TMI Blog1980 (9) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... deceased ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the aforesaid amounts totalling to Rs. 87,000 gifted by the deceased to his relatives were liable to be included in the principal value of the dutiable estate under section 10 of the Act? " The facts leading to these two references are as follows, One Harjivandas Hathibhai died on May 25, 1967, leaving behind a will dated March 20, 1967. The deceased during his lifetime derived income from the firm of M/s. Harjivandas Hathibhai in which he was a partner having four annas or twenty-five per cent. share, interest, dividend, etc. At the time of his death his estate consisted of interest in the said partnership firm, shares, insurance, a bungalow at Alkapuri, Ashram Road, Ahmedabad, and one house and a shop in village Anjol. The deceased also had share in the HUF house at village Anjol. The Asst. Controller of Estate Duty, Ahmedabad, included the sum of Rs. 56,500 being the value of four annas share of the deceased in the goodwill of the firm of M/s. Harjivandas Hathibhai in the dutiable estate. During his lifetime the deceased had given various amounts by way of gif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goodwill even during the subsistence of the partnership. Interest in goodwill is property within the meaning of s. 2(15) of the E.D. Act. But the goodwill of a firm standing by itself cannot earn any income. In a case where it is specifically stipulated between the partners of a firm that on the death of any of the partners the partnership shall not stand dissolved and that the heirs of the deceased partner shall have no right whatsoever to claim any share in the goodwill of the firm, the benefit arising to the other partners on the cesser of interest in the goodwill, on the death of one of the partners, cannot be measured in terms of s. 40. Therefore, such benefit is not liable to estate duty under s. 7. The Division Bench considered all the decisions of the different High Courts and of the Supreme Court available till then to come to its conclusion. At page 311 of the report, T. U. Mehta J., speaking for the Division Bench, observed : "We have already shown above that the word 'passes' involves the concept of mobility and change of hands resulting from the continuity of the identity of rights in the property. But, if the rights of the deceased cease to exist on the happenin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the death " includes " at a period ascertainable only by reference to the death ". The Supreme Court states that this definition was only an inclusive definition. It did not bring out the meaning of the expression " property passing on the death ". The Supreme Court, therefore, pointed out that this expression is not a term of law. The word " passes " means " changes hands ". To ascertain whether property has passed, a comparison must be made between the persons beneficially interested the moment before the death and the persons so interested the moment after the death. The Supreme Court relied upon the observations of Lord Russell of Killowen in Scott and Coutts and Co. v. IRC [1937] AC 174 at page 183; 2 EDC 579 (HL) and the following passage from Green's Death Duties, at page 34, was also relied upon: " If, after such a comparison, it appears that the beneficial enjoyment of the property (or a definable part thereof) was, in substance and in events, unaffected by the death, the property (or that part thereof) did not pass on the death merely because, as a matter of terminology, one set of limitations then ceased to have effect and another became operative ............ to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Section 10 provides : " Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extent that bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise. " The provisos to s. 10 are not material for the purposes of this judgment. In Smt. Shantaben s. Kapadia v. CED [1969] 73 ITR 171 (Guj), what happened was that in the books of account of the partnership firm in which the deceased was a partner, a sum of Rs. 60,000 was debited on October 18, 1962, and credited in the account of his brother and the credit continued in the account of the firm till the (late of death, namely, February 20, 1957. Subsequent to the making of the transfer, the deceased made a declaration of gift and also acknowledged on behalf of the firm, in a book belonging to the brother that the amount was kept by the brother with the firm without interest. The Asst. Controller included this sum of Rs. 60,000 in the estate of the deceased for estate duty purposes, rejecting the contention that the gift to the brother was more than two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction in the income-tax assessment of the firm. The Asst. Controller held that the two gifts of Rs. 30,000 and Rs. 24,000 were invalid and, in any event, bona fide possession and enjoyment of the amounts had not been immediately assumed by the donees, since these amounts were retained in the firm in which the deceased was a partner and hence the provisions of s. 10 of the E.D. Act, 1953 would apply. He accordingly brought to charge the principal amount and interest thereon. The Appellate Controller confirmed this view. The Tribunal, however, deleted the inclusion holding the gifts to be valid gifts to which the provisions of s. 10 would not apply. When reference was made to this High Court, a Division Bench of this High Court held that as the subject-matter of the gift was made available to the partnership in which the deceased had an interest as a partner and placed at its disposal, the deceased was not entirely excluded from the subjectmatter of the gift and hence the provisions of s. 10 applied to the case, and it was held that as s. 10 applied only to that property which was the subject-matter of the gift and not to the income or subsequent accretion to the originally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51 of the report, Jaganmohan Reddy J., speaking for the Supreme Court, observed: " The crux of the above