1989 (4) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 17 of the Estate Duty Act, 1953.
2. Interpretation of the "slice rule" under section 17(2) of the Act.
3. Impact of aggregate net loss on the computation of estate duty.

Detailed Analysis:

1. Applicability of section 17 of the Estate Duty Act, 1953:
The court examined whether the assets of Taj Flour Mills, a controlled company, should be included in the dutiable estate of the deceased under section 17 of the Estate Duty Act, 1953. The Assistant Controller of Estate Duty had included Rs. 3,92,700 as part of the dutiable estate, asserting that the company was a controlled company within the meaning of section 17 of the Act. The court confirmed that the deceased had transferred property to Taj Flour Mills and held shares in it, fulfilling the requirements of section 17(1) of the Act, which include:
1. Transfer of assets by the deceased to a controlled company.
2. Property transferred should not be an interest limited to cease on death.
3. Property should not have been transferred in a fiduciary capacity.
4. Benefits must accrue from the company to the deceased in the three years ending with his death.

2. Interpretation of the "slice rule" under section 17(2) of the Act:
The court addressed the principal question regarding the applicability of the slice rule when the aggregate net income of the company for the three years ending with the death of the deceased is a negative figure or net loss. Section 17(2) of the Act provides a formula to determine the proportion of the company's assets deemed to pass on death:
\[ \text{Proportion} = \frac{\text{Benefits accruing to the deceased}}{\text{Net income of the company for three years}} \times \text{Assets of the company} \]

The court noted that proviso (a) to section 17(2) is designed to compute the aggregate net income of the company, even if the company had sustained a loss in one or more of the accounting years. The proviso indicates that losses should be deducted in ascertaining the aggregate net income. However, the application of the slice rule is possible only if the proportion can be worked out as a fraction. In this case, the proportion worked out to a negative figure, making the slice rule unworkable.

3. Impact of aggregate net loss on the computation of estate duty:
The court emphasized that if the slice rule results in a negative figure, it cannot be deemed to pass, and there cannot be a charge of duty. The court referenced authoritative texts such as Green's Death Duties and Dymond's Death Duties, which support the view that if the company sustained an aggregate loss, there is no charge of duty. The court rejected the Revenue's contention that the entirety of the assets of the controlled company should be deemed to pass, stating that such an interpretation would result in a legislative exercise beyond the scope of the Act. The court held that section 17(2) of the Act can only apply if a fractional share of the assets can be worked out.

Conclusion:
The court concluded that the Tribunal was correct in its view that the slice rule could not be worked out, and accordingly, nothing passed. The court affirmed that proviso (a) to section 17(2) of the Act is limited to cases where there is income in one or more years and loss in another or others, resulting in a net income, not a loss. The question referred to the court was answered in the affirmative and against the Revenue, with costs awarded to the assessee.