Controller of Estate Duty vs Estate of Pichai Thambi (by accountable person)

The Income Tax Appellate Tribunal, Madras Bench, has referred the following question of law for the opinion of this court u/s 64(1) of the

Estate Duty Act, 1953, hereinafter referred to as ""the Act"" :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the money received under a

policy of insurance effected by the deceased on his life and assigned absolutely in favour of his wife was not chargeable to estate duty u/s 14 of the

Estate Duty Act, 1953, on the death of the deceased ?

The short facts necessary for appreciating the above question are as follows : One Pitchai Thambi died on March 19, 1966, at the age of 70.

He had taken an insurance policy No. 78214414 on November 18, 1953, for a sum of Rs. 20,000 from the Bombay Life Insurance Society. He

assigned the said policy in favour of his wife on March 16, 1956. The policy matured on November 18, 1965. The deceased wrote a letter to the

Life Insurance Corporation of India, Colombo Office, requesting it to send a cheque amounting to Rs. 23,495''20 due under the policy. The Life

Insurance Corporation of India sent a reply stating that the cheque could not be sent as the policy had been assigned by the deceased in favour of

his wife and that if the deceased wanted payment a note of authority on the back of the discharge form and in his favour should be executed by bis

wife. In the meantime, the deceased died. The wife of the deceased by a letter dated December 14, 1966, sent a note of authority in favour of one

S. A. Samu after completing the discharge form and the Life Insurance Corporation of India sent a cheque for the amount due to the said S.A.

Samu. The Assistant Controller of Estate Duty included the said sum of Rs. 23,495 in respect of the above-said policy in the dutiable estate of the

deceased. According to the Assistant Controller, the assigned policy would tantamount to gift and the bona fide possession and enjoyment of the

policy was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the deceased, or of any benefit to him, and

Section 10 of the Act was applicable to the facts of this case. On appeal by the accountable person, the Appellate Controller of Estate Duty

upheld the inclusion of the aforesaid amount not u/s 10, but u/s 14 of the Act. According to him, when the life insurance policy had been kept up

by the deceased for the benefit of his wife, the amount to be received under the policy was to be added to the principal value of the estate of the

deceased by virtue of the deeming provision of Section 14 of the Act. The accountable person preferred a further appeal to the Income Tax

Appellate Tribunal and the Tribunal held that it could not be said that the deceased had any benefit in the life insurance policy assigned to his wife

absolutely and, therefore, the provisions of Section 14 could not be applied ; that the life insurance policy could not come under the provision of

Section 6 as it was not ""property"" which the deceased was competent to dispose of; that the provisions of Section 9 could not also be applied as

that section dealt only with gifts within a certain period; and that the first part of Section 10 could not be satisfied in the present case as there was

no legally enforceable arrangement permitting the deceased to the insured money, and the contingent right of the wife of the deceased could not

come within the first limb of Section 10 of the Act. According to the Tribunal, the money received under the insurance policy was not chargeable

to estate duty and, therefore, the Tribunal allowed the appeal. It is the correctness of this conclusion of the Tribunal that is challenged in the form of

the question referred to this court extracted already.

Since the question referred to this court itself implies, the only point that was argued before this court on behalf of the Controller of Estate Duty

at whose instance the reference has been made to this court, was the applicability or otherwise of Section 14 of the Act. It is admitted that Section

14(1) alone is relevant for the purpose of the present reference and, omitting the Explanation which is not necessary for the present purpose, the

said Section 14(1) reads as follows :

(1) Money received under a policy of insurance effected by any person on his life, where the policy is wholly kept up by him for the benefit of

a donee, whether nominee or assignee, or a part of such money in proportion to the premiums paid by him, where the policy is partially kept up by

him for such benefit shall be deemed to pass on the death of the assured.

