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TMI Blog1988 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision 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/ Date of Value Value estimated No. donee discharged prior settlement estimated by in gift-tax to two years deed assessment prior to death 1. T. Pradyumna 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. Sudarsanamma Rs. 52,441 30-3-1958 Rs.11,000 Rs. 33,318 (repaid on 14-2-1976). 4. T. Priyamvada Rs. 22,309 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sement 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 on 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 purposes 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 under section 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 therefor which consisted of (a) property derived from the deceased ; or (b) consideration not being such property as aforesaid, but given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh 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 deceased. In McDougal's Trustees v. IRC [1983] 143 ITR 698 (C. Sess) (printed as an Appendix) to the decision of the Madras High Court in CED v. Ameen Khaleeli (S. T.B.) [1983] 143 ITR 679, 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 proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal, the accountable person did not press the contention that the principal debt of Rs. 1,50,000 abates under section 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 incurred. 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 under section 44 of the Act. This decision was followed by a Bench of this court in CED v. P. Subramanyam [1981] 127 ITR 258, in somew ..... X X X X Extracts X X X X X X X X Extracts X X X X
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