Estate of Late M. Ayyamuthu Pillai vs Controller of Estate Duty

Ratnam, J.—Shri M. Ayyamuthu Pillai was a partner in the firm of Messrs. Balasubramania Foundry, Coimbatore, which was carrying on

the business of manufacture and sale of electric motor pump sets and he had a one-fifth share in the firm. He died on November 24, 1971. Prior to

his death, on March 20, 1967, he had gifted Rs. 50,000 to his son, Doraiswamy, who deposited that amount in the firm of which the deceased

was a partner and that amount continued to remain invested as a deposits in the firm till the death of Ayyamuthu Pillai. Besides, the deceased had

also gifted another sum of Rs. 50,000 to his granddaughter, Nalinakumari, on November 6, 1967, and she too deposited the amount gifted to her,

in the firm in which her grandfather was a partner and that amount also remained deposited in that firm till the demise of her grandfather. The

accountable person filed an estate duty account disclosing the principal value of the estate of the deceased at Rs. 2,05,598. Applying section 10 of

the Estate Duty Act, 1953 (hereinafter referred to as the ""Act""), on the ground that the donees had not taken possession of the amounts gifted to

the exclusion of the donor and the donor derived benefits out of the amounts gifted owing to their having been left with the firm, Balasubramania

Foundry, in which the deceased donor was a partner, the Assistant Controller of Estate Duty, with reference to the amount of Rs. 50,000 gifted by

the deceased in favour of his son, it was held that though the amount gifted might have continued to remain as a deposit with the firm, the existence

of a partnership of which the donor was a partner, cannot attract the provisions of section 10 of the Act. Adverting to the other gift of Rs. 50,000

made by the deceased in favour of his granddaughter, the Appellate Controller found that the donor did not have any control whatever over the

funds gifted by him to his granddaughter, though the deceased continued to be a partner of the firm of Messrs. Balasubramania Foundry as the

control exercised by the deceased over the funds was referable to his position as a partner of the firm and not to the circumstance that he provided

the funds or was the donor thereof. On that view, the Appellate Controller of Estate Duty directed the reduction of the principal value of the estate

computed by the Assistant Controller of Estate Duty by Rs. 1,00,000 amongst others. Aggrieved by this, the Assistant Controller of Estate Duty,

Coimbatore, preferred an appeal before the Tribunal. Applying the principle of the decisions in Radhabai Ramchand Vs. Controller Of Estate

Duty, Madras, and Controller of Estate Duty Vs. S.M.M. Subramanian Chettiar, , the Tribunal held that u/s 10 of the Act, the Assistant Controller

was justified in including Rs. 1,00,000 to the principal value of the estate and that Appellate Controller was not right in directing the deletion of the

same. That is how this reference at the instance of the accountable person, u/s 64(3) of the Act, has come before this court on the following

question of law;

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the sum of Rs. 1,00,000 being the

gifts made by the deceased to his son and granddaughter should be included in the principal value of the estate u/s 10 of the Estate Duty Act, 1953

?

The only question that arises for consideration in this reference is whether section 10 of the Act could be invoked and applied to include the

amounts gifted by the deceased in favour of his son and granddaughter in the principal value of the estate of the deceased ? This has to be

considered in the background of the undisputed facts, namely that there was a gift by the deceased in favour of his son another gift in favour of his

granddaughter on the dates referred to earlier and they, in turn, had invested the amounts so gifted in the firm in which the donor was a partner, till

the date of his death. Regarding the applicability of section 10 of the Act in such a factual situation, the Supreme Court had occasion to consider

the same in two of its decisions, to which we shall make a reference immediately. The first decision is the one reported in Controller of Estate Duty,

Punjab, Haryana, J. and K., U.P., Chandigarh and Patiala Vs. Smt. Kamlavati and Shri Jai Gopal Mehra, . In that case, a deceased partner who

had a half share in the firm gifted to his son and wife Rs. 1,50,000 on March 27, 1957, and he died on January 9, 1962. In the books of the firm,

the amounts gifted were debited to the account of the deceased and credited to the accounts of the son and the wife, respectively, and on the very

next day, the son was taken in as a partner and he was given a one-fourth share out of the half share of his father. On the death of the donor, his

widow was taken in as a partner on the one-fourth share and it was in the background of these facts that the question arose whether the sum of Rs.

