TMI Blog1976 (7) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... d he contended that the estate duty payable should have been allowed as a liability in computing the net principal value of the estate. The Appellate Controller in his order rejected the contention of the accountable person and held that the estate duty payable could not be regarded as a debt existing on the date of the deceased's death for which a deduction would be permissible under section 44 of the Estate Duty Act. He, accordingly, dismissed the appeal. Against this order of the Appellate Controller, the accountable person took the matter in further appeal before the Appellate Tribunal. The Appellate Tribunal, following its earlier decision in Estate Duty Appeal No. 84 of 1968-69, decided by it on December 30, 1972, held that the estate duty payable should be deducted while computing the principal value of the estate. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion. The Tribunal in the earlier judgment had held that under section' 44 of the Act, allowance has to be made for debts and incumbrances. According to the Tribunal, the estate duty payable was part of the debts and incumbrances and, therefore, it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taken into consideration is the time of the death of the deceased and not the time of passing of the property; the incidence of estate duty or charge of estate duty as pointed out in section 5(1) is on the property which passes on the death of the deceased, but by virtue of sub-section (1) of section 36, the value must be estimated on the basis of the price it would fetch if sold in the open market at the time of the death of the deceased. Clauses (a), (b), (c) and (d) which refer to debts which are not to be allowed under section 44 are as follows: Clause (a) provides: " For debts incurred by the deceased, or incumbrances created by a disposition made by the deceased, unless, subject to the provisions of section 27, such debts or incumbrances were incurred or created bona fide for full consideration in money or money's worth wholly for the deceased's own use and benefit and take effect out of his interest." Under clause (b), allowance is not to be made for any debt in respect whereof there is right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained. Under clause (c) no allowance is to be made more than once for the same debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing is at any time vested, (b) every trustee, guardian, committee or other person in whom any interest in the property so passing or the management thereof is at any time vested, and (c) every person in whom any interest in the property so passing is vested in possession by alienation or other derivative title, shall be accountable for the whole of the estate duty on the property passing on the death but shall not be liable for any duty in excess of the assets of the deceased which he actually received or which, but for his own neglect or default, he might have received." We are not concerned with the proviso to sub-section (1) nor with any of the other sub-sections of section 53. Under sub-section (1) of section 74, a first charge on property has been created in respect of estate duty, and it is in these terms : " 74. (1) Subject to the provisions of section 19, the estate duty payable in respect of property, movable or immovable, passing on the death of the deceased, shall be a first charge on the immovable property so passing (including agricultural land) in whomsoever it may vest on his death after the debts and incumbrances allowable under Part VI of this Act; and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of estate duty, that is, while estimating the price of the property which in the opinion of the Controller it would fetch if sold in the open market at the time of the deceased's death, which is distinct from the time of passing of the property, that debts and incumbrances have to be taken into account, and it is, therefore, contended that if debts and incumbrances have to be allowed as at the moment of death of the deceased then it must by necessary implication be debts and incumbrances incurred and created respectively by the deceased. So far as the rest of the deductions in Part VI are concerned, they throw no light on this aspect of the case and, therefore, we will have to consider the question independently without any help being derived from the rest of the provisions of Part VI or section 44. Ever since the decision of the House of Lords in what is known as Graham's Trustee's case [1971] SLT 46 (HL), it is well settled that there is a distinction between the moment of death and the moment of passing of the property. The decision in Graham's Trustee's case [1971] SLT 46 (HL) has been followed by the High Courts of India, for example, in Bharatkumar Manilal Dal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Wealth-tax Act, should be the same as its value for the purpose of section 36(1) of the Estate Duty Act. It is also pointed out that section 36, sub-section (1) of the Estate Duty Act was based upon section 7(5) of the U.K. Finance Act 1894, and section 60, sub-section (2) of the U. K. Finance Act, 1910, while section 48 of the Estate Duty Act was based upon section 7(3) of the U.K. Finance Act, 1894. The following passage from Green's Death Duties, page 393, sixth edition, has been cited with approval by Khanna J., speaking for the Supreme Court, at pages 104, 105: "The price which property 'fetches' is the gross price paid by the purchaser, without deduction for the vendor's costs and expenses. This is so, even where the property is subject to a trust for sale. But if the property to be valued is merely a share in an unadministered estate, or in the proceeds of sale of trust property which must be realised for the purpose of distribution, the expenses of the executors or trustees under the old title should be taken into account. " The following passage from Dymond's Death Duties, fourteenth edition, page 569, has also been cited by Khanna J.: "The price which the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was regarding the value of a property which was subject to a mortgage and the question was what was the net value of the particular property which was under consideration. B. K. Mehta J., delivering the judgment of the Gujarat High Court, observed at page 742: " The ambit of section 2(m) of the Wealth-tax Act had come up for consideration in Spencer Co. Ltd. v. Commissioner of Wealth-tax [1969] 72 ITR 33 (Mad), where the Madras High Court was concerned with the question of deduction, under section 2(m) of the Wealth-tax Act, of Rs. 31,26,000, being the amount the assessee, Spencer Company, agreed to pay by way of consideration for purchase of sundry assets of another