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TMI Blog1981 (3) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... e or no dispute on questions of valuation. The principal value of all the joint family properties was determined at Rs. 1,06,854. In particular the value of the village dwelling house was also fixed at an agreed figure of Rs. 20,000. The family bad certain outstandings to clear : these were estimated to be Rs. 15,000. The funeral expenses of the deceased was also determined at an agreed estimate of Rs. 1,000. On these figures, the estate duty liability had to be worked out. Under the E.D. Act, the duty is arrived at by applying the rates prescribed in the Second Schedule. The rates are to be applied to the principal value of the estate. For rate purposes, all properties passing or deemed to pass on the deceased's death must be aggregated so as to form " one estate ", vide s. 34(1). The Act names certain properties as exempted properties ; but these properties also are to be aggregated. The aggregation, however, is for rate purposes only. The actual impact of the estate duty will not cover these exempted properties-vide s. 34(2). One way of describing this process of calculation of duty is to say that the unexempted estate is charged to duty at a rate (or more precisely, at the av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Mitakshara coparcener who has an undivided share and who dies leaving a lineal descendant. The provision enacts that the deceased's undivided share must be clubbed along with the lineal descendant's share also for purposes of aggregation. This provision, as applied to the present case, would mean that the half share of the son and the half share of the deceased must be clubbed together for rate purposes. Although s. 34(1) enjoins that the deceased's undivided share in the coparcenary property must be clubbed along with the share of the lineal descendant, the lineal descendant's share will not be actually subjected to .the impact of the estate duty, and will fall within the formula of s. 34(2) to which we have earlier adverted. Explanation (iii) to s. 34(2) lays down that for purposes of actual calculation of duty, the share of the lineal descendant included in the aggregated share must be regarded as exempted property. The position thus is that the rate pertaining to the aggregate family estate (which consists of the deceased's undivided half share plus the son's half share) must be applied to the deceased's estate. The accountable person, in the present case, does not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod to apply in this case was to exempt the value of the house in its entirety (namely, Rs. 20,000) while arriving at the principal value of the joint family properties and then work out the share of the deceased and the share of the son as the lineal descendant, respectively. According to the accountable person, the calculation would have to be as under, Rs. Principal value of the joint family properties 1,06,854.00 Less value of residential house 20,000.00 ----------- 86,854.00 Less family debts 15,000,00 --------- 71,854.00 --------- Deceased's half share 35,927.00 Less funeral expenses 1,000.00 --------- Deceased's net dutiable estate 34,927.00 Add lineal descendant's half share 35,927.00 --------- 70,854.00 --------- Even under this method, the deceased's estate gets reckoned only at Rs. 34,927, which is the identical figure adopted by the Asst. Controller in his assessment order. But the difference in the rest of the calculation lies in the fact that, under the latter method, the lineal descendant's (half) share is taken to be only Rs. 35,927 for rate purposes and not at Rs. 45,927 as adopted by the Asst. Controller. This makes fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exchequer. The E.D. Act, as we earlier mentioned, concentrates on the death of a human being and makes the passing of property on the occasion of his death as a taxable, or a dutiable, event. The textual Hindu law governed by the Mitakshara lays down certain rules for the devolution of property on intestacy. The rules of devolution differ according as the property in question in which the deceased had an interest, was his separate property or coparcenary property. In the case of selfacquired or separate property, the Hindu law, as subsequently altered by statute, provided for certain rules of inheritance. But the important point to be noted is that the deceased's separate property passes, as such, to his heirs. The position, however, is different where coparcenary property is concerned. On the death of an undivided coparcener, the rule of devolution is not inheritance, but succession by survivorship. Shortly put, on the death of an undivided coparcener, the surviving coparceners are the only persons who would jointly be entitled to the coparcenary properties. Estate duty, as a fiscal measure, was originally mooted in this country even before 1939. The proposal, however, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction was fashioned to catch coparcenary interests within the tax net. It was largely modelled on s. 2(1)(b) of the United Kingdom Finance Act, 1894. That provision, in short, dealt with a case where the deceased had an interest in property, which ceased on his death. A