It is not in dispute that the above provision is a verbatim reproduction of Section 2(1 )(c) of the United Kingdom Finance Act, 1894. It is

equally not in dispute that there is no decision of either the courts in the United Kingdom or the courts in the country on the specific issue with

which we are concerned. From what we have stated already, it is clear that the insurance policy in question is what is generally called an

endowment policy and the said policy matured on the expiry of the period of endowment during the lifetime of the assured himself. In that context,

the question that arises for consideration is, if the other conditions of the section are satisfied, whether the amount received on the maturity of the

policy on the expiry of the period of endowment will fall within the scope of Section 14 or not. From the facts stated by us, it is clear that the

deceased took out the policy in 1953 and that he assigned the same in favour of his wife on March 16, 1956. It is not in controversy that even

after the assignment of the policy in favour of his wife, It was the deceased who continued to pay the premia due on the policy till it matured.

Consequently, it is clear that the policy was wholly kept up by the assured for the benefit of his wife as contemplated by the section. In this

particular case, in view of the claim made by the deceased himself for payment of the money from the Life Insurance Corporation, notwithstanding

the assignment of the policy in favour of his wife, there was correspondence between the Life Insurance Corporation and the deceased and during

that interval the deceased died and the money came to be paid into the hands of the wife of the deceased after the death of the deceased.

However, it is admitted by both sides that the fact that the money was paid to the wife of the deceased after the death of her husband is not

relevant and that what is relevant is the fact that the policy matured on the expiry of the period of endowment during the lifetime of the assured

himself.

In view of the absence of any authority of any court on this question, we have to decide the question on the first principles having regard to the

language of the section. There are two significant expressions present in this section. The first is, money must be received by the donee, whether

nominee, or assignee. Normally, as it is understood in the law of insurance, once an insurance policy is assigned in favour of another person, the

assignee becomes entitled to the benefits under the policy and is, liable for the obligations under the policy. However, it may happen that an

assignment is made with the object of the assignor continuing to retain the beneficial interest in the policy. As far as the statutory provisions are

concerned, Section 38 of the Insurance Act, 1938, deals with assignment and transfer of insurance policies. Sub-section (1) and Sub-section (2)

of that section deal with the formalities to be complied with for effecting a transfer or assignment and Sub-section (2) provides for giving of notice

in writing of the transfer or assignment to the insurer. Sub-section (5) of that section provides :

Subject to the terms and conditions of the transfer or assignment, the insurer shall, from the date of the receipt of the notice referred to in Sub-

section (2), recognise the transferee or assignee named in the notice as the only person entitled to benefit under the policy, and such person shall be

subject to all liabilities and equities to which the transferor or assignor was subject at the date of the transfer or assignment and may institute any

proceedings in relation to the policy without obtaining the consent of the transferor or assignor or making him a party to such proceedings.

Since this sub-section opens with the expression, ""Subject to the terms and conditions of the transfer or assignment"", it is certainly open to the

parties to agree that, notwithstanding the transfer or assignment, the beneficial interest in the policy will continue to remain with the transferor or

assignor. Similarly, nomination of a person by a policy-holder is dealt with u/s 39 of the Insurance Act, 193S. The effect of nomination is not to

clothe the nominee with beneficial interest in the policy or the money payable thereunder, but to clothe him or her only with the power to receive

the money under the policy from the insurer without prejudice to the question of title to the money. Consequently, it confers on the nominee a hare

right to collect the policy money when the money becomes payable and by such nomination and the collection of the money, the nominee does not

become the owner of the money payable under the policy and he or she is liable to make it over to whomsoever is entitled to the same under the

law. Therefore, the mere use of the word ""nominee"" or ""assignee"" in Section 14 of the Act does not decide the title to the money. The only word

that decides the title to the moneys is ""donee"". Consequently, the section contemplates donation or gift of the benefit under the policy in favour of a

person other than the assured. The expression, ""whether nominee or assignee "", has to be understood only in this context, namely, such nominee or

assignee to come within the scope of this section must actually be a donee, that is a person beneficially entitled to the money payable under the

policy.

The second significant expression occurring in the section is ""money received under a policy of insurance effected by any person on his life"".

Generally speaking, this will cover a life insurance policy, namely, a policy under which the sum assured is payable on the death of the assured.

