1. These two references have been heard together, because they turn on the interpretation of Section 46(1) of the Estate Duty Act and its application to the facts in each. In the first of the references, the questions are :
' (1) Whether, on the facts and in the circumstances of the case, the liability of Rs. 5,548 claimed as a deduction from the value of the properties of the Hindu undivided family in which the deceased had one-third share, were rightly disallowed under Section 46(1)(a) of the Estate Duty Act, 1953 ?
(2) Whether, on the facts and in the circumstances of the case, in computing the value of the properties of the Hindu undivided family, a sum of Rs. 11,510 was rightly added under Section 46(2) of the Estate Duty Act, 1953 ?'
2. On January 21,1959, A. Arunachalam Pillai died. He was one of the members of a Hindu undivided family, the others being his two brothers. The Assistant Controller of Estate Duty, Coimbatore, valued the properties of the family at Rs. 14,30,822 and the one-third share of the deceased at Rs. 4,75,941, for purposes of levy of estate duty. The estate duty payable was assessed at Rs. 49,983'13. Several years prior to the death of Arunachalam Pillai, the family had made a gift of certain agricultural lands to three female members of the family: (1) Nagarathnammal, (2) Saraswathi Ammal and (3) Sivakami Ammal. The family managed the properties for the ladies, and receipts and outgoings were exhibited in a separate account. In May, 1957, the agricultural lands were sold and a sum of Rs. 16,500 was realised and credited in favour of the three ladies. Thereafter, a sum of Rs. 5,500 was paid to each of the two ladies, Nagarathnammal and Sivakami Ammal, towards their share of the sale proceeds. At the death of Arunachalam Pillai, the balance due to Saraswathi Ammal remained with the family to her credit. This amount was claimed as a liability eligible for deduction under Section 44(a). The claim was not admitted in view of Section 46(1)(a) read with Section 39. The Assistant Controller applied Section 46(2) in respect of the sum of Rs. 11,510 paid to the two ladies, with the result the total sum of Rs. 16,500 was taken to pass on the death of Arunachalam Pillai. The accountable person having failed at further stages of the revenue, at his instance, the reference has been made by the Central Board of Direct Taxes of the said two questions.
3. In the other reference, the question is;
' Whether, on the facts and in the circumstances of the case, the liability of Rs. 1,29,068, claimed as a deduction from the principal value of the estate of the deceased, was rightly disallowed under Section 46(1)(b) of the Estate Duty Act '
4. One Haji Mohammed Haji Moosa Sait died on November 20, 1957, leaving his two sons, Ahmed Haji Mohammed and Osman Haji Mohammed, the two accountable persons. The deceased had gifted to his sons, each a sum of Rs. 70,000, on July 31, 1952. It seems the deceased drew the total sum forming the subject-matter of the gifts from the credit balance in his favour with a firm in Bombay known as Messrs. Thayub Mohammed Haji Moosa and Company, in which the deceased's sons and four other persons were partners. The sons, rather the accountable persons, invested the sums gifted to them in a partnership firm styled Messrs. Ahmed and Osman Mohammed, Madras, in which they alone were the partners. Before his death, the deceased, as a result of continuous operation of his account with the Bombay firm, incurred a liability which was cleared by the accountable persons in a sum of Rs. 1,29,068. This amount was claimed as a debt due from the father to the sons, and the accountable persons sought allowance therefor under Section 44(a). But this was disallowed, and the Board of Direct Taxes, eventually, concurred with that view. The result is the second reference. The Board, in both the cases, was of opinion that the debts clearly fell within the ambit of Section 46(1).
5. In the first reference, Mr, K. Srinivasan, for the accountable persons, contends that the view of the Board as to the precise scope and effect of Section 46(1)(a) cannot be sustained. Learned counsel says that this provision will be inapplicable, unless, at the time of making the gift, there was a simultaneous intention on the part of the donor to borrow the subject-matter of the gift, so to speak, at a later date, in the form of a liability. This construction is supported by learned counsel by reference to the words 'given therefor' in Section 46(1).
