TMI Blog1963 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... A statement of account relating to the estate of the deceased was submitted by the applicant as the accountable person under the Act. After hearing his representative and considering the available evidence, the Deputy Controller of Estate Duty, Western Zone, Bombay, who was the assessing authority concerned, determined the principal value of the estate at Rs. 14,36,980 and the duty payable thereon at Rs. 2,60,739.82 nP. A copy of the Deputy Controller's order is made a part of the statement of the case and is marked as annexure " A ". 3. The material facts of the case are as under : (i) By a declaration of trust dated the 19th December, 1939, executed in Africa, Shri R. S. Patel, father of the deceased, settled on trusts declared therein in favour of his two sons, Manubhai R. Patel (the deceased), and Mahendra R. Patel (the applicant), both then minors, a part of his interest in a partnership called Central Cotton Trading Company of Uganda (Africa). The partnership was later on converted into a limited company called " Central Cotton Trading Company (Uganda) Ltd. and the said R. S. Patel executed a fresh declaration of trust on 26th June, 1941, settling 160 fully paid up shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Board under section 63 of the Act. The only contention raised in the appeal related to the addition of Rs. 10,43,050 being the value of the properties comprised in the deed of declaration dated the 26th June, 1941, which, according to the Deputy Controller, passed on the death of the deceased under section 5 of the Act. In support of this contention, arguments were advanced before the Board as fully set out in paragraph 4 of their order dated the 31st October, 1960, which is made a part of the statement of the case and marked as annexure " C ". The gist of these arguments was that there was no passing of property under section 5 in this case, that the deceased was entitled only to maintenance till he should attain the age of 25 ; that, in any case, his life interest ceasing on death was not capable of quantification ; that his interest in the corpus of the trust did not fall into possession in his lifetime and, therefore, no duty was payable in respect thereof because of the exemption under section 23 of the Act. 5. On analysing the provisions of the trust deed dated the 26th June, 1941, the Board found as follows : "(a) Clause 3 provided that the shares settled in trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to the half share of the income from the beginning, and the trust deed provided for the disposition of the corpus only, in the event of the premature death, while the deceased's heirs would be entitled to the savings from this income up to the date of death. 7. In view of the aforesaid findings, the Board did not consider it necessary to deal with the other arguments regarding the applicability of section 7 and/or section 23 to the facts of the case. They accordingly dismissed the appeal and confirmed 8. On the above facts of the case, the applicant has formulated the following questions of law for reference to the High Court : " (i) Whether the interest settled on trusts for the deceased under the declaration of trust dated the 26th June, 1941, was an interest in possession chargeable to estate duty under section 5 of the Estate Duty Act, 1953 ? (ii) Whether on a true construction of the material provisions of the declaration of trust dated the 26th June, 1941, and the relevant provisions of the Estate Duty Act, 1953, the respondent was justified in law in including in the estate duty assessment of the deceased the amount of Rs. 10,43,050 being the trust funds in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of these 160 shares by the settlement dated 26th June, 1941, and in terms of the settlement and with a view to effectuating it, Rambhai Patel and Purshottam Patel transferred the respective 80 shares standing in their names to the trustees with the result that a trust was constituted in respect of these 160 shares on the terms and conditions contained in the settlement. The settlement was for the benefit of Mahendra and Manubhai, the minor sons of Rambhai Patel, with certain limitations over in case of death of either. Rambhai lived for several years after the making of the settlement and died on 17th October, 1953. We are, however, not concerned with the position arising on the death of Rambhai Patel. What concerns us in this reference is the position arising on the death of Manubhai. Manubhai died on 7th June, 1954, when he was only about 16 years of age and he did not leave behind him any widow or issue. As a matter of fact, he was not married at the time of his death. On the death of Manubhai a question arose whether estate duty was exigible on any part of the trust property. The revenue claimed that on the death of Manubhai one-half share of Manubhai in the trust property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il he attained the age of twenty-five, such surplus belonged to him as his absolute property and, in the event of his death before twenty-five, was heritable by his heirs. On this construction of the provisions of the settlement, the Central Board of Revenue applied the well-established principles of law relating to charge of estate duty and observed that since there was a change in the persons beneficially interested in the one-half share of Manubhai in the trust property, in that the moment before his death, he was entitled to the whole income and the moment after his death, other persons, namely, his brothers, were entitled to the