However, policies with several names have this characteristic as a common feature. The whole-life assurance policy is a policy on the life of an

assured and the money is payable at death whenever it occurs. Similarly, an endowment assurance policy can also be termed a life insurance policy

because under that policy money assured is payable on survival to a specified date or at earlier death. A temporary assurance policy or a term

assurance policy is one under which money is payable at death only if it occurs before a specified date. A convertible temporary assurance policy

is a policy under which money is payable at death only if it occurs before a specified date, with an option to convert it to a whole-life or

endowment assurance. In all the above cases, one of the contingencies in which the money assured is payable is the death of the individual, even

though, under policies other than whole-life policies, the money becomes payable at a particular date even during the lifetime of the assured. So

long as a policy contemplates payment of the sum assured on the death of the assured as the sole contingency for such payment or as one of the

contingencies for payment of the amount, certainly such a policy can be termed as a life insurance policy or a policy effected on the life of a person,

whatever the nomenclature of the policy may be. As a matter of fact, even accident policies may fall within this category. A policy of insurance

provided for the payment of certain specified sums by the underwriters on death or disablement of the assured caused by accident. The assured

died as a result of an accident within the policy. It was held in In re Gladitz : ''Guaranty Executor and Trustee Company Ltd. v. Gladitz [1937] 1

Ch 588; [1938] 8 Comp Cas 36 (Ch D) that the policy was one effected by the assured on his own life within the meaning of the Married

Women''s Property Act, 1882.

The following passage occurring in Halsbury''s Laws of England, third edition, volume 22, may be apposite in this context :

Nature of contract in strict sense.--A contract of life insurance in its strict form may be defined as a contract under which the insurers

undertake, in consideration of specified premiums being continuously paid throughout the life of a particular person, to pay a specified sum of

money upon the death of that person. The particular person whose life forms the subject-matter of the insurance need not be the person who pays

the premiums ; it may be a third party.

Life policies for specified periods: endowment policies--It is theoretically possible for an assured to take out a life insurance policy in a strict

form but limited for a period of years, that is to say upon the terms that death is to be the sole contingency upon which payment is due but the

policy is only to run for a specified period, so that nothing is payable if the assured survives the period. Such policies are nowadays very rare.

Policies are, however, frequently taken out the basic feature of which is the provision of a capital sum on a given date if the assured so long

survives, with or without a provision for the making of a payment, or repayment of premiums, if he dies before that date ; such policies are

commonly known as endowment policies.

Broad meaning of life insurance.--The term life insurance for many purposes has a broader meaning than the strict one given previously and

includes endowment insurance. It has been said that the essential feature of a contract of life insurance, in this broad sense, is that it is a contract in

any way relating to human life. This is perhaps too wide; a public liability, or employer''s liability, policy, in so far as it provides indemnity against

death claims, could be said to relate to human life, but it could not for that reason be regarded in any real sense as a life policy. It is, however,

provided by statute that, for certain purposes, any instrument under which the payment of moneys is assured on the happening of any contingency

which depends on the duration of human life is a contract of life insurance; and, apart from express statutory provision, life insurance in the broader

sense comprises any contract in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration

of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another party,"" (pages 272-

273).

The decision of the Supreme Court in Chandulal Harjiwandas v. Commissioner of Income Tax [1976] 63 ITR 627 is illustrative of the above

position. The question in that case arose in the context of Section 15 of the Indian Income Tax Act, 1922. Section 15 of the Indian Income Tax

Act, 1922, provided :

The tax shall not be payable in respect of any sums paid by an assessee to effect an insurance on the life of the assessee or on the life of a wife or

husband of the assessee or in respect of a contract for a deferred annuity on the life of the assessee or on the life of a wife or husband of the

assessee, or as a contribution to any provident fund to which the Provident Funds Act, 1925 (XIX of 1925), applies.

