Controller of Estate Duty vs Rebala Subbarami Reddy

Jeevan Reddy, J.—Three question are referred for the opinion of this court u/s 64(1) of the Estate Duty Act, 1953. They are :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the debts due to Sri T. Pradyumna Kumar Reddy and Sri T. Prabhas Kumar Reddy are not to be abated u/s 46(1) of the Estate Duty Act, 1953 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the repayments of debts made by the deceased to Smt. T. Sudarsanamma and Smt. T. Priyamvada within the period of two years preceding the date of death cannot be included in the estate of the deceased u/s 46(2) of the Estate Duty Act, 1953 ?

(3) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is justified in upholding the order of the Appellate Controller deleting the addition of Rs. 1,88,084 made by the Assistant Controller of Estate Duty by applying the provisions of sections 46(1) and 46(2) of the Estate Duty Act, 1953 ?"

Question No. (3) is merely consequential; the answer thereto follows the decisions on questions Nos. (1) and (2).

The matter pertains to the valuation of the estate of the late Rebala Subbarami Reddy, who died on October 15, 1976. In the return filed by the accountable person. deduction was claimed for the outstanding debts and liabilities. The debts were due to four grandchildren of the deceased, to whom the deceased had gifted agricultural lands during his lifetime. The particulars of the gifts are as follows :

------------------------------------------------------------------------ Sl Name of the Debt due/dis- Date of Value esti- Value estimated No. donee charged prior settle- mated by in gift-tax to two years ment deed assessment prior to death ------------------------------------------------------------------------ 1. T. Pradyumma Rs. 1,25,417 30-3-1958 Rs. 23,000 Rs. 82,000 Kumar Reddy (outstanding) 2. T. Prabhas Rs. 50,437 2-4-1958 Rs. 23,000 Rs. 81,540 Kumar Reddy (outstanding) 3. T. Sudarsa- Rs. 52,441 30-3-1958 Rs. 11,000 Rs. 33,318 namma (repaid on 14-2-1976). 4. T. Priyamvada Rs. 22,309 1958 Rs. 50,000 Not available (repaid on 31-3-1976). ------------------------------------------------------------------------

The claim for deduction of the above debts was rejected by the Assistant Controller of Estate Duty on the ground that the debts must be deemed to have abated u/s 46 of the Act. To the debts due to the two grandsons, he applied sub-section (1) of section 46, and to the debts repaid to the grand-daughters within two years of the death of the deceased, he applied sub-section (2) of section 46. Accordingly, he included the total value of the said debts in the estate of the deceased. on appeal, the Appellate Controller found that the moneys advanced by the grandchildren were larger than the income from the settled properties, and that the settled properties were, and were continuing in possession and ownership of the donees. He found that the moneys lent to the deceased were out of the income of the other properties held by the donees. Accordingly, he directed the deletion of the said debts. His discussion is confined to sub-section (1) of section 46. Against the decision of the Appellate Controller, the Department filed an appeal before the Appellate Tribunal. The Appellate Tribunal found that so far as the moneys lent by the grandsons are concerned, it cannot be said that they represent the income from the gifted properties. It found that they represent the income of the other substantial properties held by the grandsons. On this basis, it found that there was no occasion to apply sub-section (1) of section 46. It further found that the very provision in section 46(1) is inapplicable in the circumstances, inasmuch as u/s 46(1), what abates is the consideration which consisted of property derived from the deceased and not any accretions by way of earnings therefrom. So far as the grand-daughters are concerned, though there was no finding that they had any other property, the Tribunal upheld the deletion made by the Appellate Controller on the ground that section 46 itself has no application. Thereupon, the Revenue applied for and obtained this reference.