whole income, the said one-half share in the trust property passed on his death within the meaning of section 5. The argument of Mahendra based on section 23 was repelled by the Central Board of Revenue by holding that the interest of Manubhai under the settlement was an interest in possession since he was entitled to the whole income of his one-half share in the trust property and that it could not, therefore, be said that his interest determined by reason of his death before it became an interest in possession so as to bring the case within the exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narily, in the absence of any provision to the contrary in the settlement, a person who is given a vested interest in a fund is entitled not only to claim the income of the fund but also to require the trustees to transfer the fund to him. Mahendra and Manubhai each would, therefore, have been entitled to claim the income of his one-half share of the said 160 shares as also to require the trustees to transfer such one-half share to him. But clauses 2 and 4 postponed the period of distribution and also provided as to what was to happen to the income of the said 160 shares in the meantime. Some argument turned on the true construction of clauses 2 and 4 and we will, therefore, reproduce these clauses in full rather than give a mere summary of them, so that the argument may be properly appreciated. Clauses 2 and 4 were in the following terms : "2. The trustees shall stand possessed of the said shares until each of the said beneficiaries shall complete the age of 25 years and until the said time, out of the profits arising therefrom, to apply either the whole or part thereof as the said trustees may deem fit and proper in the maintenance and advancement of the said beneficiaries. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in part as the trustees thought fit and proper for the maintenance and advancement of both the beneficiaries irrespective of their share in the said 160 shares. This construction is in our opinion fallacious for it sins against the fundamental rule of interpretation that in construing any writing, be it a writing, settlement or anything else, every clause must be considered with reference to the context and other clauses of the writing, so as, as far as possible, to make a consistent whole and that no part of the writing should be construed in isolation for the intention of the author of the writing is to be found not in one part of the writing or in the other, but in the entire writing and that intention can best be gathered by viewing a particular part of the writing not detached from its context in the writing but in connection with its whole context. If clause 2 is read with the recital in the settlement and clauses 4, 6 and 7, it is clear that clause 2 cannot bear the construction which Mr. I. M. Nanavati wants to place on it. The last recital in the settlement clearly shows that the intention of the settlor was that out of the said 160 shares, 80 shares should be for the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective beneficiary in the said 160 shares. There is also another circumstance which throws considerable light on the construction of clause 2 and shows that the construction which we are placing upon these clauses is the right construction and not the construction contended for by Mr. I. M. Nanavati. That circumstance relates to the accumulation of surplus income referred to in both clauses 2 and 4. Clause 4 provided that when any beneficiary attained the age of twenty-five, the trustees should transfer to such beneficiary his one-half share in the said 160 shares as also the accumulation of surplus income in respect of such one-half share. Clause 4 clearly postulated the existence of a distinct and separate accumulation of surplus income in respect of one-half share of each beneficiary in the said 160 shares. Now there could not be a distinct and separate accumulation of surplus income in respect of one-half share of each beneficiary unless the amount to be utilised for the maintenance and advancement of each beneficiary was to go only out of the income of his one-half share in the said 160 shares. Unless the income in respect of the one-half share of each beneficiary was trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in support of our view, that if the interest of Manubhai and Mahendra in their respective one-half share in the said 160 shares had been contingent on their respectively attaining the age of twenty-five or if they had no vested right to the income of their respective one-half shares in the said 160 shares, it would have been totally unnecessary to have clause 5 in the settlement. Clause 5 became necessary because the settlor wanted that neither Mahendra nor Manubhai should be entitled to sell, mortgage or encumber in any manner either his vested interest in one-half of the said 160 shares or his vested right to the income in respect of such one-half share. Having said what was to happen to the corpus and income until Mahendra and Manubhai respectively attained the age of twenty-five and what was to be done to the corpus and accumulation of surplus income when Mahendra and Manubhai respectively attained the age of twenty-five, clauses 6 and 7 proceeded to declare what was to happen if either Mahendra or Manubhai died before attaining the age of twenty-five. Clause 6 provided that if either Mahendra or Manubhai died before completing the age of twenty-five leaving male issue or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that the accumulation of surplus income should also be the subject of a gift over along