In the case the Supreme Court was considering, on June 23, 1959, a policy called ""Children''s Deferred Endowment Assurance"" for a sum of

Rs. 50,000 was issued by the Life Insurance Corporation of India. The proposer was Harjiwaridas Kotecha, the father of the assessee, and the

life assured was that of the assessee. The contract of insurance entered into by the father of the assessee with the Life Insurance Corporation

provided that the contract was to become the assessee''s contract only by his adopting it on attaining majority. Clause 5 of the policy stated that all

moneys payable in terms of the policy shall, if the policy had been adopted by the life assured, be payable to the life assured, or his assigns or

nominees u/s 39 of the Insurance Act or proving executors or administrators or other legal representatives and that in the event of the life assured

not having adopted the policy, the moneys payable in terms of the policy shall become payable to the proposer or his proving executors or

administrators or other legal representatives. One other clause in the policy provided :

The life assured shall at any time after attaining majority and before the deferred date by a writing signed by him adopt this policy, agreeing to be

bound by all its provisions. On such adopting by the life assured, this policy shall be deemed to be a contract between the corporation and the life

assured as the absolute owner of the policy as from the date of such adoption and the proposer or his estate shall not have any right or interest

therein :

Provided that if all the premiums due prior to the deferred date have been paid, the person entitled to the policy moneys shall have the option to

apply for and receive as on the deferred date the cash option mentioned in the schedule in entire cancellation of this policy.

This policy shall stand cancelled in case the life assured shall die before the deferred date and in such event a sum of money equal to all the

premiums paid without any deduction whatsoever shall become payable to the person entitled to the policy moneys.

This policy shall stand cancelled also in the event of the life assured declining to adopt or failing or neglecting to adopt the policy before the

deferred date, and in such event a sum of money equal to the cash option will become payable to the person entitled to the policy moneys.

Dealing with such a policy and the applicability of Section 15(1) of the Indian Income Tax Act, 1922, to that policy, the Supreme Court held--

See Chandulal Harjivandas, Jamnagar Vs. Commissioner of Income Tax, Gujarat, :

According to the contract of insurance the Life Insurance Corporation was liable to pay the sum assured (a) on the stipulated date of maturity, if

the life assured was alive on that date, i.e., March 11, 1982, or (b) if the life assured were to die before the said date, provided that the death

occurred on or after the deferred date, i.e., March 11, 1965. Under the terms of the policy, these are the two events upon the happening of either

of which the Corporation was to pay the sum assured, viz,, Rs. 50,000. A special clause of the policy provides that at any time after attaining

majority and before the deferred date the life assured may adopt the policy and on such adoption the policy is deemed to be a contract between

the Corporation and the life assured as the absolute owner of the policy from the date of such adoption. In our opinion, the requirements of Section

15(1) of the Act are satisfied in this case because all that Section 15(1) requires is that in order to get exemption from payment of tax in respect of

any sum two conditions must be satisfied, viz., (1) such sum must have been paid by the assessee himself, and (2) that such payment must have

been made to effect an insurance on the life of the assessee himself. In the present case, the subject-matter of the contract is the insurance on the

life of the assessee and it is not disputed that the payment of the premium was made by the assessee out of his taxable income. On behalf of the

respondent, Mr. Desai contended that the assessee was not entitled to the rebate u/s 15(1) of the Act on the premium paid. It was pointed out that

the contract of insurance provided that the assessee was not entitled to the benefit of the policy till he adopted the contract on the date of his

attaining majority. The argument was stressed that the contract was made between the Life Insurance Corporation and the father of the assessee

and under the terms thereof it could become the assessee''s contract only on his adopting it on his attaining majority. It was pointed out that if the

assessee continued to be alive after the deferred date but failed to adopt the policy, it was the proposer who would be entitled to the cash option

and not the assessee. If the assessee were to die before the deferred date the policy would stand cancelled and in thai; event it was the proposer

and not the heirs of the assessee who would get the sums equal to the premiums paid. We are, however, of the opinion that the contract of

insurance between the assessee''s father and the Life Insurance Corporation must be read as a whole and in spite of the clauses referred to by Mr.