Before we take up the questions referred for consideration, it is necessary to mention a few more facts. The deceased had settled/gifted agricultural lands to all the four grandchildren concerned herein in the year 1958. Though the value shown in the gift deed was Rs. 23,000 in the case of the grandsons, the Gift-tax Officer valued the same at Rs. 82,000 and Rs. 81,000, respectively. Similarly, the value of the properties gifted to the grand-daughters was also determined at a higher figure by the Gift-tax Officer. Lands were taken possession of by the donees on the date of the gift itself. Subsequently, on June 15, 1960, a family partition took place in which both the grandsons, T. Pradyumna Kumar Reddy and T. Prabhas Kumar Reddy, obtained substantial properties besides money-lending dues and capital. The said partition was put forward in the Income Tax assessment proceedings and was accepted and recorded. It has been found by the Appellate Controller - which finding has not been disturbed by the Appellate Tribunal - that there was no income from these gifted properties during the years 1958-59 and 1959-60. They started yielding income only from the accounting year 1960-61 onwards. The net income from the settled properties during the four years, i.e., 1960-61 to 1963-64 was Rs. 30,444, whereas the amount lent by T. pradyumna Kumar Reddy to the deceased, as no March 31, 1964, was Rs. 3,80,822. The same situation continued even for the subsequent years, viz., that the income from the settled properties was far below the amounts lent by T. Pradyumna Kumar Reddy to the deceased. Indeed, the Appellate Controller found further that a sum of Rs. 30,444 due by the end of the accounting year 1963-64 was repaid on March 31, 1964, by the deceased to T. Pradyumna Kumar Reddy. Similar is the case with reference to T. Prabhas Kumar Reddy with some variation in the figures. It is on these facts that the Appellate Controller found that the amounts lent by the grandsons to the deceased cannot be related to the income from the settled properties, but that they represented the income from other substantial properties held by them. Of course, so far as the two grand-daughters are concerned, there was no materials on record to show that they had any other properties yielding income. Evidently, therefore, the amounts lent by them to and repaid by the deceased represented income from the properties settled upon them by the deceased. It is on the above facts that the questions referred have to be examined and answered.

Part VI of the Estate Duty Act deals with deductions. Section 44, the first section in the Part, provides for deduction of funeral expenses not exceeding Rs. 1,000, as also for deduction of debts and encumbrances. It is, however, provided that only such debts and encumbrances as 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 taking effect out of his interest alone are deductible. Section 45 is in the nature of a proviso to section 44, but being unnecessary for our purpose, it need not be referred to. Section 46 is in the nature of a further proviso to section 44. It would be appropriate, therefore, to set out both section 44 and section 46. They read as follows :

"44. In determining the value of an estate for the purpose of estate duty, allowance shall be made for funeral expenses (not exceeding rupees one thousand) and for debts and incumbrances; but an allowance shall not be made, -

(a) for debts incurred by the deceased, or incumbrances created by a disposition made by the deceased, unless, subject to the provisions of section 27, such debts or incumbrances 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, or

(b) for any debt in respect whereof there is right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained, or

(c) more than once for the same debt or incumbrance charged upon different portions of the estate, or

(d) for debts incurred by or behalf of the deceased by way of dower, to the extent to which such debts are in excess of rupees five thousand,

and any debt or incumbrance for which an allowance is made shall be deducted from the value of the property liable thereto.

Explanation. - For the purpose of this section, ''funeral expenses'' include all expenses which may have to be incurred in connection with the ''sraddha'' or ''barsi'' ceremonies of the deceased for a period of one year from his death."

"46. (1) Any allowance which, but for this provision, would be made u/s 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 therefore 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 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 has 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."

Section 46 corresponds to and is practically a reproduction of section 31 of the English Finance Act, 1939. The language employed in the section is highly involved and does not admit an easy understanding of the meaning and purport of the section. We found a good amount of difficulty initially in appreciating the precise purport and meaning of the section. Indeed, this is the comment made by the English judges also with respect to the language employed in section 31 of the English Finance Act - and this comment holds good for many other sections in the Act. True it is that this Act has since been repealed; but, if and when this Act is revived, we do hope and trust that the Act will be redrafted afresh in plain and clear language, so that any one reasonably conversant with the English language can understand it without seeking the help of expert lawyers.

