Indrajit Chaliha vs Controller of Estate Duty

A. Raghuvir, C.J.—The following question has been referred under Sub-section (1)of Section 64 of the Estate Duty Act, 1953 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the conversion of the sole proprietary business of Shri J.P. Chaliha, the deceased, into a partnership business styled ''Korangani and Azizbagh Tea Estate'' by taking his wife and his sons as partners by allowing 1/4th share to each of the said partners by partnership deed dated August 2, 1962, amounts to a gift and thereby upholding the inclusion by the Assistant Controller of Estate Duty of the entire difference between the market value and the book value of the assets of the firm, Korangani and Azizbagh Tea Estate, amounting to Rs. 6,45,459 dutiable as part of the estate of Shri J.P. Chaliha, the deceased, under Sections 5 and 10 of the Estate Duty Act, 1953 ?"

The reference relates to the estate of Jadav Prasad Chaliha. He was a planter-manufacturer and a tea merchant. He was the sole proprietor of a business styled as Korangani and Azizbagh Tea Estate. He converted the sole proprietary business into a partnership business on August 2, 1962. In that firm, his two sons, Indrajit and Ranjit, his spouse, Debabala, were admitted to the benefits of the partnership firm. Each of the three persons brought Rs. 2,000 and in all Rs. 6,000 was contributed by three of the partners. The four partners were declared to be four equal shareholders. Ranjit Chaliha agreed to devote his time to the firm. He was to be paid Rs. 1,250 as salary for the first three years, Rs. 1,500 for the next three years and in the succeeding three years Rs. 1,750. Indrajit and Debabala agreed to devote attention to the business and perform all that as may be required of each of them for the business of the firm.

Jadav Prasad Chaliha died on June 15, 1964. The accountable persons submitted returns under the Estate Duty Act, 1953. The net value of the estate was assessed at Rs. 20,74,036 and the tax demanded was Rs. 6,91,262. Aggrieved thereby, an appeal was filed before the Appellate Controller of Estate Duty, Eastern Zone, Dibrugarh and, inter alia, it was urged that by reason of the conversion of the sole proprietary business, there was no gift made by the deceased. The contention did not succeed. The contention was repeated before the Income Tax Appellate Tribunal at Gauhati in further appeal without any success. Finally, at the instance of the accountable persons, the following question is referred to this court.

"Whether the conversion of the sole proprietary business by the deceased of Korangani-and Azizbagh tea estates resulted in a gift in law and whether the three partners were donees" is the first question that arises in the case.

We see Ranjit had agreed to devote his entire time to the business of the firm. Indrajit and Debabala agreed to devote attention to the work of the partnership firm as was required of them to do: Whether these factors form consideration ? If so, it is obvious, there is no gift under the laws of the country.

The cases in Commissioner of Gift Tax, Gujarat I Vs. Karnaji Lumbaji, and Additional Commissioner of Gift-tax Vs. A.A. Annamalai Nadar, were cited on behalf of the accountable person to support the contention. It is seen in the latter case that the major son was taken as a partner of the firm by the aged father. The major son agreed to render service and that agreement was held to be consideration to hold that there was no gift involved in the case. The Madras High Court in that case held (at p. 577) : "The Tribunal was right in its view that there was adequate consideration for the conversion of the business into a partnership business and, therefore, there was no gift in the case of the major son." A similar conclusion was drawn in Controller of Estate Duty, Bombay City, Bombay Vs. Kantilal Nemchand, where the proprietary business was converted into a partnership business. The father relinquished his rights, shuffled the property and converted it into a firm and in that his son was taken as a partner. He agreed to devote his time to the business of the firm and it was held that there was consideration and that, in that view, there was no gift. In the instant case, the three partners agreed to devote their attention and, therefore, there was consideration. Therefore, there was no gift involved when the three were inducted into the firm on the day when the deed was executed by all four of them.

The next question arises as to the application of Section 9 or Section 10 of the Estate Duty Act of 1953. The deed was executed on August 2, 1962, and the death of the estate-holder occurred on June 15, 1964, more than two years after and, therefore, Section 9 has no application. The Revenue authorities applied Section 10 in the instant case.

We see that two cases of Australia decided by the Privy Council, one in Munro (H.R.) v. Commr. of Stamp Duties [1934] AC 61 and the other in Clifford John Chick v. Commr. of Stamp Duties [1959] 37 ITR 89 ; [1958] AC 435 were followed for many years by the courts in India. A significant departure was made in the case of Controller of Estate Duty, Madras Vs. C.R. Ramachandra Gounder, After a gift was made and the donees invested the gifted property in the partnership, the Supreme Court held that Section 10 did not apply. If the Privy Council cases were to be followed, the decision and conclusion would have been different in Controller of Estate Duty, Madras Vs. C.R. Ramachandra Gounder, and that case was followed in Commissioner of Income Tax and Controller of Estate Duty, Madras Vs. N.R. Ramarathnam and Others, Controller of Estate Duty, Punjab, Haryana, J. and K., U.P., Chandigarh and Patiala Vs. Smt. Kamlavati and Shri Jai Gopal Mehra, and Controller of Estate Duty, A.P. Vs. Godavari Bai, All these cases are referred and approved in N.K. Sanghi, Partner of Sanghi Brothers Vs. Controller of Estate Duty, Rajasthan,

This part of the decision is really not necessary in the instant case as it is held that there was no gift involved when the partnership deed was executed on August 2, 1962, but is adverted to as there was discussion touching on this aspect of the case.

The first part of the question is answered in the negative, in favour of the assessee and against the Revenue. In view of the answer to the first part, there is no necessity to answer the second part as regards escalation of the value of the assets of the firm amounting to Rs. 6,45,459. No costs.