company ...... This decision of the Madras High Court has been confirmed by the Supreme Court in Commissioner of Wealth-tax v. Spencer Co. Ltd. [1973] 88 ITR 429. Mr. Kaji, the learned advocate on behalf of the revenue, therefore, attempted to persuade us that the exception in section 2(m) of the Wealth-tax Act indicates that debts even though secured would go to increase the aggregate value of the debts and not reduce the aggregate value of the assets. We are of the opinion that Mr. Kaji has while urging thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also a debt within the meaning of the same section of the Wealth-tax Act, are hardly of any assistance in considering the problem before us, because what has been observed in the context of the Wealth-tax Act and what has been laid down for the purpose of that Act is hardly of any assistance for the purpose of deciding as to whether the estate duty payable in respect of an estate which passes on the death of the deceased is part of the debts and incumbrances within the meaning and plain object of section 44 of the Estate Duty Act. It is true that in Kesoram Industries' case [1966] 59 ITR 767 (SC), which was followed in Setu Parvati Bayi's case [1968] 69 ITR 864 (SC), the Supreme Court has made observations regarding what is a debt and how the courts should approach the question of what amounts to a debt, generally speaking, in the language of the law. In Kesoram Industries' case [1966] 59 ITR 767 (SC), Subba Rao J. (as he then was), delivering the judgment of the majority of the learned judges of the Supreme Court who decided the case, summarised the position thus : "We have briefly noticed the judgments cited at the Bar. There is no conflict on the definition of the word 'deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to determine as to what amounts are "debts" and what amounts are "encumbrances" within the meaning of section 74. Mr. Anjaneyulu for the accountable person has rightly contended that the principal section which is before us is section 44. It is under that section that deductions or allowances have to be made; but, we cannot overlook the fact that the meaning of the words "debts" and "encumbrances"-particularly in the context of the controversy before us-has to be judged in the light of the other provisions of the Act. Section 53 of the Estate Duty Act, as pointed out above, provides for the liability of the accountable person. The accountable person may be either a legal representative, or a trustee, guardian, committee or other person, in whom any interest in the property so passing, or the management thereof at any time, is vested; or every person in whom any interest in the property so passing is vested, or who is in possession by alienation or other derivative title. Such legal representative or other person is accountable for the whole of the estate duty on the property passing on the death, but such accountable person is liable only to the extent of the assets of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased, is created. We have already set out section 74(1) hereinabove. But it has to be noticed that it is a first charge on the immovable property, passing on the death of the deceased, in whomsoever the property may vest on his death. The property so passing may be movable or immovable; it may include agricultural land as well. But the words about which some controversy has been raised before us in the context of section 44 are " after the debts and encumbrances allowable under Part VI of this Act " occurring in section 74(1) of the Act. It has been contended on behalf of the revenue that the words "after the debts and encumbrances allowable" go to qualify the words "shall be a first charge on the immovable property so passing" occurring earlier ; whereas, it has been contended by Mr. Anjaneyulu, on behalf of the accountable person, that these words, which are under immediate consideration before us, qualify the words "immovable property so passing". It is obvious that, if estate duty has to be the first charge on the immovable property passing on the death of the deceased-if provision is not made for the debts and encumbrances which the deceased had either incurred or created on h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion, the Division Bench has relied upon the interpretation of section 74(1) of the Act. The reasoning which appealed to the learned judges of the Mysore High Court is practically on the same lines as the reasoning which has appealed to us, though there is a slight difference between our respective approaches. What is more important is that Govinda Bhat C.J., delivering the judgment of the Mysore High Court, has pointed out at page 225 : " The Act (Estate Duty Act) is modelled after its counterpart in the United Kingdom and not infrequently do we refer to the English law and practice on most of the issues arising under the Act. Section 5(1) of the Act corresponds to section 1 of the U. K. Finance Act, 1894 (57 58 Vict. c. 30). Section 44 of the Act corresponds to section 7(1) of the U. K. Finance Act, 1894. The language of section 44 of the Act and of section 7(1) of the U. K. Finance Act, 1894, are identical. Although estate duty has been in force in the United Kingdom since 1894, it was never contended under the said Act that estate duty is liable to be deducted in determining the principal value of the estate of a deceased person." A perusal of the standard text books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broader interpretation of the word "encumbrance", it can be said to be an encumbrance subject to which the estate passes on the death of the deceased. But, in this case, we are not concerned with encumbrances in general; we are concerned only with the expressions, "debts" and "encumbrances" occurring in section 44 of the Act. The next question relates to the determination of the principal value which a property would fetch if sold in the open market at the time of the deceased's death, as contemplated by section 36(1) of the Estate Duty Act. It is, no doubt, true that estate duty would be a burden on the estate, but it is not the type of encumbrance which is contemplated by a mortgage created under the provisions of the Transfer of Property Act, or a charge created under section 100 of the Transfer of Property Act. It is a burden of the type which has to be discharged by the accountable person, because the principal liability for payment of estate duty is that of the accountable person. In the notional sale which is contemplated by section 36(1) of the Act, for the purposes of ascertaining the market value of the property as at the moment of the passing of the property on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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