1971 (4) TMI 7 - HC - Income Tax

Estate Duty Act, 1953 - partner transfers amounts from his capital account to donees - donees actually did not make any attempt to realise the claims - right to earn interest on that amount did not form part of the gift and therefore the interest earned by the donees did not pass on the donor s death

Summary

Issues Involved:
1. Applicability of Section 10 of the Estate Duty Act, 1953.
2. Validity of the gifts made by the deceased.
3. Determination of the amount liable for estate duty.

Detailed Analysis:

1. Applicability of Section 10 of the Estate Duty Act, 1953:
The primary issue was whether the sum of Rs. 35,824 was liable for estate duty under Section 10 of the Estate Duty Act, 1953. Section 10 states that property taken under any gift shall be deemed to pass on the donor's death to the extent that bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise.

The court analyzed the substantive part of Section 10, which is divisible into two parts:
- The assumption of bona fide possession and enjoyment of the gifted property by the donee to the entire exclusion of the donor and thenceforward its retention by the donee to the entire exclusion of the donor.
- Such retention by the donee to the entire exclusion of the donor or of any benefit to him by contract or otherwise.

The court found that the donees did not assume bona fide possession and enjoyment of the gifted property to the entire exclusion of the donor. The gifted property remained in the use of the partnership in which the donor was a partner, meaning the donor was not entirely excluded from the possession and enjoyment of the gifted property from the inception of the gifts until his death.

2. Validity of the Gifts Made by the Deceased:
The gifts in question were sums of money transferred to the donor's grand-daughters through entries in the books of account of the partnership firm in which the donor was a partner. The court noted that the gifts were not of money in specie but were actionable claims as defined in Section 3 of the Transfer of Property Act. The gifts were valid under Section 130 of the Transfer of Property Act by the execution of the four instruments in writing signed by the transferor or donor.

However, the court emphasized that the validity of the gifts under ordinary law is not sufficient to exclude the operation of Section 10. It was necessary to determine if the gifts fell under both parts of the substantive portion of Section 10. The court concluded that the donees never assumed bona fide possession and enjoyment of the gifted property, and the gifted property remained in the use of the partnership, thus failing the requirements of Section 10.

3. Determination of the Amount Liable for Estate Duty:
The court had to decide whether the entire sum of Rs. 35,824 (which included Rs. 25,000 as principal and Rs. 10,824 as interest) was liable for estate duty or only the principal amount of Rs. 25,000. The court referred to previous decisions, including Rash Mohan Chatterjee's case and K. E. Abdul Hamad v. Controller of Estate Duty, which held that estate duty is payable only on the part of the property in which the donor retains some interest.

The court concluded that the subject-matter of the gift was Rs. 25,000, and the right to earn interest on that amount was never gifted by the deceased. The interest accrued on the gifted amount did not form part of the gifted property at the time the gift was made. Therefore, estate duty was payable only on the sum of Rs. 25,000 and not on the amount of Rs. 10,824.

Conclusion:
The court answered the question by holding that estate duty is payable only on the sum of Rs. 25,000 and not on the amount of Rs. 10,824. As the revenue did not fully succeed in this reference, no order as to costs was made.