Kashmiri Lal Talwar vs Controller of Estate Duty

N.K. Agrawal, J.—This is a reference made by the Income Tax Appellate Tribunal (for short, "the Tribunal") u/s 64(1) of the Estate Duty Act, 1953 (for short, "the Act"), seeking the opinion of this court on the following question of law :

" Whether, on the facts and in the circumstances of the case, the estate duty payable by the accountable person, is deductible in computing the net principal value of the estate of the deceased ?"

Panna Lal Talwar of Amritsar died on December 14, 1975, leaving behind certain estate. His legal heir, Kashmiri Lal Talwar, filed the account of the estate duty in the status of an accountable person in response to the notice issued by the Assistant Controller of the Estate Duty, Amritsar, u/s 58(2) of the Act. Deduction on account of liability of the estate duty was claimed by the accountable person from the principal value of the estate on the plea that it was in the nature of a charge on the estate of the deceased. However, the Assistant Controller of Estate Duty took the view that the amount of estate duty payable under the Act was neither a debt nor an encumbrance within the ambit of Section 44 of the Act. The Assistant Controller, therefore, refused to allow deduction of the estate duty liability from the value of the estate. The Appellate Controller of Estate Duty rejected the appeal filed by the accountable person and so did the Tribunal.

Section 44, of the Act permits deduction of the funeral expenses and, with certain exceptions, of the debts and encumbrances while determining the chargeable value of the estate. Debts incurred by the deceased or encumbrances created by a disposition by the deceased are to be allowed as deduction from the value of the estate, if the debts or the encumbrances were incurred or created bona fide. It would, therefore, mean that the debt must necessarily have been incurred by the debtor. The liability to pay the estate duty accrues under the statute after the death of the owner of the estate. This liability is created by the statute and, therefore, it cannot be regarded as an encumbrance nor can it be said to have been created by the deceased. Section 74 of the Act, however, lays down that the estate duty payable in respect of the movable or immovable property on the death of the deceased shall be a first charge on the immovable property so passing in whomsoever it may vest on his death. Such a charge shall, however, operate after the debts and encumbrances allowable under Part VI of the Act are discharged.

Shri R.P. Sawhney, senior advocate and counsel for the Department, has argued that Section 74 of the Act merely creates a charge on the property forming part of the estate of the deceased, but that alone will not create a legal presumption to the effect that the estate duty liability would form part of the debt within the meaning of Section 44 of the Act. Liability to estate duty arises on the death of the owner of the property and, therefore, the charge, if any, comes into force after the death only. No such charge exists at the time of the death.

Section 44 of the Act provides for deductions allowable in computing the value of the property passing on death. If the provisions of Section 44 are read with those of Section 74, it would be clear that estate duty payable on the estate of a deceased does not fall within the ambit of the former section. The debts and encumbrances under Part VI of the Act take priority over the estate duty payable. It would, therefore, mean that the estate duty has not been treated to be either a debt or an encumbrance allowable u/s 44 and, therefore, a special provision was enacted for raising a legal presumption that the estate duty liability would be a charge u/s 74 of the Act.

Liability incurred as to the estate duty is a personal liability of the accountable person and not a liability of the estate itself. Therefore, in the light of the nature of the liability also, it cannot be said that it is a debt contemplated by Section 44 of the Act. The estate duty has been treated to be a burden on the estate and an encumbrance in its broader meaning but it cannot be held to be an encumbrance within the meaning of Section 44 of the Act. The obligations, which came to be attached to the property while the deceased was alive, shall be taken into consideration while determining the principal value of the property which passes as a result of the death of the owner. An obligation, like the charge created by Section 74 of the Act, cannot be considered to be an obligation which came to be attached to the property of the deceased while he was alive. Such an obligation attaches to the property as a result of the death only.

The Karnataka High Court in V. Pramila Vs. Controller of Estate Duty, Bangalore, had an occasion to examine a question about the deducibility of the estate duty payable on the estate of the deceased while determining the value of the property passing on death. It was held that estate duty is not allowable to be deducted u/s 44 of the Act.

A similar matter came up for examination before the Andhra Pradesh High Court in Controller of Estate Duty Vs. Estate of Late Omprakash Bajaj, and a similar view was taken.

A decision of the Gujarat High Court in Gunvantlal Keshavlal Vs. Controller of Estate Duty, Gujarat, and that of the Gauhati High Court in Bhawani Shankar Bagaria Vs. Asst. Controller of Estate Duty, also support the view taken by the Karnataka High Court in V. Pramila Vs. Controller of Estate Duty, Bangalore, and the Andhra Pradesh High Court in Controller of Estate Duty Vs. Estate of Late Omprakash Bajaj, The Madras High Court in G. Shenbagammal Vs. Controller of Estate Duty, has also taken the similar view.

A conjoint reading of Sections 44 and 74 of the Act makes it amply clear that the debts and encumbrances, referred to in Section 44, are primarily those debts and encumbrances which had been created by the deceased during his lifetime. The estate duty payable on the death of the deceased cannot be said to be a debt or an encumbrance falling within Section 44 though, for purposes of Section 74, the estate duty liability assumes the character of a first charge. But, that alone will not convert the estate duty liability into a debt or an encumbrance u/s 44 of the Act.

Keeping in view the nature of the estate duty liability and in conformity with the decisions of other High Courts, as discussed above, the question referred to this court for opinion is answered in the negative and against the accountable person.