: Sethuraman, J. - In the pursuance of the directions of this Court, the Appl. Tribunal has referred u/s. 64(3) of the ED Act, the following question :
'Whether on the facts and in the circumstances of the case, the Appl. Tribunal was right in holding that the sum of Rs. 1,71,519/- is not includible as gifts deemed to pass on the death of the deceased in terms of s. 10 of the ED Act' ?
One A. P. Ramchandra died on 23rd May, 1960. He was carrying of business in the manufacture and sale of perfumery under the name and style of M/s. Ganga Works as sole proprietor. He was also a partner in the firm of M/s. A. R. Rangachari Perfumeries with 0-2-0 share therein. On 20th March, 1948, he executed a deed, by and under which he assigned and conveyed on his wife a one-third of his profits in M/s Ganga Works and a one-third of his share of profits in M/s. A. R. Rangachari Perfumeries to be taken by her absolutely and exclusively for a period of eight years. On 22nd March, 1948, he executed a similar deed assigning and conveying to Smt. Rajalakshmi, his brothers wife, a one-third of his profits in M/s. Ganga Works and a one-third of his share of profits in M/s. A. R. Rangachari Perfumeries to be taken and enjoyed by her absolutely for a period of eight years. The income accruing to the donees in pursuance of the said settlement was only credited in their accounts in the books of M/s. A. R. Rangachari Perfumeries. Such income credited to the account of his wife amounted to Rs. 1,10,190-10-10 and Rs. 10,200-8-1 as on 21st March, 1955 in M/s. Ganga Works and M/s. A. R. Rangachari Perfumeries respectively. The amount credited to the account of Rajalakshmi stood at Rs. 46,699-12-5 and Rs. 10,200-8-11 as on 31-3-1956 in the two firms mentioned already. With effect from 1st April, 1955 a firm called M/s. Saganla was formed, in which the deceased was one of the partners till his death. That firm took over the business under the name and style of M/s. Ganga Works, and also that of the firm M/s. A. R. Rangachari Perfumeries, with all the assets and liabilities. The amounts standing to the credit of the two ladies in the respective books of M/s. Ganga Works & M/s. A. R. Rangachari Perfumeries, were transferred to their respective accounts in the books of M/s. Saganla. Interest thereon was also credited to their respective accounts. As on 30th June, 1960, shortly after the death of Ramchandra, the amounts standing to the credit of the two ladies in M/s. Saganla came to Rs. 1,44,038.97 and Rs. 43,311.10.
2. The Asst. CED considered the settlement deeds executed by Ramchandran in the context of s. 10 of the ED Act. He was of the view that the said transactions amounted to gifts made by the deceased to his wife and brothers wife, that since the amounts gifted were lying in deposit with M/s. Saganla in which the deceased was a partner, it could not be said that bone fide possession and enjoyment thereof were immediately assumed by the donees and thenceforward retained by them to the entire exclusion of the deceased donor and that consequently s. 10 of the ED Act applied. He accordingly brought to tax Rs. 1,71,519/-made up of Rs. 1,20,390/- in the name of Rajalakshmi, in the books of M/s. Saganla as on the date of the death of Ramchandra.
The accountable persons appealed against the assessment to estate duty challenging the inclusion of the said sum of Rs. 1,71,519/- u/s 10 of the ED Act. The Appl. Contr. confirmed the assessment.
On further appeal to the Tribunal, the Tribunal directed, following the decision of the Supreme Court in CED v. C. R. Ramchandra Gounder, deletion of Rs. 1,71,519/-. It is this order of the Tribunal that has given rise to the reference mentioned already.
3. The documents which formed the basis of the gifts are not made annexures. However, the material portions of the document have been set out by the Appl. CED in paragraph 6 of his order, and that portion is extracted below :
1. The Settlor hereby assigns unto the beneficiary all the rights of the Settlor in respect of 1/3rd of the property from Ganga Works and one-third of his share of profits in A. R. Rangachari Perfumeries mentioned above (but not the losses) payable to him during a period of eight years commencing from the date hereof (inclusive of the profits for the accounting year ended 31-3-1948) to be taken and enjoyed by the Beneficiary in absolute and exclusive right.
2. The Settlor shall not have any manner of right or interest in the said one-third share in the profits from Ganga Works and in the share of profits from A. R. Rangachari Perfumeries hereby settled, and the right to receive the said one-third share in the profits from Ganga Works and in the share of profits from A. R. Rangachari Perfumeries during the said period of eight years shall exclusively the said period of eight years shall exclusively vest in the Beneficiary.
3. The right to the said one-third share in the profits of Ganga Works and in the share of profits from A. R. Rangachari Perfumeries after the expiry of the said period of eight years shall exclusively vest in the settlor himself and the Beneficiary shall not have any right thereto.
4. This Settlement does not absolve the Settlor from his obligation to maintain the Beneficiary.
5. Nothing in this deed shall be construed to confer upon the Beneficiary any right or interest in the assets or property of the said two business; but her right shall be limited to the one-third share hereby settled.'
