm, though its partners were the donor and his sons. Further, the donor did not receive out of the rent paid by the firm anything more than what is referable to his one-eighth share in the premises. It is true that as the premises were not divided between the donor and the donees in proportion to their relative shares, the portion of the premises let out to the firm must be taken to be in the possession and enjoyment of the co-owners. But that the donor in the nature of things could not help. That is an incident inherent in the very concept of a co-tenancy and that should make no difference to Sec. 10.
(5) This view of ours seems to be amply supported by authority. In St. Aubyn v. Attorney General, 1952 AC 15: 3 EDC 292, 306, Lord Simonds construing the English section corresponding to S. 10 of the Estate Duty Act, observed:-
" I venture to think that much of the argument that was addressed to the House in this case and much of the confusion that has arisen in the past on this admittedly difficult branch of the law have been due to the failure to bear in mind that that of which enjoyment is to be assumed and retained and from which there is to be exclusion of the donor and any benefit to him by contract or otherwise, is that which is truly given, a proposition which is obvious enough in the case of two separate estates, but more difficult to follow and apply where trusts are declared of a single property which are not completely exhaustive in favour of a donee. It should at least be clear from the judgment of Lord Russell of Killowen that by retaining something which he has never given, a donor does not bring himself within the mischief of the section".
Though the observations of Lord Radcliffe were to a similar effect, it is worthy to quote them:
"If it is right, the wording of the section is indeed inept to express its meaning; for to adopt it requires no more than to ascertain whether the deceased was left in possession of any contractual benefit at all at the end of the transaction and gives no significance to the question whether that benefit, whatever it is, is such as to trench upon the possession and enjoyment of the property in which the interest has been surrendered. My own view is that the whole proposition is fallacious. Nor do I think it the better founded if the qualification is introduced that a benefit by contract, to be within the mischief of the section, must be 'referable to' the transaction by which the life interest is determined".
These observations of the noble Lords make it clear that the benefit which S. 10 envisages and from which there should be exclusion is that which is given by the gift and not that which is outside the scope and subject matter of the gift.
(6) Clifford John Chick v. Commissioner of Stamp Duties, 1958 A. C. 435: 1958-37 ITR (E. D.) 89, incidentally touched upon a case where the gift itself was a gift of an interest in a tenancy-in-common. It was argued for the Revenue in that case that where a gift itself was a gift of tenancy-in-common, the nature of the gift was such that it carried with it the right mutually to enjoy the whole of the property and that was why the Board in Oakes case 1954 A.C. 57: 1954-26 ITR (ED) 1, held that there was no benefit which impinged on the donee's interest, but where the gift was of the fee simple and thereafter a partial enjoyment of the given property took place, an entirely different situation was created. This distinction between the two classes of cases was accepted by the Privy Council. Lord Simonds speaking for the Board said:
"It must often be a matter of fine distinction what is the subject matter of a gift. If as in Munro's case, 1934 A.C. 61 the gift is of a property shorn of certain of the rights which appertain to complete ownership, the donor cannot, merely because he remains in possession and enjoyment of those right, be said within the meaning of the section not to be excluded from possession and enjoyment of that which he has given".
So then, where a donor makes a gift of a portion of a property and retains ownership of the rest of it and thus brings out a tenancy-in-common, the fact that in such circumstances, the donor remains in possession and enjoyment of the property as such co-owner will not derogate from the position that he has entirely divested and excluded himself from possession and enjoyment of the property for the purpose of the section which he had gifted. The Assam High Court in Controller of Estate Duty v. Birendrakumar, 1964-53 ITR (ED) 1 took a similar view. In the circumstances, therefore, we have no hesitation in answering the question referred to us in favour of the assessee with costs; counsel's fee Rs. 250.
(8) Reference answered.