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Judgment
Veeraswami, J.—One Mr. N.S. Ramaswami Iyer died on October 17, 1960. He was a landlord owning agricultural lands, house properties
and also investments. He was instrumental in starting a partnership styled as Ennessor and Company at Coimbatore in 1947. Besides himself, the
other partners were his three sons and daughter. The firm was engaged in money-lending business and was registered u/s 26-A of the Income Tax
Act, 1922. On March 31, 1953 and April 1, 1956 the deceased transferred by book adjustments in the account of the firm Rs. 52,042--7--3 and
Rs. 77,881-11-8 respectively to his sons and daughter. In the return for purposes of estate duty, the accountable persons excluded from the
principal value of the estate, the total of the two sums, namely, Rs. 1,29,924. The revenue disagreed with the accountable persons and included the
same as dutiable, but the Tribunal was not prepared to accept that view. In doing so the Tribunal felt supported by Munro v. Commissioner of
Stamp Duties 2 E.D.C. 462. At the instance of the Commissioner of income tax who as the Controller of Estate Duty the following question has
been referred to this Court:
Whether on the facts and in the circumstances of the case, the sum of Rs. 1,29,924 was liable to estate duty as property deemed to pass on the
death of the deceased u/s 10 of the Estate Duty Act, 1953?
The Revenue''s point of view was that there were no cash gifts of the two sums but they were brought about by mere adjustments in the books
without physical handing over of the cash and further by being a partner in the firm, the deceased was not entirely excluded from the subject-matter
and beneficial enjoyment of the gifts. The Assistant Controller noticed that this was not a case of the deceased parting with cash and thereafter the
donees reintroducing such cash in the business at a later stage, but, nevertheless, he thought that this made no difference and he would add that the
deceased had also beneficial enjoyment of the gifted properties. Confronted with Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 and
Clifford John Chick v. Commr. of Stamp Duties 3 E.D.C. 915 the Tribunal found that Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 was
nearer to this case.
In spite of the fact that the scope and intendment of Section 10 of the Estate Duty Act, 1953 have been considered and defined in numerous
cases of the High Courts and of the Supreme Court, largely in the background of English cases decided both by the Privy Council as also the
Court of Appeal and the House of Lords with reference to a section more or less similarly worded, it often raised, in its application to particular
facts, subtle questions not always free from difficulty. The intention of Section 10 is that gifts with reservations passed to the extent of such
reservations. The section has two parts, one relating to complete exclusion of the donor from the subject-matter of the gift and the other to his
exclusion from any benefit from and out of the subject-matter of the gift arising by contract or otherwise. The firs* limb a fortiori pre-supposes, as
has been indeed expressed by the section itself, that the done assumes bona fide possession and enjoyment of the subject-matter of the gift. While
this is clear, confusion in likely to arise in the application of the section if a clear view of the subject-matter of the gift is not formed at the outset.
Before proceeding further, a few more facts may be stated. The partners contributed each a sum of Rs. 101 towards his or her share capital,
and shared the profits equally. The amounts transferred to the donees were apparently profits earned by the partnership business and lying to the
credit of the donor. But having regard to the fact that the transfer of the two amounts was effected by book entries, no cash was handed over and
the amount transferred continued to be in the firm''s books and were available for purposes of the business of the firm. Whether the moneys so
transferred were regarded as a loan to the firm or as surplus profits to the credit of the donor, they can be made use of by the firm. As the funds
belonged to the donor, who was a partner, their repayment would be subject to the provisions of the Partnership law. It is in this back-ground we
have to view what precisely was the subject-matter of the gift; was it, the two sums, free of any conditions or liabilities or subject to them? We are
inclined to think that on a consideration of the entire facts, the book entries of the two amounts were made in effecting the transfer, the donor being
fully alive to the fact that there would be no handing over of those two sums in cash to the donees and they would be available for the continued
use of the partnership in the business and in that contingency, therefore, the amounts, while being used in the firm would be looked after, managed
and controlled by the father in his capacity as the managing partner.