simple example of such interest is a life annuity charged on property. With the death of the annuitant, his interest in the charged property ceases. Such an interest is of a kind which does not pass, and is not capable of passing, on the death of the annuitant. It merely comes to an end. But, the cesser of this interest always has beneficial repercussions on the property charged with the annuity. For, with the annuitant's death, the charged property is rid of the charge. Under the English statute, therefore, this situation was thought to be an eminently fit subject for estate duty levy. Section 2(1)(b) of the United Kingdom Finance Act, 1894, therefore, laid down that where a person dying had an interest in property and that interest ceased on his death and on the cesser of that interest, a benefit accrued, then, for purposes of estate duty, property shall be deemed to pass on the deceased's death to the extent of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Succession Act, 1956, came into the statute book. Section 6 of the Hindu Succession Act declares that subject to the exception in the proviso to that section, the rules of inheritance in that Act will not apply where a coparcener dies possessed of an undivided interest in a Mitakshara coparcenary. The enacting part of s. 6 of the Hindu Succession. Act avowedly contains a restatement of the textual Hindu law to the effect that where a Mitakshara coparcener dies, his interest shall devolve by survivorship on the surviving members of the family. This restatement shows that the undivided interest of the coparcener is itself taken as a stock for devolution. It is not, therefore, surprising that under s. 30 of the Hindu Succession Act, the undivided coparcener has a testamentary capacity to make a disposition even of his undivided interest in the coparcenary properties. The enacting part of s. 6 of the Hindu Succession Act declares that the undivided interest, as such, would devolve, that is to say, pass into the hands of the surviving coparceners and not to the deceased's heirs (alone). This way of understanding what happens when a coparcener dies makes the position easy for estate duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is usually regarded as the charging section. In that sense, there is no need whatever for deeming, no need for fictions of any kind, to bring the coparcenary interest to charge for estate. The one-time judicial view of the deeming provisions of the estate duty law in England was that when once an item of property is deemed to pass on the death, it would not be appropriate to bring it to charge as though it actually passed on the deceased's death. The courts held that the two sets of provisions were mutually exclusive. See Earl Cowley v. IRC [1899] AC 198 (HL). The latest learning on the subject, even in England, is that the charge based on property actually passing on the deceased's death, and the charge based on property deemed to pass on his death are not provisions which can be regarded as mutually exclusive. It is now settled doctrine of English courts that the two kinds of provisions only give the estate duty authorities an alternative basis for charge to duty. See Public Trustee v. RC [1960] AC 398 (HL). In our E.D. Act, the matter is made clearer still than in England, both on the words of the charging s. 5 and on the basis of the rule of interpretation laid down in s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principal value of the property belonging to the deceased. By this method of deeming the whole of the joint family property as if it had belonged to the deceased, the implication of the statute is that all the provisions which have to do with the evaluation of the principal value of a deceased's property must be applied mutatis mutandis to the evaluation of the joint family property as a whole. For instance, under s. 36(1) of the E.D. Act, the principal value of any property of the deceased shall be estimated to be the price which, in the opinion of the Controller, it would fetch if sold in the open market at the time of the deceased's death. The principle of this section will have to be applied for purposes of s. 39(3) of the Act where the properties to be evaluated are not the properties of the deceased, but the properties of the joint family on which the deceased was but a member. The method which is enjoined by the statutory fiction in s. 39(3) is that whatever might be the computation and whatever might be the section which would be appropriate for the purpose of arriving at the market value of non-joint family property must be applied to arrive at the principal value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the property which is exempt under s. 33(1)(n) is also property which must be excluded from aggregation under s. 34(1)(a) of the Act. Hence, a necessary and dispensable part of the process of computing the principal value of the concerned property is that the exemption provisions also will have to be taken into consideration. Since the charge to duty is laid on the basis of aggregation of properties into a single estate, and since properties exempted under s. 33(1)(n) are excluded from the ambit of the aggregation and since the principal value of property passing is on the basis only of those