Now coming back to section 46, its object evidently is to hit at devices designed to diminish the value of the estate passing on the death of a deceased. In McDougal''s Trustees v. IRC [1983] 143 ITR 698 (printed as an Appendix) to the decision of the Madras High Court in Controller of Estate Duty, Tamil Nadu Vs. S.T.B. Ameen Khaleeli, , LORD Patrick explained its meaning and purport in the following words (p. 715) :

"Under section 7(1) of the Finance Act, 1894, in determining the value of an estate for the purpose of estate duty, allowance is to be made for debts due by the deceased if incurred bona fide, for full consideration in money or money''s worth, and if taking effect out of his interest.

Section 31(1) of the Finance Act, 1939, innovated on that position. The section is intricate and involved in expression. It looks back from the date of death to the events of the past. If any of the consideration given for a debt consisted of property derived from the deceased, an abatement is to be made from the allowance proportionate to the value of the property derived from the deceased. This is designed to meet the case where A gives property to B, and B lends the value of the property to A. If, in such a case, A''s executors were allowed to deduct the amount of the loan from A''s estate for estate duty purposes, a device would have been found for avoiding the provision that gifts must bear estate duty, if the donor dies within five years of the date of the gift, since the debt would rank for deduction from the deceased''s estate, if the debtor died at any time after the gift was made and the debt incurred. The above is case (a) of section 31(1).

Case (b) under the section is where any of the consideration given for the debt, not being property derived from the deceased, which is case (a), was given by a 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 emphasis is mine. In such a case, there is to be a similar abatement from the allowance made in respect of the debt.

There is an important proviso to case (b)..."

(Since we are not concerned with clause (b) of section 46(1) in this case, we are omitting the observations of Lord Patrick relating to the proviso to clause (b) of section 31(1), corresponding to section 46(1)(b). It would also be evident that section 7(1) of the Finance Act, 1894, referred to in the above extract, corresponds to section 44(a) of our Act, Further, as against five years'' period mentioned in section 31 of the English Act, our Act speaks of two years).

Now, section 46(1)(a) provides that deduction allowed u/s 44 on account of a debt due from a deceased shall be subject to abatement to an extent proportionate to the value of any of the considerations given therefore (for such debt) which consisted of property derived from the deceased. In other words, it contemplates and provides for an arrangement or an understanding between the deceased and the creditor whereunder the deceased had agreed to transfer certain property to the creditor and in consideration thereof, the transferee/creditor had agreed to advance a loan. Only in such a case, it is possible to say that the consideration for the debt consisted of property derived from the deceased. May be, the interval between the transfer of property and the advancing of debt varies from case to case; but, still, there must be a nexus, a connection, between both. If they are independent and unrelated, it can never be said that the transfer of property by the deceased constituted consideration for the loan advanced by the transferee. While sub-section (1) of section 46 deals with an outstanding debt due from the estate of the deceased, sub-section (2) deals with a case where the debt has been discharged within two years of the death of the deceased; otherwise, the principle of both the subsections is the same. If the debt has been repaid more than two years prior to the death of the deceased, the principle of abatement cannot be applied to such a debt and it has to be deducted from out of the estate of the deceased as per section 44. The expression "property derived from the deceased" has to be understood in the sense in which the said expression is defined in clause (a) of sub-section (2) of section 16 (vide sub-section (1) of section 46). According to this definition, "property derived from the deceased" means any property which was the subject-matter of disposition made by the deceased, either by himself or in concert or arrangement with any other person, whether for consideration or otherwise and whether directly or indirectly. The idea evidently is to hit at devices designed to diminish the value of the estate of the deceased.