section as pointed out by this court in George Da Costa v. CED [1967] 63 ITR 497, lies in two parts: (1) the donees must bona fide have assumed possession and enjoyment of the property which is the subject-matter of the gift to the exclusion of the donor, immediately upon the gift; and (2) the donees must have retained such possession and enjoyment of the property to the entire exclusion of the donor or of any benefit to him by contract or otherwise. Both these conditions are cumulative. Unless each of these conditions is satisfied, the property would be liable to estate duty under s. 10 of the Act. The second part of the section has two limbs: the deceased must be entirely excluded, (i) from the property, and (ii) from any benefit by contract or otherwise. The words 'by contract or otherwise' in the second limb of the section will not control the words ' to the entire exclusion of the donor ' in the first limb. The first limb may be infringed if the donor occupies or enjoys the property or its income, even though he has no right to do so which he could legally enforce against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The view, that if it is once found that the deceased had some benefit in the property, that in itself was sufficient to bring the case within the ambit of section 10 irrespective of the question whether that benefit was referable or not referable to the gift, in our opinion, is erroneous '. " The Supreme Court held that neither the property gifted to the donees, nor the amount of rupees one lakh gifted to the five sons, could be included in the estate of the deceased. The decision in CED v. C. R. Ramachandra Gounder [1973] 88 ITR 448. (SC) was considered by a Division Bench of this High Court in Sakarlal Chunilal v. CED [1975] 98 ITR 610. A distinction was made so far as the amounts paid by the deceased concerned during his lifetime by way of havala entries in the books of account of the firm in which the deceased was a partner, and the amounts paid in cash which the donees subsequently deposited with the firm in which the deceased was a partner. As regards cash gifts the principle laid down in Clifford John Chick's case [1958] AC 435 ; [1959] 37 ITR (ED) 893 EDC 915 (PC) was applied whereas as regards transfer entries the principle laid down in H. R. Munro v. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference held that the subject-matter of the transfers in favour of each of the sons were the assets to the extent of Rs. 45,000 subject to the rights of those assets being available for the continued use of the business and that, therefore, the sum of Rs. 2,70,000 was not includible in the estate of the deceased under s. 10. The Supreme Court confirmed this view of the High Court that the transfer of Rs. 45,000 by book entries in favour of each of the four major sons on September 12, 1955, and in favour of each of the minor sons on September 18, 1955, the execution of the partnership deed on September 17, 1955, and of the other agreement on September 17, 1955, and of the other agreement on September 18, 1955, were all parts of one integrated transaction, the object of which was to bring about transfer of six-sevenths share of the deceased in his business in favour of his sons so that he and his sons might have each one-seventh share therein. In view of the Tribunal's finding that the deceased transferred six-sevenths share in his business and retained one-seventh share therein, no question could possibly arise of the inclusion of the six-sevenths share or of the amount of Rs. 2,70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Stamp Duties [1934] AC 61 ; 2 EDC 462 (PC) and also the principle laid down by the Supreme Court itself in C. R. Ramachandra Gounder's case [1973] 88 ITR 448 (SC). Thus, it is clear that according to the decision in R. V. Vishwanathan [1976] 105 ITR 653 (SC) if the gift was made by havala entry, the amount thus transferred by way of havala entry in favour of any donee by the deceased partner could not be said to be property deemed to pass on the death of the deceased by virtue of s. 10 of the Act. As regards cash gifts which were subsequently invested by the donees in the firm in which the deceased donor was a partner, the point is now clarified by the decision of the Supreme Court in CED v. Kamalavati [1979] 126 ITR 456. The Supreme Court in that case by one judgment disposed of two cases, one of Kamalavati and another of Jai Gopal Mehra. In the second case of Jai Gopal Mehra the facts were that in April or May, 1958, the deceased, Jai Gopal Mehra, made gifts of Rs. 20,000 each in favour of a son and four daughters-in-law. The donees invested the entire amounts gifted to them in a firm in which J was a partner. The donees were not partners in the firm nor were they taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] AC 61 ; 2 EDC 462 (PC) is applicable. In our opinion, this case is on a stronger footing than that of Civil Appeal No. 2527 (Kamlavati's case [1979] 120 ITR 456) ........" In Kamlavati's case [1979] 120 ITR 456, the gift was made by transfer entries in the books of account of the firm. Thus, according to these two decisions, one in R. V. Viswanathan's case [1976] 105 ITR 653 (SC) and the other in Kamlavati's case, the Supreme Court has clearly indicated that unless there is something more, over and above the mere factum of the grant of gift being kept as deposit, either as creditor or as a partner's contribution to the capital of the firm by the donee, the mere factum of such deposit cannot attract the provisions of s. 10 of the Act. What is required to be looked at is the character in which the deceased donor continued to enjoy the benefit of the property, either by contract or otherwise. If he continues to enjoy that property even after the gift in his capacity as donor or in the capacity in which he made the gift and not in his capacity as partner, then only the provisions of s. 10 would be attracted. Otherwise, in all such cases, whatever be the character of the donee vis-a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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