with the one-half share in the said 160 shares, he would have used appropriate language for the purpose of giving effect to his intention and he would not have stopped short at the words " the said shares " in clauses 6 and 7 but would have proceeded to include " the accumulation thereof " as he did in clause 4. We cannot, therefore, agree with Mr. I. M. Nanavati that clauses 6 and 7 contained a gift over in case of death of either beneficiary before completing the age of twenty-five not only in respect his one half share in the said 160 shares but also in respect of the accumulation of surplus income in respect of such one-half share. To our minds, it is clear that the accumulation of surplus income in respect of the one-half share of each beneficiary in the said 160 shares was not intended to go over to the person mentioned in clauses 6 and 7 on the death of such beneficiary before completing the age of twenty-five and since such beneficiary had a vested right to the income of his one-half share during his lifetime, such accumulation of surplus income would on the death of such benefic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notification the States so added shall be deemed to be States specified in the First Schedule within the meaning of sub-section (1). " Now the expression " passes on the death "might have created some difficulty of interpretation but two generations of judicial decisions have imparted to that expression as occurring in section 1 of the U. K. Finance Act, 1894, which imposed for the first time in England the duty called " estate duty ", exact shades of meaning that could not have been originally discerned and our Act being modelled on the English statute, it would be a fair presumption to make that when the legislature enacted our Act, the legislature used the expression " passes on the death " in the sense in which it had been judicially interpreted in England. We might, therefore, usefully refer to English decisions on the interpretation of section 1 of the U. K. Finance Act, 1894, in order to comprehend the true import of passing of property referred to in section 5 of our Act. The question as to when property can be said to pass on death must be approached as one of substance and not of technicality. Ordinarily, when a person dies and his estate devolves on his heirs, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and profits, invest it, and apply the proceeds in discharging debts or incumbrances upon the estates, with a proviso limiting the duration of the trust. In 1908 the eldest son of the Fifth Earl died and the only son of that son died in 1910. In 1915 the Fifth Earl died and was succeeded by his second son as Sixth Earl and the life estate of the Sixth Earl became an estate in possession. In 1933 the Sixth Earl died and was succeeded by his only son who became the Seventh Earl and tenant in tail male in possession of the estates. On these facts the question arose whether the property passed on the death of the Sixth Earl within the meaning of section I of the U. K. Finance Act, 1894. Lord Russell of Killowen accepted the law to be that in order to constitute a passing of property on death within the meaning of section 1 of the U. K. Finance Act, 1894, there must be a passing beneficially from some person or persons to another person or persons and upheld the claim of the Crown in the following words 2 E. D. C. 579, 588 : "On the death of the Sixth Earl the Seventh Earl's estate in tail male became, instead of an estate in remainder, an estate in tail male in possession. He became e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in beneficial possession or enjoyment of the property both before and after death without interruption, there is no passing of property even if there is change of source or title. Lord Evershed M. R. said in In re Parkes' Settlement : Midland Bank Executor and Trustee Co. Ltd. v. Inland Revenue Commissioners [1956] 1 All E. R. 833, 838 ; 3 E. D. C. 721, 729 : " I agree with counsel for the trustees that prima facie there must, in order to give rise to a valid claim for duty, whether under section 1 or under section 2 of the Finance Act, 1894, be a change, not merely of source or title, but of possession or enjoyment. " We might also in this connection refer to In re Jones' Will Trusts : Soames v. Attorney-General [1947] 1 Ch. 48. There the deceased had a contingent interest in the residuary estate left by a testatrix (subject to payment of two annuities) on his attaining the age of twenty-five. The will, however, contained no disposition of the income until the deceased attained the age of twenty-five and such disposition, therefore, fell to be regulated by section 31(1) of the Trustee Act, 1925, under which the deceased became entitled to the whole of the income of the residuary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the residuary estate and yet it was held that the residuary estate passed on his death. The question to which we must, therefore, address ourselves is whether on the death of Manubhai there was any change in the beneficial possession or enjoyment of his one-half of the said 160 shares. We must make a comparison between the persons beneficially interested in the one-half share of Manubhai in the said 160 shares the moment before the death of Manubhai, and the persons so interested the moment after the death of Manubhai and see whether there is any change. The moment before his death Manubhai was beneficially interested in one-half of the said 160 shares since he was entitled to the whole income of the said one-half. No doubt until he attained the age of twenty-five, he