Controller of Estate Duty vs P.K. Agarwalla

B.N. Agrawal, J.—In this reference u/s 64(1) of the Estate Duty Act, 1953 (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, "A" Bench, Patna, has referred the following question of law to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal is legally correct in excluding the interests of the lineal descendants of the deceased in the residential house of the joint family from the aggregation u/s 34(1)(c) of the Estate Duty Act, 1953 ?"

One Banwari Lal Agarwalla died on November 18, 1969, leaving behind 5 sons and a widow having interest in a joint family residential house and other Mitakshara coparcenary properties worth several lakhs. The value of the joint family residential house was Rs. 70,000 in which the deceased having 1/7th share, the value of his share was Rs. 10,000, and the value of the share of the lineal descendants, i.e., the 5 sons of the deceased, in the said house was Rs. 50,000. The Assistant Controller of Estate Duty held that no estate duty is payable on Rs. 10,000 which was the value of the share of the deceased in the house in question as the same was exempt u/s 33(1)(n) of the Act. According to him, no duty was leviable on Rs. 50,000 which was the value of the share of the lineal descendants in the house but u/s 34(1)(c) for ascertaining the rate of estate duty payable on the estate of the deceased passing on his death, the value of the share of the lineal descendants in the house, i.e., a sum of Rs. 50,000, was liable to be aggregated.

The matter thereafter was taken in appeal by the accountable person to the Appellate Controller who reversed the order of the Assistant Controller on this account and held that the value of the share of the lineal descendants will not be included for aggregating the same with the estate of the deceased u/s 34(1)(c) of the Act for calculating the rate of estate duty. The Revenue then took up the matter in further appeal before the Tribunal which upheld the decision of the Appellate Controller on the ground that since the value of the joint family residential house was less than Rs. 1,00,000 which was the exemption limit of such properties u/s 33(1)(n) of the Act, the entire value of the house in question, i.e., Rs. 70,000 will be exempted and not only the share of the deceased in the said house, i.e., Rs. 10,000 will be exempted. Therefore, the Tribunal held that the value of the share of the lineal descendants, i.e., Rs. 50,000, could not have been included for aggregating the same with the estate of the deceased for ascertaining the rate of estate duty u/s 34(1)(c) of the Act. Hence, this reference.

Learned senior standing counsel appearing in support of the reference contended that the Appellate Controller and the Tribunal were not justified in exempting Rs. 70,000, being the value of entire joint family residential house from payment of estate duty u/s 33(1)(n) of the Act and holding that the value of the share of the lineal descendants in the joint family residential house, i.e., the sum of Rs. 50,000 could not have been aggregated u/s 34(1)(c) of the Act for ascertaining the rate of estate duty payable on the estate of the deceased which passed on his death. On the other hand, learned counsel appearing on behalf of the accountable person contended that the Appellate Controller and the Tribunal have correctly decided that the entire value of the joint family residential house was liable to be exempted from payment of the estate duty and not only the value of the share of the deceased was liable to be exempted and, consequently, the value of the share of the lineal descendants was rightly not taken into consideration for aggregating the same with the estate of the deceased for calculating the rate of estate duty.

In support of his contention, learned counsel appearing on behalf of the accountable person has placed reliance upon a decision of the Madras High Court in Controller of Estate Duty, Madras Vs. D. Rajesekaran Kamak, . In that case, the Assistant Controller estimated the principal value of the entire estate at Rs. 4,00,000 odd. The deceased had a joint family residential house the value of which was estimated at Rs. 39,000 in which the deceased had only half share, the value of which was Rs. 19,500. The Assistant Controller exempted the value of the share of the deceased from payment of estate duty but for rate purposes he aggregated Rs. 19,500 being the value of the half share of the lineal descendants in the residential house. The matter was taken in appeal. The Appellate Controller held that Rs. 39,000 which was the value of the entire residential house was liable to be exempted u/s 33(1)(n) of the Act and since the value of the entire house was exempt, Rs. 19,500 being the value of the lineal descendants'' share in the said house could not have been aggregated for calculating the rate of estate duty u/s 34(1)(c) of the Act. The Tribunal upheld the order of the Appellate Controller. When the matter was taken in reference before the Madras High Court, their Lordships approved the view of the Tribunal. It was held that Section 39(3) of the Act provides that if the deceased was a member of a joint family, the principal value of the property as a whole should be determined on the assumption that the entire joint family properties belonged to the deceased and at the stage of determination of the principal value of the properties of the family as a whole, treating the same as belonging to the deceased, the provisions of exemption contained in Section 33(1)(n) of the Act should be given effect to. It was further held that after giving exemption u/s 33(1)(n) treating the deceased as the owner of entire house, the principal value of the estate as a whole should first be determined and then the principal value of the share of the deceased will be carved out for the purpose of estate duty. Their Lordships were further of the view that if, on the other hand, the deceased''s share in the joint family properties is ascertained first and the exemption u/s 33(1)(n) is then applied to the deceased''s share only in the residential house, it will result in the co-sharers getting shares of unequal value. While laying down the aforesaid law on the ground that the co-sharers should get equal shares, their Lordships have given an example and dealt with the same in their judgment which is as follows (at pages 774 and 775 of 147 ITR) :