4. The above clauses are to be found in the settlement deed in favour of Padmavathi Ramachandra, wife of the settlor; and identical terms are, it is admitted, to be found in the other settlement deed dated 22-3-1948 in favour of Rajalakshmi, his brothers wife. The share of profits accruing to each of the beneficiaries was credited to the respective accounts of the two beneficiaries in the books and no interest was charged thereon. After the merger of the proprietary business of M/s. Ganga Works and of the partnership firm of A. R. Rangachari Perfumeries into a single entity called M/s. Saganla, the amounts to the credit of the respective parties were transferred, a mentioned already, to their respective accounts in M/s. Saganla. The amounts mentioned above were to the credit of the respective parties in the books of M/s. Saganla at the time of the death of Ramchandra. The question is whether the provisions of s. 10 of the ED Act apply to the transactions dealt with above.
5. S. 10 of the ED Act, in so far as it is material, runs as follows :
'Property taken under any gift, whenever made, shall be deemed to pass on the donors death to the extent that bona fide possession and enjoyment of it was not immediately assumed to the entire exclusion of the donor or of any benefit to him by contract or otherwise.'
There are two provisos to this section. The first proviso is material, and that runs as follows :
'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 reversed 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.'
We shall consider the question of the applicability of the main part of s. 10 before going into the aforesaid proviso.
6. As seen already, there are two gifts in the present case to the respective individuals. The first is with reference to the share of profits in M/s. Ganga Works. M/s. Gangs Works was admittedly a sole proprietary concern till the partnership concern of M/s. Saganla was formed on 1st April, 1955. Thus, at the time when the document was executed, M/s. Ganga Works being a sole proprietary concern, the effect of the gift in the context of its being a proprietary concern must be considered. In the case of proprietary business, the effect of the entries made in ones own books has been gone into of us a party, in CED, Madras v. Leelavathi Devi. In that case, one Govindram Shivaldas was the sole proprietor of a business which he carried on in his own name and style. On 24-10-1965, he debited a sum of Rs. 15,000/- to his capital account and opened an account in the name of his son Kailash and credited it to that account. The proprietary concern continued till 8th November, 1966 and thereafter the amount standing to the credit of Kailash along with interest accrued there on was transferred to the partnership concern. The applicability of s. 10 of the ED Act to the amount so gifted came up for consideration by the Full Bench, and in the course of its judgment, the Full Bench, while noticing the differing view points in decided cases which had been applied in respect of similar transactions, pointed out :
'We are of the opinion that there is no disagreement (between the decisions of this Court and those of the Supreme Court) at all. All that the Courts have done it to point out the difference between a partner debiting his capital account in the partnership and crediting third party with that amount in an account in the partnership business itself and the owner of a proprietary concern debiting his capital account in the business and crediting a third party with that amount in an account opened in the said partys name in his proprietary business. There is undoubtedly a fundamental difference between the two. In the case of a proprietary concern, all the assets and the liabilities of the business are exclusively those of the owner and he has exclusively those of the owner and he has absolute control over the same. In the case of a partnership, no individual partner can be said to be the owner of even a part of the assets and similarly a partner cannot be said to separately and exclusively liable in respect of any specified item of the liabilities of the firm. Hence in the present case, when the father on 24th October, 1965 debited his capital account in his proprietary concern and credited that amount in the name of his son in the account with his firm (of that business) itself, it must be construed as if the father drew the sum of Rs. 15,000/- from his own business and paid over the same to his son, who in turn deposited the amount in the business of the father for the purpose of earning interest thereon ...... As we have pointed out already, in this case the Tribunal has stated that the gift was a completed gift and the donee acquired full and exclusive right to the money in question. If so, it was certainly open to the donee to invest the money wherever he liked; but in this case he chose to invest the money with his father himself in the business which he carried on. From this point of view, it cannot be stated that from the moment of the donee, namely, the son, taking complete possession of the subject-matter of the gift, he continued to have that possession to the total exclusion of the donor, namely the father. On the other hand, the very subject matter of the gift which is cash in the present case, was utilised by the father in the present case, was utilised by the father in the business run by him in consideration of his paying interest to his son on the amount invested by him. Therefore, even though the donee can be said to have assumed bona fide possession and enjoyment of the property gifted, he cannot be said to have retained the same to the entire exclusion of the donor.'
The above passage completely covers the gifts of a share of his profits in the deceaseds proprietary business, and it follows that s. 10 was rightly applied.
