Controller of Estate Duty vs Estate of Late V.L. Ethiraj

Veeraswami, J.—This raises a problem of interpretation of Explanation 2 to Section 2(15) read with Section 9 as also Section 27 of the

Estate Duty Act, 1953.

Sri Y. L. Ethiraj, a well-known barrister of this court, died on August 18, 1960, leaving a will dated April 21, 1952, by which, he nominated the

official trustee as the sole executor. The official trustee declared the value of the deceased''s estate at Rs. 7,47,682. Among other items, the

question was whether the estate included two loans of Rs. 13,000 and Rs. 4,000 respectively, which the deceased had given to his niece and

niece-in-law. These loans appear to have been given between April 1, 1956, and March 31, 1957. The deceased himself, in his wealth statement

for the year ended March 31, 1957, included the two sums and stated that his niece and niece-in-law might or might not pay back the amounts. In

his subsequent wealth statements also, the two sums were included, the last of which was filed on November 7, 1959, for the year ended March

31, 1959. They were, therefore, till then, not treated by the deceased as gifts made to the two ladies or as having become time-barred. It is now

accepted, for purposes of this reference, that the loans became time-barred between November 7, 1959, and March 31, 1960, and that the

deceased did not take any steps to recover these loans before they became barred by time. The Deputy Controller included the two sums as part

of the estate passing on the death of the deceased. This was on the view that the deceased, in the circumstances, should be taken to have decided

to treat the loans to his relatives as gifts if they were found to be not recoverable easily, and that the point of time at which the debts became bad

should also be regarded as the time at which the deceased would have treated them as gifts. Since this event fell within two years prior to his death,

the revenue considered that the debts would be included as gifts within the statutory period u/s 9 of the Estate Duty Act. The Appellate Tribunal

was not prepared to accept that view but held that the deceased treated the loans as subsisting, and that, if it was his intention to treat them as gifts,

he would have specifically treated them as such and would not have shown them as subsisting even on the date of his wealth statement for the year

ended March 31, 1959. Even on the basis that the deceased allowed the two debts to become time-barred and, in that sense, intended to

abandon them, such abandonment could not be said to have not been made bona fide At the instance of the Commissioner, the reference arises of

the following question :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts of Rs. 13,000 and Rs. 4,000 were

not includible in the principal value of the estate ?

In our opinion, the Tribunal''s conclusion is correct. The whole question will turn on the scope of Explanation 2 to Section 2(15). That sub-

section is an inclusive definition of "" property "", and the second Explanation supplements or adds to the inclusion. It reads as follows :

The extinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in

favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression '' property '' shall

include the benefit conferred by the extinguishment of the debt or right.

As pointed out by Jenkins L. J. in In re Stratton''s Disclaimer, [1958] Ch. 42 ; [1958] 34 ITR (E.D.) 47 ; 3 E.D.C. 830 the principal elements

of the Explanation are (i) a debt or other right, and (ii) an extinguishment of that debt or other right, (a) at the expense of the deceased and (b) for

the benefit of some other person. The effect of a combination of these elements is that the benefit conferred by the transaction shall be treated as

property "" for purposes of Section 9 and also of Section 27. That was a case of disclaimer by a widow of interest, in certain policies of insurance

and freehold properties to which she was entitled under the will of her husband; and the court had not to consider whether an extinguishment of a

debt or other right by operation of law would be within the ambit of the Explanation. Section 9 obviously deals with disposition made by the

deceased and does not cover a disposition by operation of law. The contention for the revenue is that Explanation 2 to Section 2(15) introduces

that kind of disposition also into Section 9 and enhances the liability to tax by including it in the principal value of the estate that passes on the death

of the deceased, provided the transaction is within the required period. ''At first sight, it may appear that Explanation 2, as it refers to "" the

extinguishment "", may include any extinguishment, whatever the means by which it is brought about whether it is by conscious act of the deceased,

or by his inaction, or by operation of law But the words that follow which provide for the deeming, we are inclined to think, are only confined to

deeming of an extinguishment as a disposition and do not extend to the assumption that where a disposition is not made by the deceased, it should

also be deemed to have been made by him. It looks as if the legislature, in the Explanation, has avoided repetition of be words ""made by the

deceased"", after the words "" the extinguishment "". In our opinion, the words, "" made by the deceased "" qualify also the words "" the extinguishment

. The intention of Sub-section (15) of section 2 is no doubt to enlarge the scope and content of "" property "" and not to cover a disposition not

made by the deceased. The subject-matter of the Explanation is the debt or other right of which there is extinguishment by the deceased at his

expense with a corresponding benefit in favour of the person for whose benefit the debt or right was extinguished. Normally, a debt or other right

so extinguished will no longer be "" property "". But the Explanation deems it to be property. We think that is all the purpose and effect of the

Explanation. An extinguishment made by the deceased is deemed by it to be a disposition. If the extinguishment was not made by the deceased,

we do not think the Explanation will have any application and that means neither Section 9 nor Section 27 will be attracted.

Diamond''s Death Duties (fourteenth edition), volume 1, pages 267, 271, to which Mr, Balasubrahmanyan has invited our attention, says that

passive inaction might bring about an extinguishment, such as lapse of time or failure to apply, as well as by active steps. On a careful

consideration, we are unable to share that view, if it meant passive inaction without any animus on the part of the deceased. The passive inaction

such as lapse time or failure to apply, in order to come within the Explanation, should be the result of the deceased''s conscious act, positively or

negatively. In this case, there is nothing in the facts to show that the deceased consciously allowed the time to lapse with the result that the debts

became barred by time.

We answer the question against the revenue with costs. Counsel''s, fee Rs. 250.