"Take for example the case of a deceased who is one of the two coparceners in the joint family and the joint family owning residential house worth about Rs. 1,50,000 and other properties worth about Rs, 2,50,000. By applying Section 39(3), we have to take all the properties of the joint family as belonging to the deceased and apply the exemption provision contained in Section 33(1)(n). In that view, the principal value of the properties held by the joint family will come to Rs. 4,00,000 minus Rs. 1,00,000, if the residential house is situated in a place where the population is above 10,000, which is equal to Rs. 3,00,000. Thus, the principal value of the deceased''s share, assuming a partition of the joint family on the date of death of the deceased, comes to half of Rs. 3,00,000, that is, Rs. 1,50,000. Since the exemption u/s 33(1)(n) has been granted at the stage of determination of the principal value of all the properties of the joint family, the benefit of the exemption provision also goes to the lineal descendant whose share is taken for rate purposes. This results in the shares of all the coparceners including that of the deceased being equal. If, on the other hand, the deceased''s share in the joint family properties is ascertained first and the exemption u/s 33(1)(n) is then applied to the deceased''s share in the residential house, it will result in the sharers getting shares of unequal value. In the example above given, since the deceased''s share in the joint family properties if a partition has taken place on the date of death of the deceased will be half of four lakhs of rupees, that is, two lakhs of rupees and if exemption is to be given u/s 33(1)(n) to the deceased''s half share alone in the residential house, the principal value of his share in the joint family will come to two lakhs of rupees minus seventy-five thousand rupees, that is, Rs. 1,25,000, while the lineal descendant''s share will be Rs. 2,00,000, because he will not be entitled to exemption u/s 33(1)(n) as his share did not pass on the death of the deceased. Thus, for rate purposes, the principal value of the deceased''s share comes to Rs. 1,25,000 and that of the lineal descendant comes to Rs. 2,00,000. This inequality will not arise, if, as already stated, Section 39(3) is properly given effect to, that is the exemption u/s 33(1)(n) is given at the stage of determination of the principal value of the properties of the joint family in entirety and then apportioning the shares of all the coparceners including that of the lineal descendants."

According to the example given and the principle decided by their Lordships, more estate duty was leviable on the estate of the deceased in that case. If exemption is given u/s 33(1)(n) out of the value of the share of the deceased only in the residential house, estate duty in the given example is payable on Rs. 1,25,000. On the other hand, if exemption is given u/s 33(1)(n) out of the value of the entire house, estate duty would be payable on Rs. 1,50,000.

Same view has been taken by a Full Bench of the Andhra Pradesh High Court in K. Venugopal Vs. Controller of Estate Duty, . I am in respectful disagreement with the view taken in the aforesaid two decisions for the reasons stated hereinafter.

u/s 2(15) of the Act, property has been defined to include any interest in property. Section 5 of the Act lays down that estate duty is leviable on the principal value of that property which alone passes on the death of the deceased. According to Section 7 of the Act, where a person dies leaving behind interest in the Mitakshara coparcenary properties, what passes on his death is the interest of the deceased in the Mitakshara coparcenary. u/s 39(1), the interest of the deceased in the Mitakshara coparcenary would be the share therein which would have been allotted to the deceased had there been a partition in the family immediately before his death. Section 39(3) of the Act lays down that the principal value of the entire joint family property will be estimated in accordance with the mode of estimation of the principal value of separate property of the deceased which is done in accordance with the provisions of Section 36 of the Act. In this view of the matter, the property which passes on the death of the deceased would be the principal value of the share of the deceased in the joint family property had a partition taken place immediately before his death. After ascertaining the value of the share of the deceased in the joint family residential house, the provision of exemption contained in Section 33(1)(n) has to be applied. Section 33(1)(n) lays down that estate duty is not payable on one house or part thereof up to the value of one lakh which house or part thereof is exclusively used by the deceased for residential purposes in case the same passes on the death of the deceased. I find that in case of joint family residential house in which the deceased is residing with his co-sharers, the entire house does not pass on the death of the deceased, but what passes on the death of the deceased within the meaning of Section 33(1)(n) of the Act is only share of the deceased in the joint family residential house. Therefore, the principal value of the share of the deceased only in the joint family residential house can be exempted from payment of the estate duty u/s 33(1)(n) of the Act and the principal value of the entire joint family residential house will not be liable to be exempted. u/s 34(1)(c), the value of the share of the lineal descendants in the house shall be aggregated only for calculating the rate of estate duty on the value of the share of the deceased therein though no estate duty is leviable on the value of the share of the lineal descendants in the house.