properties which are within the charge, the exemption provisions in the Act must also, per force, come into the process of computation of the principal value of the estate. In the sense, therefore, although s. 39(3) starts by saying " For the purpose of estimating the principal value of the joint family property the provisions of this Act, so far as may be, shall apply as they would have applied if the whole of the joint family property had belonged to the deceased ", the exemption provisions enacted elsewhere in the Act cannot be entirely excluded from the reckoning. In our view, the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are precisely relatable to the computation of the principal value, were either completely, or to any extent, left out of account. In the strict theory of Mitakshara coparcenary, no coparcener, while remaining undivided, can point to any particular asset of the family and say that it is his. He cannot even say that he is the owner of any definite share in any given asset or even on the entirety of the assets of the joint family put together. This is because the joint family is a fluctuating unit of an ambulatory character having the effect of increasing the quantum of a member's coparcenary interest on the death of a member, or adoption away from the family of a member, and of lessening the quantum of that coparcenary interest by births and by adoption into the family. In another sense, however, a coparcener's interest pervades all the properties of the joint family. He cannot, for instance, be excluded from the residence of any family dwelling-house. Although the karta or manager of the joint family is not strictly accountable to the other coparceners, the other coparceners are entitled to maintenance and also to a reasonable appropriation out of the joint family income for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properties, the properties mentioned in section 33(1) which are exempt from the charge should be omitted and then the share of the deceased member determined. A reading of section 33 makes it clear that subject to the limitations introduced by the various clauses regarding the quantum of the exemption, properties of the kinds mentioned in the various clauses of sub-section (1) of section 33 will not come into the picture at all in reckoning the value of the property that passed on the death of an individual. This section has to be applied in the case of individuals in their exclusive right as well as in the case of members of a joint Hindu family who by virtue of the fictions introduced by sections 7 and 39(1) are taken to have passed on properties on their death for the purpose of the Estate Duty Act. Naturally, it follows that in determining the total value of the properties of the Hindu family, those properties that are left out of account by the clear provisions under section 33(1) must also be left out for the purpose of determining the total value of the properties of the joint family ". With respect, we adopt these observations as a correct enunciation of the scheme of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perties of the joint family and from the net principal value of the properties of the joint family, the share of the deceased must be worked out. In his assessment order what the Asst. Controller did was first to work out the principal value of the estate and then divide it into two halves so as to arrive at the gross value of the half share of the estate relating to the deceased, and thereafter deduct therefrom one-half of the value of the exempted house, viz., Rs. 10,000, as going towards his share. Strictly speaking, this is not in accordance with the method of working enjoined by the provisions of s. 39(3) of the Act as clarified in the Division Bench ruling of this court. The learned counsel for the Department, however, referred to the latter portion of the Division Bench ruling and doubted whether what the learned judges had observed in that part had not introduced an opening for a double deduction under s. 33(1)(n) of the Act. According to him, on a reading of that part of the judgment, it looks as though the learned judges had laid down that after arriving at the net principal value of the joint family estate, allowing for the exemptions under s. 33(1)(n) or other related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment was prone to be misunderstood was an apprehension expressed by the learned counsel for the Department particularly on the basis of subsequent judgment of this court, to which as it happens, one of us was a party. In T. Sundaresa Mehta v. CED [1981] 127 ITR 107 (Mad), while purporting to follow the earlier decision in CED v. Estate of Late R. Krishnamachari [1978] 113 ITR 200 (Mad), the Division Bench apparently mistook the latter part of the judgment in [1978] 113 ITR 200, as containing the ratio decidendi in that case. However, it would appear that even the Bench deciding the later case did not express themselves finally on the subject, since they gave a direction to the Tribunal to make a computation in accordance with the rule laid down in [1978] 113 ITR 200 (Mad). In T. Sundaresa Mehta v. CED [1981] 127 ITR 107 (Mad), this is what was observed by the learned judges after referring to the latter part of Krishnamachari's case [1978]113. ITR 200 (Mad) at p. 110: " In other words, the direction in the said case is to value the property as a whole and then ascertain the share of the deceased. If the value of the share of the deceased exceeded rupees one lakh, then rupees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier in our own judgment. But, what is to be taken note of in this judgment of the Karnataka High Court is the enunciation by the learned judges and what, according to them, is the inter-relation between ss. 39 and 33(1) of the Act. They laid down three propositions as summing up that inter-relation in the course of their judgment. It is enough to set down the first of the points which they had derived from their study of the two sections (p. 774) : " Section 39 which is in Part V and which has been there since the commencement of the Act deals with valuation of the coparcenary interest of the deceased, like ss. 36, 37, 38 and 40. Sections 36 to 40 have nothing to do with the exemptions from payment of estate duty, which are dealt with in Part III of the Act. The fiction under s. 39(3) should be limited for the purpose of valuation only and cannot be extended for determining exemptions. It has also to be observed here that s. 39(3) has been there from the commencement of the Act but s. 33(1)(n) was introduced in 1964 with effect from September 23, 1963. " With great respect, we do not agree with the presentation of the law contained in the above passage. As for the last observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 39(3) provides that for the purpose of estimating the principal value of the joint family property, the whole of the joint family property shall be valued as if it had belonged to the deceased, the section imports a statutory fiction and, while doing so, the section enjoins on us to have regard to " the provisions of this Act, so far as may be ". This is a caution that, while applying the fiction of s. 39(3), we should not allow our minds to boggle. The learned judges of the Karnataka High Court have also observed in CED v. K. Nataraja [1979] 119 ITR 769, at page 774, that only properties which are referred to in ss. 21 to 24 of the Act are items of properties which are not to be treated as part of the estate passing on the death of the deceased. This observation seems to be quite inconsistent with the provisions contained in s. 34(1)(a) of the Act, to which we have earlier referred. We are, therefore, persuaded not to accept the construction placed by the learned judges of the Karnataka High Court upon s. 39(3) of the Act in relation to the exemption under s. 33(1)(n) of the Act. We find another element of illogicality in the reasoning and conclusion of the learned judges of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of Rs. 34,927, the share of the lineal descendant was taken to be Rs. 45,927, although there was no dispute that the father and son possessed exactly equal shares in the joint family properties. The illogicality of this manner of ascertaining the lineal descendant's share for rate purposes has been brought out very well in the order of the Appellate Controller thus : " Section 39(3) prescribes that the principal value of the joint family property shall be first ascertained after application thereto of the relevant provisions of the Estate Duty Act and the deceased's share therein only thereafter should be considered for his estate duty assessment. This subsection as it were imports a legal fiction into the proceedings that for the purposes of evaluating the interest of a deceased coparcener, the whole of the joint family property is to be treated as belonging to him and all the relevant provisions of the Act applied thereto. In the context of such legal fiction the exemption admissible under section 33(1)(n) in respect of the dwelling house cannot be denied in the computation of the principal value of the joint family property. In this view of the matter, it is quite clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principal value of the joint family property for this purpose shall be taken without reference to the exemptions and inclusions, would lead to absurd results. Not merely the residential house property, but several other assets are exempt from duty. For example, suppose the family possesses foreign immovable property to the extent of rupees four lakhs and property in India to the extent of rupees two lakhs, the share of the deceased would be taken only at rupees one lakh, whereas, on the Department's argument, the share of the son would be taken at rupees three lakhs. It would not have been the intention of the legislature to levy duty on property passing by reference to value of properties which were not contemplated at all as liable to estate duty and which even on principles of international law, are not taxed. Equally, suppose an item of the property of the Hindu undivided family has gone out in circumstances which attract sections 9 to 17 of the Act, these properties would be included in ascertaining the share of the deceased but the Department's argument would leave them out of account. There is no statutory or other warrant for any differentiation as to the basis of ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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