Mr. Balasubramaniam for the Revenue heavily relied on Clifford John Chick v. Commr. of Stamp Duties 3 E.D.C. 915 and suggested that as
Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 merely related to a case of reservation of benefits to the donor or rather non-exclusion of
the donor from a benefit, it would be inapplicable to the fact of this case. Clifford John Chick v. Commr. of Stamp Duties 3 E.D.C. 915 related to
a transfer by a father by way of gift to one of his sons a certain pastoral property, the gift being without any reservation, qualification or condition.
Months later, the donor, the donee and another son of the donor entered into a partnership agreement to carry on the business of glaziers and
stock dealers. The stipulation of the agreement between them was that the father should manage the business and that his decision should be final
and conclusive in connection with all matters relating to the conduct of the business, the capital of the business was to consist of livestock and plant
then owned by the respective partners. The business was to be conducted on the respective holdings of the partners which should be used for the
purposes of the partnership only. That all lands held by any of the partners at the date of the agreement should remain the sole property of such
partner was another interesting stipulation. The question was whether the value of the properties given to the son by way of gift was to be included
in computing the value of the father''s state for purposes of estate duty. There was no dispute before the Court that the son had assumed bona fide
possession and enjoyment of the property immediately on the gift to the entire exclusion of the father. But the question was whether thereafter the
donee retained to the exclusion of the father the subject-matter of the gift. His inclusion was sustained by the Privy Council and VISCOUNT
SIMONDS delivering the judgment pointed out that the section was clear that if possession and enjoyment were thenceforth to be retained by the
donee, it was irrelevant to enquire whether there was any interval between the dates when the donor was excluded and ceased to be excluded.
VISCOUNT SIMONDS observed (at page 926):
But the sub-section says nothing about independent transactions. The sole question is one of fact-- was the donor excluded If he was not
excluded, it is not relevant to ask why he was not excluded.
Their Lordships also repelled the contention that the transaction was in no way related to the gift and was but a mode of enjoyment by the donee
of his property. In doing so VISCOUNT SIMONDS further observed:
The words'' related to the gift'' are no doubt an echo of the words referable to the gift'' which are to be found in Munro''s case 2 E.D.C. 462 and
St. Aubyn''s case 3 E.D.C. 292 and are lucidly explained by Dixon C.J., in Owens case 88 C.L.R. 67, 85 and at an earlier date by Owen A.J., in
Budd v. Commissioner of Stamp Duties (1937) 37 S.R. (N.S.W.) 366. They might become of importance if it was the second limb of the sub-
section which was under consideration and the question, therefore, was whether the donor had been entirely excluded from any benefit of
whatsoever kind. But it is difficult to see what bearing they have when the simple question is whether the donor has been excluded from the
subject-matter of the gift, a pastoral property known as ''Mia Mia'' and the clear answer is that he has not.
Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 was cited before the Board but VISCOUNT SIMONDS stated as to that (at page 925):
It follows that the decision of this Board in Munto v. Commissioner of Stamp Duties 2 E.D.C. 462 on which the Appellants relied, has no
application to the present case. It must often be a matter of fine distinction what is the subject matter of a gift. If as in Munro''s case 2 E.D.C. 462
the gift is of a property shorn of certain of the rights which appertain to complete ownership, the donor cannot, merely because he remains in
possession and enjoyment of those rights, be said within the meaning of the section not to be excluded from possession, and enjoyment of that
which he has given.
It may be seen that in Clifford John Chick v. Commr. of Stamp Duties 2 E.D.C. 462 the gift of the property made by the father to the son was as
complete as it could be and there was no reservation whatever. But because of the requirements that the donor should be excluded even after the
donee had assumed possession and enjoyment from the subject-matter of the gift'' the decision in that case was that the section was attracted to
the facts of that case, particularly the'' limb requiring the retention by the donee of the subject'' matter of the gift to the exclusion of the donor. But
in Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 the position was different. That was a case of gift, as Viscount Simonds pointed out, of
property shown of certain of the rights. The question in Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 was decided not with reference to
the applicability of any of the limbs of the section but more on the view as to what constituted the subject-matter of the gift. In Munro v.