Desai we consider that the contract is in substance a contract of life insurance with regard to the life of the assessee. The important point to notice

is that if the assessee adopts the policy upon attaining majority the Corporation becomes liable to pay the sum assured, viz., Rs. 50,000 to the

assessee on the stipulated date of maturity, i.e., March 11, 1982, if the assessee was alive. The Life Insurance Corporation will also be liable to

pay the amount assured if the assessee were to die before the stipulated date of maturity but on or after the deferred date, i.e., March 11, 1965. In

our opinion, the insurance on the life of the assessee was the main intention of the contract and the other clauses upon which Mr. S. T. Desai relied

are merely ancillary or subordinate to that main purpose. Life insurance in a broader sense comprises any contract in which one party agrees to

pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of

a smaller sum or certain equivalent periodical payments by another party (Halsbury''s Laws of England, third edition, volume 22, page 273). It was

held by the Court of Appeal in Gould v. Curtis [191.3] 6 TC 293, that for the purpose of the statutory provisions relating to relief in respect of life

insurance premiums for purposes of Income Tax, a contract by which a sum is payable on the death of the assured within a specified period and a

larger sum if he is alive at the end of the period must be held to be an insurance on life.

It is significant to note that the expression used in Section 15(1) of the Indian Income Tax Act, 1922, which was the subject-matter of

consideration by the Supreme Court in the case referred to above and that used in Section 14(1) of the Act is similar, Section 15(1) of the Indian

Income Tax Act, 1922, using the expression ""to effect an insurance on the life of the assessee etc."", and Section 14(1) of the Act using the

expression ""a policy of insurance effected by any person on his life"".

In cases where the money becomes payable on the death of the assured, there can be no difficulty in applying the provisions of Section 14 of

the Act. On the hypothesis that the benefit under a policy had already been made a gift of, the section creates a fiction that the said money must be

deemed to pass on the death of the assured, in view of the fact that the deceased had kept up the policy for the benefit of the donee. However, the

question for consideration in the present case is as to the applicability of Section 14 of the Act to a case where money becomes payable even

during the lifetime of the assured on the happening of a particular contingency, as contemplated by the contract between the assured and the

insurer, and in the present case when the money became payable on the expiry of the period of endowment. As we have pointed out already, the

policy in the present case matured on November 18, 1965, and the assured died only on March 19, 1966. In other words on November 18,

1965, the money became payable under the policy. Consequently, subsequent to November 18, 1965, there could be no policy of insurance

effected on the life of the assured. The moment the policy matured the money became payable under the policy and the policy had worked itself

out. In other words, on the moment of maturity the life policy ceased and became an endowment immediately payable. What remained was a debt

due by the insurer to the wife of the deceased in the present case. When the section talks of policy of insurance effected by any person on his life

this description and the character of the policy have to be understood as on the date of the death of the assured. If the policy had matured even

during the lifetime of the assured, subsequent to the maturity it could not be termed to be a policy effected on the life of the assured. Therefore, it is

clear from the language of the section itself that the section has no application to the moneys received under a policy, which money became

payable even during the lifetime of the assured. In other words, the section applies only to moneys received or payable on the death of the assured

and it has no application to moneys received or payable under a contingency having no reference to and not depending upon the duration of the life

of the assured. Consequently, under a whole-life assurance policy the only contingency under which money is payable is the death of the assured

and, therefore, the section will clearly apply to such money. Similarly, under an endowment policy, if the assured dies before the expiry of the

period of endowment and, therefore, the money becomes payable on his death, the section will equally apply to such money. On the other hand, if

under an endowment policy the assured survives the period of endowment and, therefore, the policy matures and the money becomes payable

during his lifetime the section can have no application. We reach the above conclusion simply as a matter of construction of Section 14 of the Act

and on the fundamental basic notions relating to a policy of insurance effected on the life of a person.

We are also of the opinion that even common sense will lead to the same conclusion. If it is held that the section will apply to money received

under an endowment policy on maturity even during the lifetime of the assured, it will lead to very strange and unintended consequences. Take for

instance, a case where a person effects an insurance on his life under an endowment policy at the age of 30, the period of endowment being 20

years. In other words under the policy if he continues to pay the premium regularly, the sum assured will be payable on the expiry of 20 years or in

the event of his death if he dies before the expiry of the said 20 years. Assume that the other condition of the section, namely, the assured keeping

up the policy for the benefit of a donee is satisfied. Assume again that the assured lives up to the age of 65. Under the terms of the policy, the

policy would have matured when he was 50. The donee would have received the money. If the section is said to apply to such a situation the

consequence will be that even when a third party had received the money 15 years earlier, still that money would be deemed to pass on the death

of the assured and would form part of his dutiable estate.