6. In order to appreciate the argument, we have to notice the relative statutory provisions. Section 5 charges the principal value of the property which passes on the death of the deceased. A group of sections commencing from Section 6 prescribes what property shall be deemed to pass. Section 7, in particular, relates to cesser of interest on death, and says that, subject to the provisions of the section, property in which the deceased had an interest ceasing on the death of the deceased shall be deemed to pass on the deceased's death to the extent to which a benefit accrues or arises by the cesser of such interest including, in particular, a coparcenary interest in the joint family property of a Hindu family governed by the Mitakshara law. Section 39(3) provides for estimating the principal value of such interest. It is to the effect that, for the purpose, the properties of the family should be taken as those of the deceased coparcener at his death and that once the value is ascertained on that basis, the value of the share of the coparcener can be ascertained thereafter. Part VI relates to deductions in the computation of the principal value. So far as is relevant for our present purpose, Section 44 says that, in determining the value of an estate for the purpose of estate duty, allowance shall be made for funeral expenses and for debts and incumbrances, but allowance would not be made for debts incurred by the deceased, unless, subject to the provisions of Section 27, such debts were incurred or 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. But further limitations are imposed in the matter of deduction of debts by Section 46, which reads as follows:
'(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 the 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 had 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 the purpose of that section.'
7. The argument for the assesses, in the first of these references, is two-fold. The first is that the consideration for the debt being the sale proceeds and not the property itself derived from the family, the debt is not hit by Section 46(1)(a), and the second is that, in any case, only if there is an intention on the part of the donor, at the time of making the gift, to get back the property comprised therein at a later date but in the form of a liability that the provision will apply. It seems to us that neither of these contentions can be sustained. 'Property' has been defined in the Act so as to include its sale proceeds. ' Property' in Clause (a) of Section 46(1) should, therefore, be taken to represent its sale proceeds as well. If that be so, the debt, the consideration for which are the sale proceeds, will squarely fall within the ambit of Section 46(1)(a). As regards the second contention, what is urged is that, if full effect is given to the words 'given therefor, in the context, it should mean that only cases of the type with the intention aforesaid present would fall within the mischief of Section 46(1)(a).
8. Now, ' 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. We are unable to spell out any further element necessary for the application of Section 46(1)(a), in the form of the intention, as contended for. We must confess that, at first sight, we felt some difficulty in appreciating the real scope of Section 46(1). This is because, while the policy of the provision is obvious, viz., to avoid evasion of estate duty, the section seems to overstep that mark, and in its abundant caution, appears to do injustice by disallowing even debts not intended to escape tax. But we can only interpret the statutory provision, having regard to the actual words it has employed. Making that approach, it seems to us that the debt in the first reference seems to squarely fall within and satisfy the words therein. It is not in dispute that the debt is one within Section 44(a). It is not also in controversy that the gift of lands was made by the family to the three ladies and that they were sold and the sale proceeds remained with the family for some time and that thereafter two-thirds of which were paid out towards two-thirds share of two of the ladies. It should be taken, therefore, particularly having regard to the definition of ' property ', that because sale proceeds represent property, viz., the lands, and the property was derived from the family, the nexus required between the debt and the consideration of the particular type, in order to apply the limitation under section 46(1)(a) is satisfied. We are unable to see what further requirement is to be satisfied, in order to apply Section 46(1)(a). Sub-section (3) of Section 46 attracts, for its purpose, the provisions of Section 16(2). Section 16(2) defines ' property derived from the deceased '. The expression 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. '
9. This makes it abundantly clear, to our minds, that 'property' in Section 46(1) is one which would be the subject-matter of a disposition made by the deceased and that, in this case, was the gift made to the three ladies of the family properties. Reading Section 46(1) with the other provisions of the Act which we have referred to, we have not found possible or permissible to construe the section as being confined to a debt which was incurred pursuant to an intention evinced by the donor at the time of making the donation, to incur the debt.
10. In the other case, the revenue, as the question under reference reflects, relies on Section 46(1)(b). We think the revenue is right in doing so. Actually, the Board of Direct Taxes thought that Section 46(1)(a) would apply only if the deceased at the time of making the gift intended that he should borrow it back in the form of a liability. Having formed that view as to the scope of Section 46(1)(a), it referred to the facts and reached the conclusion that they justified the finding that the donor had such an intention. We are unable to accept this view of either the effect of Section 46(1)(a) or of the facts in the second reference. But 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. Mr. Balagopal, for the accounting persons, however, says that, unless there is interposition of persons between the deceased and the person from whom he had borrowed, Section 46(1)(b) would not be attracted. This contention is not justified by the language of the provision. It does not contemplate any such interposition as a condition for its application.
11. In our opinion, therefore, question No. (1) in the first reference and the question in the other reference should be answered in favour of the revenue. In view of our answer to the first question in the first reference, and as the payment to the two ladies was within two years of the deceased's death, it should necessarily follow that the second question in that reference should also be answered in favour of the revenue. The revenue is entitled to its costs in both. Counsel's fee, Rs. 250 in each.