In case it is held that the principal value of the entire joint family residential house is to be taken into consideration for granting exemption u/s 33(1)(n) of the Act and the exemption will be granted thereon and thereafter only the estate duty will be payable on the share of the deceased, it would mean that higher amount of estate duty shall be payable on the estate of the deceased which passes on his death. This would go contrary to the spirit of the legislation. This may be demonstrated by giving an example. A person dies leaving behind a son having interest in a joint family residential house in a portion of which he was residing and the valuation of the entire house is Rs. 2,50,000. If a sum of Rs. 1,00,000 which is the exemption limit of such house u/s 33(1)(n) is deducted out of Rs. 2,50,000 which is the value of the entire house, estate duty is leviable on Rs. 75,000, i. e., upon half of the balance sum of Rs. 1,50,000. On the other hand, if exemption of Rs. 1,00,000 is deducted out of the value of half share of the deceased in the house which is Rs. 1,25,000, estate duty will be payable on Rs. 25,000 only. In this view of the matter, it is not possible to accept the contention of learned counsel for the accountable person and I am clearly of the view that exemption u/s 33(1)(n) can be allowed only out of the value of the share of the deceased in the joint family residential house. Consequently, the value of the share of the lineal descendants in the residential house would be liable to be aggregated u/s 34(1)(c) for purposes of ascertaining the rate of estate duty.

The view which I have taken is supported by the decision of the Karnataka High Court in Controller of Estate Duty, Mysore Vs. K. Nataraja, . In that case, Rs. 80,000 was the value of the entire residential house in which the deceased had only 1/4th share. Besides this, value of the other joint family properties was Rs. 56,400. Thus, the total value of joint family? properties was Rs. 1,36,400. It was contended that u/s 33(1)(n), Rs. 80,000 being the value of the entire joint family house, will be excluded and the share of the lineal descendants would not be liable to be aggregated for rate purposes u/s 34(1)(c) of the Act. Their Lordships repelled the contention and held that exemption u/s 33(1)(n) would be given out of the principal value of the share of the deceased in the joint family residential house and not out of the value of the entire house. Speaking for the court, Mr. Justice Venkataramaiah (as he then was) (now elevated to the Supreme Court Bench) observed (headnote) :

"Where the residential house belongs to a Hindu undivided family governed by the Mitakshara law, only the share of the deceased in such house is exempt from estate duty u/s 33(1)(n). For the purpose of determining the rate of estate duty, the value of the share of the deceased in such house has to be excluded from the value of the property passing on his death u/s 34(1)(a), but the value of the shares of all the lineal descendants of the deceased in the coparcenary property including the residential house has to be aggregated u/s 34(1)(c) without any reference to any exemption u/s 33(1)(n) of the Act."

The Madhya Pradesh High Court in Controller of Estate Duty Vs. R.S. Gwalre, , the Allahabad High Court in Income Tax Appellate Tribunal Vs. Madan Mohan, and in Controller of Estate Duty Vs. Satish Chandra, and the Gujarat High Court in Gunvantlal Keshavlal Vs. Controller of Estate Duty, Gujarat, have taken the view in line with the Karnataka High Court.

Thus, I hold that the Assistant Controller has rightly exempted only the value of the share of the deceased in the joint family residential house and aggregated the value of the share of the lineal descendants in the residential house for calculating the rate of estate duty. In my view, neither the Appellate Controller nor the Tribunal was justified in taking the contrary view.

Learned counsel for the accountable person further contended that the provision of Section 34(1)(c) of the Act providing for aggregating the share of the lineal descendants in the joint family property for calculating the rate of estate duty is violative of Article 14 of the Constitution as in case a person dies leaving behind no lineal descendants, the accountable person shall be liable to pay estate duty at a lower rate, whereas in case a person dies leaving behind lineal descendants, rate of estate duty will be higher. Since this question does not arise out of the order of the Tribunal as the same could not have been agitated before the Tribunal, rightly this question has not been referred to this court. As such, the accountable person cannot be allowed to raise this question in the present reference application and his remedy in that event was to challenge the constitutional validity of the provision of Section 34(1)(c) of the Act by filing a writ application before this court in which a direction could have been given to hear the same along with this reference. Apart from this, I find that this contention of learned counsel is squarely covered by a decision of this court in Rameshwar Lall Agarwal Vs. Union of India (UOI) and Others, . In that case, the constitutional validity of Section 34(1)(c) of the Act was challenged before this court in a writ application and it was held that the said provision was not violative of Article 14 of the Constitution and was a valid piece of legislation.

Thus the reference is answered in the negative, that is, in favour of the Revenue and against the accountable person. The reference is accordingly disposed of, but, in the circumstances of the case, there shall be no order as to costs.

Let a copy of this judgment be transmitted to the Assistant Registrar, Income Tax Appellate Tribunal, "A" Bench, Patna, in terms of Section 64(6) of the Act.

Uday Sinha, J.

I agree.