In the case of McDougal''s Trustees [1983] 143 ITR 698, the decreased gifted a certain property to the city of Edinburgh. The gift was brought about in the following manner : The deceased entered into an agreement with the owners of the property, paid the consideration, and had it conveyed in favour of the City of Edinburgh. Of course, he imposed certain conditions which the city had to fulfil, in contravrntion of which condition, conveyance in its favour was to become null and void. The consideration paid by the deceased was pound 11,000. In this turn, the deceased was to obtain to loan from the City of a sum of pound 11,300 to cover the price and expenses incidental to the said transaction. It was agreed that the loan should subsist during the lifetime of the deceased, that no interest should be paid during the said period,but that the loan along with intrest should be repaid on his death subject to the deduction of any net rents derived from the property. By way of security for repayment of the loan, the deceased assigned certain stocks in trust in favour of the City. After his death, the trustees claimed deduction for the said debt amount from the estate of the deceased, u/s 7(1) of the Finance Act, 1894 (corresponding to section 44(1)(a) of the Indian Act). The question then arose whether the debt abates because of the provisions contained in section 31 of the Finance Act, 1939 (corresponding to section 46 of the Indian Act). It was held by the Scottish Court (comprising of Lord Justice Clerk (Lord Thomson), Lord Mackay and Lord Patrick) that section 31 of the Finance Act, 1939, applies, inasmuch as, in the words of Lord Patrick (at p. 716), "in the present case the gift and the loan were related in the closest possible way. In fact they formed part of one transaction. The property would not have been bought by McDougal and given to the citizens of Edinburgh but for the fact that the citizens of Edinburgh were prepared in return for the gift to lend the purchase price and the expenses of the transaction to McDougal...".

In Controller of Estate Duty, Tamil Nadu Vs. S.T.B. Ameen Khaleeli, , the deceased gifted a vacant land to his son on August 29, 1963. The son constructed a residential building thereon. The building was let out to the deceased. Later, the deceased purchased the building together with the land from his son for a sum of Rs. 2,00,000, which was the market value of the property on that date. Some time later, the deceased took a loan of Rs. 80,000 from his son and repaid a sum of Rs. 50,000 in due course. On the date of death of the deceased i.e., June 5 1970, the deceased still owed a sum of Rs. 30,000 to his son which amount was claimed as a deduction from his estate by the accountable person. This claim for deduction was negatived with reference to sub-section (1) of section 46. Further, the Assistant Controller applied sub-section (2) of section 46 and included the sum of Rs. 50,000 already repaid to the son in the estate of the deceased on the ground that the said repayment was made within two years of the death. On a reference, the High Court affirmed the Tribunal''s view that neither clause (b) of sub-section (1) of section 46 nor sub-section (2) thereof has any application to the facts of the case, inasmuch as (i) the loan advanced by the son to the deceased was not in consideration of the gift of vacant land by the deceased to his son, both the transactions being far remote; (ii) the land was not gifted by the deceased to enable or facilitate the son to advance a loan later; and (iii) on the date the loan was advanced, the property was not in the hands of even the son. For all these reasons, it was held, it cannot be said by any stretch of imagination or language that there any "nexus" between the loans borrowed in the years 1967 and 1970 and that the gift of vacant land effected in 1963. It was also found that the tenancy of the building by the father was a bona fide transaction. Of course, in this case, what fell for consideration was clause (b) of sub-section (1) of section 46 and not clause (a). Be that as it may, it was observed by the court that the idea behind both the clauses in section 46(1) is based on he apprehension of the Legislature that the requirement u/s 44 of the Act that a debt must be for full consideration and must be incurred bona fide, could be easily defeated by the deceased by making an unconditional gift to the would-be creditor and then borrowing the amount of the value of the gift from the donee with a diminution in the deceased''s purchasing powers. In other words, the policy behind the provision is to counteract any attempt at avoidance or evasion of estate duty in this manner. It was further pointed out that while clause (a) of sub-section (1) deals with a direct nexus, clause (b) thereof deals with a nexus which is somewhat less direct.