7. Learned counsel for the accountable person submitted that after the merger of this proprietary business with M/s. Saganla the amounts had been taken over to the deceased was a part in the said firm, by reason of the amounts being invested in the said firm, it cannot be stated that the deceased was not completely excluded from enjoyment of the same. This submission cannot be accepted. It was open to the donees at the stage when the proprietary business of M/s. Ganga Works and the partnership concern of A. R. Rangachari Perfumeries were merged into a new firm, to withdraw the amounts, and invest them elsewhere, with which the deceased was not concerned. However, they chose to keep the moneys in the new partnership, in which the deceased was admittedly a partner. The identity of the property gifted and the amounts deposited in the new firm is completely established in the present case, as they have been taken over in fact from M/s. Ganga Works and M/s. A. R. Rnagachari Perfumeries and invested in the new firm. The result is that the gifted properties have been invested in a firm in which the deceased being a partner, cannot be said to have been excluded from enjoyment of the gifted properties.
8. We may now take up the amounts credited in the firm of M/s. A. R. Rangachari Perfumeries originally, and taken over subsequently to the new partnership firm of M/s. Saganla. Here also by reson of the investment in Saganla, s. 10 would be attracted. Learned counsel for the accountable person contended that what was credited to the two donees would only be an actionable claim and that in the case of such an actionable claim the provisions of s. 10 of the ED Act cannot be applied. This aspect of the matter had not been placed before the Tribunal in the matter in which it is now placed before us. However, in view of the nature of the question, we think it proper to go into it inspite of the fact that the same was not argued before the Tribunal. The real point to be considered is whether there was an actionable claim or a cash gift in this case.
9. In the case of a partnership, the profits are to be credited to the partners only at the time of the closing of the accounts. It is at that stage that the profits accrue to the partners only at the time of the closing of the accounts. It is at that stage that the profits accrue to the partners. In the present case, having regard to the settlement deeds, having regard to the settlement deeds, the amounts came to be credited to the respective accounts of the donees in accordance with the settlement deeds. Actionable claim, as understood in the general law, is what is known to English law as chose in action. The amount that is liable to be credited to a partner and then taken over as a result of an assignment cannot be equated to a chose in action. Supposing the firm fails to credit the amount, the assignee cannot have any recourse to the firm as such. The assignee can only proceed against the partner. There was thus no actionable claim in the hands of the assignor which was assigned in favour of the donees in this particular case. The amounts which have been gifted are thus only in the nature of cash gifts. On the date when the profits were due to the partner it was open to him to withdraw the profits, to extent available to him and pay them over to the two ladies. By reason of the assignment, the assignees came to have a right over the said profits as against the assignor. At that stage, the assignee could have demanded the amount from the assignor, from the firm. The amount so received would only be in the nature of cash and by reason of the subsequent entry in the books of the firm it would only be in nature of an investment of cash made by the donees in the firm in which deceased was a partner. The argument that there was any actionable claim in this case cannot therefore be accepted.
10. Learned counsel for the accountable person relied on the decision of the Supreme Court in CED v. C. R. Ramchandra Gounder. There, the subject-matter of the gift was in immovable property in which a business was being carried on by a firm of which the donor was a partner. The donor had also gifted certain amounts to his credit in the books of the firm. The question was whether the gift of the property as well as the amounts transferred from his account to the account of the donee, attracted the operation of s. 10 of the ED Act. The Supreme Court pointed out that as far as the property was concerned, it was given subject to the right of occupation of the firm in which the deceased was a partner, and so far as the amounts transferred from his account to the account for the donee were concerned, there was a transfer subject to the rights of the partnership. In the present case, having regard to the terms of the gift, there was no retention of any rights in the amounts on the part of the donor so as to rule out the application of s. 10.
11. Learned counsel drew our attention to a decision of this Court in CED. v. S. M. M. Subramanian Chettiar. In that case the distinction between an actionable claim and mere credit entry in the personal books of a proprietor has been considered. This aspect has been elaborated in the judgment of the Full Bench which has been extracted earlier. An entry in the current account was treated as if it was entered in the nature of a cash transaction. In the case of a current account, it is a matter of partners and the partner is free to withdraw the amount. In the present case, the account cannot be said to be even a current, because the profits were yet to accrue and only after accrual were to be credited in the accounts of the donees. Thus either when the gift deeds were executed or when the entries were made there was no actionable claim which could be transferred. There is nothing in this decision which could be of any assistance to the accountable person. If at all, it supports the revenues contention, as it is an a fortiori case as compared to a current account.
12. During the course of argument learned counsel for the accountable person submitted that the whole of Rs. 1,71,519/- should not have been brought to tax, as according to him, there were certain withdrawals prior to the date of the death of Ramchandra, which would have to be excluded. The first proviso to s. 10, which we have already extracted, would require an investigation of the facts to find out as what was the amount to the credit of the donees prior to two years before the death of deceased. Any withdrawals during the period of the two years would be of no consequence. If there were withdrawals prior to two years prior to the death, then those withdrawals would have to be excluded from consideration in the estate duty assessment, provided it is shown that they were retained by the donees and enjoyed by them to the entire exclusion of the donor.
13. The result is that the question referred is answered in the negative and in favour of the Revenue. The Controller will be entitled to his costs.