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TMI Blog1986 (2) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs transferred by the deceased to his three grandnephews in equal shares was includible in the estate of the deceased that passed on his death ? Substantially, the answer thereto depends upon whether section 10 of the Estate Duty Act, 1953, is attracted to the case or not. The facts giving rise to the question may briefly be stated. The deceased, Sri Bankatlal Lahoti, was a partner in the firm of M/s. Dayaram Surajmal, which carried on business as bankers. With a view to give Rs. 1 lakh each to his three minor grandnephews (three grandsons of his deceased brother), the deceased, on October 4, 1952, issued a cheque for Rs. 3 lakhs in favour of the firm; this amount was debited in the account of the deceased in the firm and credited in the accounts of the three minors in equal proportion. The said sum thus transferred to the three nephews continued to stand in their respective accounts in the books of the firm till its dissolution on July 4, 1960, whereafter some assets were allotted to each one of them in lieu of the amounts standing to their credit. The deceased died on February 21, 1956. After the death of the deceased, his widow, Smt. Godavari Bai, as the accountable pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in that behalf reliance was placed on Ramaswamy Chettiar v. K. S. M. Manicham Chettiar, AIR 1938 Mad 236 and Seetharama Ayyar v. Narayanaswami Pillai [1918] 47 IC 749, but the Tribunal did not accept the contention and held that a plain reading of section 130 showed that the transfer of an actionable claim became complete and effectual only upon the execution of an instrument in writing signed by the transferor or by his duly authorised agent; that the cheque issued by the deceased in favour of the firm only authorised the firm to pay to itself the sum of Rs. 3 lakhs from out of the amount lying to the credit of the deceased, but it did not by itself authorise the firm to transfer this amount to anyone else and that such a transfer could be authorised by a separate letter of instructions from the deceased but no such instrument was obtained and the oral instructions given could not take the place of such an instrument in writing and, therefore, the transfer of Rs. 3 lakhs made in favour of the donees was not in accordance with the requirements of section 130. The alternative contention that the transfer was in the nature of a novation was also rejected on the ground that the don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 934] AC 61 as well as its two earlier decisions in CED v. C. R. Ramachandra Gounder [1969] 73 ITR 166 (Mad) and CED v. N. R. Ramarathnam [1969] 74 ITR 432 (Mad), the High Court held that the donor had been completely excluded from the subject-matter of the gift and as such section 10 was not applicable. In other words, differing from the view taken by the Tribunal, the High Court held that the transaction involved in the case was gratuitous transfer of an actionable claim and that there was in law valid, complete and effectual gift thereof in favour of the three minor grandnephews and since section I 0 was not attracted, the sum of Rs. 3 lakhs was not includible in the value of the estate of the deceased that passed on his death. It, therefore, answered the question in the negative and in favour of the assessee. The Revenue has come up in appeal. Counsel for the Revenue did not assail the High Court's conclusion in regard to there being a valid gift of the actionable claim in favour of the minors resulting from the issuance of the cheque accompanied by oral instructions and followed by the making of the requisite debit and credit entries in the firm's books but vehemently critici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of property desiring to make a gift of it to another may do so in any manner known to the law. Apparent gifts may be genuine or colourable, and experience has shown that frequently the process of ascertaining their genuineness is attended with delay, expense and uncertainty-all of which are extremely embarrassing from a public revenue standpoint. With a view to avoiding this inconvenience, the legislature has fixed two standards, both of them consistent with actual genuineness, but prima facie indicating a colourable attempt to escape probate duty. One is the standard of time. A gift, however, real and bona fide, if made within twelve months before the donor's death is for the purpose of duty regarded as not made. The other is conduct which at first sight and in the absence of explanation is inconsistent with the gift. The prima facie view is made by the legislature conclusive. If the parties to the transaction choose to act so as to be in apparent conflict with its purport, they are to be held to their conduct. The validity of the transaction itself is left untouched, because it concerns themselves alone. But they are not to embarrass the public treasury by equivocal acts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight known to law of exclusive possession and enjoyment, any subsequent enjoyment of the benefit of that property by way of possession or otherwise by the donor would bring the gift within the purview of section 10; but where the gift is subject to some reservation or qualification, that is to say, if the subject-matter of the gift is property shorn of certain rights and the possession or enjoyment of some benefit in that property by the donor is referable to those rights, i e., rights shorn of which the property is gifted, then in that case the subject-matter of the gift will not be deemed to pass on the death of the deceased-donor. In other words, if the deceased-donor limits the interest he is parting with and possesses or enjoys some benefit in the property not on account of the interest parted with but because of the interest still retained by him, the interest parted with will not be deemed to be a part of the estate of the deceased-donor passing on his death for the purpose of section 10 of the Act. It is these aspects which mark the distinction between the two leading cases, namely, Chick's case [1959] 37 ITR (ED) 89 (PC) and Munro's case (1934] AC 61. As we shall indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners and each of them were in possession and enjoyment of the property so long as the partnership subsisted. The judicial Committee observed that where the question was whether the donor had been entirely excluded from the subject-matter of the gift, that was the single fact to be determined, and, if he had not been so excluded, the eye need look no further to see whether his non-exclusion had been advantageous or otherwise to the donee. In its opinion, it was irrelevant that the father gave (if he did give) full consideration for his right as a member of the partnership to possession and enjoyment of the property that he had given to his son. Inter alia, two or three points emerge clearly from the decision that need to be emphasised: (a) there was initially an outright gift of the property-not of the property shorn of any rights, (b) the deceased-donor was not, in fact, excluded from the property, but as a partner enjoyed rights over it, and (c) that it was immaterial that the donor gave full consideration for enjoying his rights over the property as a partner. It was these aspects that brought the gifted property within the mischief of the taxing statute. The other decisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the partnership subject to which the gifts had been made. Thus, this decision clearly enunciates the principle that if the subject-matter of the gift is property shorn of certain rights and if the possession or enjoyment of some benefit in that property by the donor is referable to those rights, i.e., rights shorn of which the property is gifted, then the subject-matter of the gift will not be deemed to pass on the death of the deceased-donor. The ratio of this decision has been followed and applied by this court in Ramachandra Gounder's case [1973] 88 ITR 448 (SC), N. R. Ramarathnam's case [1973] 91 ITR 1 (SC), R. V. Viswanathan's case [1976] 105 ITR 653 (SC) and Kamlavati's case [1979] 120 ITR 456 (SC). Having regard to the undisputed facts and facts found by the High Court, it seems to us clear that the instant case falls within the principle enunciated in Munro's case [1934] AC 61 (PC). Admittedly, the deceased-donor was partner in the banking firm of M/s. Dayaram Surajmal, wherein the minor donees were never admitted to the benefits of the partnership firm. An extract of account filed by the assessee before the High Court brought out the procedure followed for effecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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