1,50,000 credited in the accounts of the son and the wife could be included in the principal value of the estate of the deceased. The Tribunal took

the view that section 10 of the Act included in the property passing on the death of the donor and this view was also confirmed by the High Court

on a reference. On further appeal to the Supreme Court, it was pointed out that the benefit in the property, viz., the money gifted, which the donor

was enjoying and continued to enjoy as a partner, was not sufficient to bring the case within the ambit of section 10 of the Act, irrespective of the

question whether that benefit was referable or not to the gift and that the mere fact that a partnership may make use of the sums of money gifted in

which the donor also was a partner, did not mean that he was allowed to enjoy or derive any benefit from the money gifted, which could be

referable to the gift itself. With a view to clearly set out the position with reference to the applicability of section 10 of the Act, the Supreme Court

at page 463 of the reports made the following observations :

When a property is gifted by a donor the possession and enjoyment of which is allowed to a partnership-firm in which the donor is a partner, then

the mere fact of the donor sharing the enjoyment or the benefit in the property is not sufficient for the application of section 10 of the Act until and

unless such enjoyment or benefit is clearly referable to the gift, i.e., to the parting with such enjoyment or benefit of the donor in the property is

consistent with the other facts and circumstances of the case, other than those of the factum of gift, then it cannot be said that the donee had not

retained the possession and enjoyment of the property to the entire exclusion of the donor or to the entire exclusion of the donor in any benefit to

him by contract or otherwise, it makes no difference whether the donee is a partner in the firm from before or is taken as such at the time of the gift

or he becomes a creditor of the partnership-firm by allowing it to make use of the gifted property for the purposes of the partnership.

Ultimately, the Supreme Court held that the Tribunal as well as the High Court was right in holding that the amount gifted should be excluded

from the principal value of the estate as section 10 could not be applied. On the facts of this case, we are of the view that the aforesaid principles

laid down by the Supreme Court would be applicable, as the use of the moneys by the firm o which the donor was a partner is not in any manner

referable or relatable to the gifts by the deceased.

We are also further fortified in this view by yet another decision of the Supreme Court reported in N.K. Sanghi, Partner of Sanghi Brothers Vs.

Controller of Estate Duty, Rajasthan, . There, the father gifted to each of his four sons Rs. 25,000 on September 1, 1955, and, immediately, the

amounts gifted were invested in a firm consisting of the father and the four sons, which was constituted after the gifts were made. On the death of

the donor on July 21, 1961, the question arose whether estate duty was leviable on the sum of Rs. 1,00,000 in view of section 10 of the Act, The

Tribunal took the view that section 10 was not attracted, but on a reference the High Court held that the father in one sense or the other, had

dominion over the amount gifted and that the money was utilised both for the benefit of the donor and donees and therefore, section 10 of the Act

stood attracted. On further appeal to the Supreme Court, after referring to its earlier decision in CED v, kamlavati [1978] 120 ITR 456, the

Supreme Court held that the interest which the deceased father retained or obtained in the aggregate sum of Rs. 1,00,000 invested by the four

sons in the firm, was an interest merely as a partner in the firm and was not related to the gifts made by him to his sons and, under those

circumstances, it cannot be said that by reason of the constitution of the partnership and investment of the money by the sons in the partnership

firm, the donees (sons) had not assumed bona fide possession and enjoyment of the amounts gifted to them or that they had not retained the same

to the entire exclusion of their father (donor). It was further pointed out that there was a failure on the part of the High Court to appreciate that the

interest which the donor retained in the amounts gifted and invested by the donees in the partnership in which the donor was a partner is not an

interest which can be said to be related to the gift. In the context of the undisputed factual position obtaining in this case, it follows that the

circumstance that the firm, of which the donor was a partner, made use of the amounts gifted, would not mean that he was allowed to derive or

enjoy any benefit as such in the amounts gifted, referable or relatable to the gifts themselves, we, therefore, answer the question referred to us in

the negative and in favour of the accountable person. The accountable person will be entitled to the costs of this reference, counsel''s fee Rs. 500.