Commissioner of Stamp Duties 2 E.D.C. 462 a father entered into an agreement of partnership with his six children into which he brought a vast
extent of land on which he earlier carried on the business of graziers. During the currency of the partnership the father transferred by way of gift of
his right, title and interest in portions of his land to each of his four sons on the understanding that no partner would withdraw and work his land
separately. The evidence showed that the transfers were taken subject to the partnership agreement. On the death of the father later, the land that
had been transferred by him to his sons was included in his estate to death duties on the ground that it was dutiable. The Privy Council held that the
property comprised in the transfers in favour of the sons was the land separate from the rights therein belonging to the partnership and was
excluded by the terms of Section 102(2)(a) of the Stamp Duties Act, 1920--31. Under the terms of the partnership it was entitled to the use of the
holdings which had been transferred to the sons and they were so used for the purpose of the partnership. In such circumstances the Privy Council
observed (at page 468):
...what was comprised in the gift was, in the case of each of the gift to the children and the trustees, the property shorn of the right which belonged
to the partnership, and upon this footing it is in their Lordships'' opinion plain that the donee in each case assumed bona fide possession and
enjoyment of the gift immediately upon the gift and thenceforward retained it to the exclusion of the donor.
It is to be noted that the case was disposed of by the Privy Council entirely on its view as to what precisely was the subject-matter of the gift, that
is to say, the gift was not of the entire land with all the rights going with it, but only shorn of the right which belonged to the partnership under the
terms of the agreement between the father and the sons constituting the firm. That is precisely the case here.
The nature, extent and manner of enjoyment of the two sums gifted by the father to his sons and daughter were no different in the hands of the
donees. At the time of making the gift having regard to the facts it has to be taken that the two sums transferred by book entries were still available
for purposes of the business of the firm which near that their user for that purpose would be controlled by the managing partner. In the very nature
of things, therefore, the transfer of the two sums by way of gift should be taken subject to the rights of the firm and in the words of the Privy
Council in Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 the two sums were transferred to the donees shorn of the rights which belonged
to their partnership. On that view, there can be no question that immediately'' on the making of the gift the donees assumed such possession and
enjoyment of the subject-matter the gift as it was capable of at the time and also that they retained that to the exclusion of the donor. If the donor
continued to have control over the two sums, that was not because of any reservation in him while making the gift but because the gift itself was
made subject to the condition that the funds would be available for the use of the partnership business and as such, they would be subject also to
the control and management by the donor in his capacity as managing partner.
In Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 after deciding the scope of the subject-matter of the gift the Privy Council went on to
make further observations that the benefit which the donor in that case had as a member of the partnership, in the right to which the gift was subject
was a benefit referable in no way to the gift but to the agreement and it was such a benefit as is contemplated by Section 102(2)(d). A reference
was made to this observation by Viscount Simonds in Clifford John Chick v. Commr. of Stamp Duties 3 E.D.C. 915 and it was stated (at page
927):
They might become of importance if it was the second limb of the sub-section which was under consideration and the question, therefore, was
whether the donor had been entirely excluded from any benefit of whatsoever kind. It seems to us that by these observations it is not to be taken
that Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 as is contended for the Revenue, was decided with reference to the limb relating to
the reservation of benefit. The observation above referred to in Munro v. Commissioner of Stamp Duties 2 E.D.C. 462 should be understood in
conjunction with the conclusion of the Privy Council as to the scope of the subject-matter of the gift itself. The observation aforesaid immediately
followed that conclusion. All that was meant by the Privy Council by such observation was only that the benefit, if any, was not referable to the gift,
that is to say, the gift was of the property less the right which belonged to the partnership.
Mr. Balasubramaniam invited our attention to George Da Costa Vs. Controller of Estate Duty in Mysore, Bangalore, and contended that for the
purposes of exclusion the factual position should be kept in view and if as a matter of fact, the donor is in some way associated with or found to
enjoy the benefit out of or in relation to the gift, that would attract the application of Section 10. But as we pointed out, it would all depend upon
what the subject-matter of the gift is. If the subject-matter of the gift is exclusive of what is regarded by the Revenue as benefit or association, no
question of exclusion can arise at all. In that case, the matter will have to be decided only on the basis of the subject -matter of the gift.
We are of the view that the question referred to us should be answered against the Revenue and it is accordingly answered with costs.