The principle underlying section 46 was also considered in another decision of the Madras High Court in Mrs. Ratnakumari Kumbhat Vs. Controller of Estate Duty, . In this case, the deceased made a gift of Rs. 50,000 to each of his three minor sons on March 31, 1955. It was accepted by the mother of the minors as their guardian and on their behalf. The said money was deposited with the deceased an an interest-bearing deposit. Appropriate entries were made in the books, besides execution three promissory notes by the deceased in favour of the minors. Interest on these amounts was credited and withdrawals were also made in the minors'' accounts in the books of the deceased. The deceased died on June 25, 1962. The accountable person claimed the entire amount of Rs. 1,50,000 and the interest accrued thereon as a deduction u/s 44 of the Act which was disallowed by the authorities under the Act. At the stage of the Appellate Tribunal, the accountable person did not press the contention that the principal debt of Rs. 1,50,000 abates u/s 46(1) of the Act. He confined his contentions only to the interest of Rs. 1,16,205 which had accrued thereon. The Tribunal held against the accountable person, applying clause (b) of sub-section (1) of section 46. On a reference, the High Court held that in order to attract clause (a) of sub-section (1) of section 46, the property which constituted the consideration should have been in existence on the date when the debt was in cured. Applying this principle, it was held that the future interest payable on the loan could not have constituted the consideration for the debt. It was observed that only the debt of Rs. 1,50,000 constituted the consideration for the debt, but not the future interest payable, or paid thereon. Accordingly, it was held that no part of the interest paid on the loan would be covered by the provisions of section 46(1) and that the interest outstanding on the date of death has to be allowed as a deduction u/s 44 of the Act. This decision was followed by a Bench of this court in Controller of Estate Duty Vs. P. Subramanyam (by accountable person P. Rajyalakshmi), , in somewhat similar circumstances. On principle, we find it difficult to appreciate the distinction made in the Mrs. Ratnakumari Kumbhat Vs. Controller of Estate Duty, , between the principal debt and the interest accruing thereon. If, in the Mrs. Ratnakumari Kumbhat Vs. Controller of Estate Duty, , the sum of Rs. 1,50,000 constitutes consideration for the debt, the interest occurring on such sum would also go with it. True it is that the property which constituted consideration should have been in existence on the date the debt was incurred, but from that it does not follow necessarily that interest should be treated as distinct from principal. But, as we shall presently point out for the purpose of the case before us, it is unnecessary for us to go into this aspect, though it is true that the Tribunal has relied upon these two decisions to hold in favour of the accountable person.

In the case before us, so far as the two grandsons are concerned, it is found as a fact that the amount lent by them to the deceased did not, and could not have constituted income from the property gifted by the deceased to them. It has been found that the loan amount was derived from other substantial properties held by the grandsons. In such a case, there is no occasion for applying the principle of section 46 at all. So far as the two grand-daughters, namely, Sudarsanamma and Priyamvada, are concerned, we are inclined to sustain to conclusion of the Tribunal, on reasoning different from the one it has given. The gift of landed properties in their favour was made in the year 1958. The material before us does not show as to when the loan was advanced by these two ladies to the deceased; was it soon after the gift in their favour or was it after a long interval ? The deceased died on October 15, 1976. This aspect in relevant for the purpose of determining whether it can be said that the gifting of property by the deceased constituted the consideration for the debt advanced by the two grand-daughters to him. If the interval is too long, it would be difficult to say that there is any nexus between both; and in the absence of nexus, section 46 would not apply. None of the three authorities, viz., the Assistant Controller, the Appellate Controller, of the Tribunal have addressed themselves to this aspect. In the circumstances, therefore, it is not possible for us to say that the amounts repaid by the deceased within two years of his death to his two grand-daughters aforesaid are subject to abatement under sub-section (2) of section 46 of the Act. We are also of the opinion that in all the circumstances of the case and also having regard to the value of the items in dispute, it would not be appropriate to call for a finding in this behalf. It is better that the matter is given a quietus here on the ground mentioned by us hereinabove.

For the above reasons, all the three question referred to us are answered in the affirmative, i.e., in favour of the accountable person and against the Revenue. There shall be no order as to costs.