We can examine this illustration with reference to yet another specific situation. The Act came into force on October 15, 1953. Section 5(1) of

the Act states :

In the case of every person dying after the commencement of this Act, there shall, save as hereinafter expressly provided, be levied and paid upon

the principal value ascertained as hereinafter provided of all property, settled or not settled.....which passes on the death of such person, a duty

called ''estate duty''.

Sub-section (2) of Section 3 provided :

In Parts II and III of this Act, any reference to any interest disposed of, policy of insurance effected, annuity or other interest purchased or

provided or to any gift, settlement, disposition or transfer of property made, shall be construed as including any such interest, policy, annuity, gift,

settlement, disposition or transfer, as the case may be, whether it was disposed of, effected, purchased or provided, or made before or after the

commencement of this Act.

Section 9, for instance, occurring in Part II of the Act deals with gifts within a certain period before death. Sub-section (1) of this section

states:

Property taken under a disposition made by the deceased purporting to operate as an immediate gift, inter vivos, whether by way of transfer,

delivery, declaration of trust, settlement upon persons in succession, or otherwise, which shall not have been bona fide made two years (originally

the Act contained the expression ''one year'' and that was substituted by the expression ''two years'' by Section 38 of Act 13 of 1966 with effect

from April 1, 1966) or more before the death of the deceased shall be deemed to pass on the death ;

Provided that in the case of gifts made for public charitable purposes the period shall be six months.

Thus, it will be seen that even though the Act applies to the estate of a person dying after the commencement of this Act, it expressly deals with

transfers, gift, etc., made before the commencement of the Act. At the same time, Section 9 which deals with the case of gifts expressly provides

that if the gifts had been made prior to two years before the death of the deceased, the property taken under such gift shall not form part of the

dutiable estate. If Section 14 is held to apply to moneys received on the maturity of a policy during the lifetime of the deceased, there is no

provision in the section prescribing a time limit with reference to the date of the death of the deceased within which the money should have been

received or the gift should have been made. The relevancy of this point is obvious because Section 14 itself proceeds on the basis of a gift alone. If

so, Section 9 which also deals with gifts, prescribes a period of two years from the date of the death of the deceased for including the property

disposed of by a gift in the dutiable estate, while Section 14 has no such provision. Consequently, in the illustration we have given already,

assuming that the deceased died in 1954, at the age of 65, still the money received by the donee 15 years earlier, namely, 1939, would be held to

be liable to be included in the dutiable estate. Though, for the purpose of illustrating the point, we have taken the interval between the date of

maturity of the policy on the expiry of the period of endowment and the date of the death of the assured as 15 years, the period can be much

longer. Certainly it could not have been the intention of the legislature to include all those moneys irrespective of the interval between the receipt of

the money and the date of the death of the deceased in the dutiable estate of the deceased.

There is yet another aspect to be taken note of in this context. We have referred only to the interval between the date of the receipt of the

money and the date of the death of the deceased. However, the actual gift of the benefit under the policy should have preceded the date of the

receipt of the money by the donee and, consequently, the interval between the date of the gift and the date of the death of the donor will be longer

than that between the date of the receipt of the money and the date of the death of the donor. We are merely referring to this aspect solely for the

reason that whenever the statute intended to include the property already disposed of by the deceased in the dutiable estate, it had done so by

creating a fiction only subject to certain conditions. But in Section 14 of the Act no such condition is contemplated at all and all that is

contemplated is a gift of the right in the policy by the assured in favour of a third party and the assured keeping up the policy for the benefit of such

donees. This is yet another circumstance in support of the view that Section 14 does not have any application to the money received on the expiry

of the period of endowment during the life-time of the assured.

Consequently, though we do not agree with the reasoning of the Tribunal, we are of the opinion that the Tribunal was right in its conclusion that

Section 14 of the Act has no application to the present case. Under these circumstances, we answer the question referred in the affirmative and in

favour of the accountable person. The accountable person is entitled to his costs of this reference. Counsel''s fee is fixed at Rs. 500.