could not require the trustees to pay him the whole income and all that he could ask the trustees was to apply the whole or part of the income as the trustees thought fit and proper for his maintenance and advancement, the surplus income being accumulated, but he was certainly entitled to the accumulation of surplus income and he could but for clause 5 dispose it of during his lifetime even before attaining the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property. The argument is clearly misconceived and based on a mis-appreciation of the true import of section 5. We have already pointed out and we need not repeat it here that what section 5 contemplates is not the passing of the interest of the deceased in settled property but the passing of the settled property itself. The question that requires to be considered under section 5 is not whether the limited interest of the deceased in settled property has passed or not, for that by its very nature cannot pass but must cease with death, but whether the settled property has passed from the beneficial possession or enjoyment of one beneficiary to that of another. And if that be the correct way of looking at the section, as we think it is, it does not matter that the beneficiary has no interest in the property comprised in the settlement but has a mere personal right against the trustees to compel performance of the obligations under the trust. The test is not whether the deceased has any interest in the property capable of passing on death-though we may point out that even the right of the beneficiary against the trustees under the Indian law is transferable and can pass on death-but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould continue to subsist. And thirdly, the facts should be such that but for the exemption, the property would have been deemed to pass on the death of the deceased by reason only of the failure or determination of the interest of the deceased and for no other reason. Now the dispute between the parties centred round the fulfilment of the first two conditions. If the first two conditions were fulfilled, it was not the contention of the revenue that section 23 should not yet be held applicable on the ground of non-fulfilment of the third condition. We will, therefore, confine our attention only to the question whether the first two conditions were fulfilled. Before, however, we examine this question we must deal with a preliminary objection raised by the learned Advocate-General to the applicability of section 23. The learned Advocate-General contended that since the claim of the revenue was based on section 5, section 23 could not be invoked by Mahendra. The argument was the familiar argument founded on Lord Macnaghten's dictum in Cowley's case [1899] A. C. 198 ; 1 E. D. C. 193, 207 suggesting a dichotomy between sections 1 and 2 of the U. K. Finance Act, 1894. Lord Macnaghten said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k at section 2(1)(b), and, bearing in mind that section 1 referred to property ' settled or not settled ', and that section 2(1)(a) had dealt with property that was not settled, I should expect to find that section 2(1)(b) dealt with settled property. And that is what I should find. In language that is apt to cover all settled property and, in particular, the commonest form of settled property, viz., property in which a life interest is given with remainders over, the second main category of property is exhaustively defined. It would not occur to me that section 2(1)(b) was intended to cover only property which did not pass (whatever that as yet undefined word might mean) under section 1. . . . . Thus, my Lords, I come to the end of my examination of sections 1 and 2 with the clear conviction, which is not weakened but rather is confirmed by other sections, that section 2 is a categorical description of the property ' settled or not settled ', upon which the new estate duty is imposed. " Lord Radcliffe also said much to the same effect when he observed in the course of his speech at page 37 (1) : " Settled estate duty apart, section 1 would be read as the section that imposed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty in which some other person had an interest terminable with the life of the deceased, and property in which there subsisted some interest for life, such as a life annuity, which did not carry the ownership of the whole income. No doubt, much that is described in these two heads of section 2(1) would have been charged in any event by force of the words used in section 1. In that sense, it is permissible to say of section 2(1), as has so often been said, that it ' sweeps up ' what is not covered by section 1. But that is to describe its effect or rather the effect that section 1 would have in the hypothetical situation of section 1 standing without section 2. It is not to describe its construction; and the distinction is important. " The question in that case arose in regard to the applicability of the excepting words in section 2(1)(b), namely, " but exclusive of property the interest in which of the deceased or other person was only an interest as holder of an office, or recipient of the benefits of a charity or as a corporation sole " in a case in which the Crown sought to charge estate duty under section 1. The question was : If the words of section 2(1)(b) are a fit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if the claim for estate duty is based on section 5, section 23 can be invoked as an answer to the claim of the revenue if the claim otherwise falls within the language of section 7. Of course, Mr. I. M. Nanavati contended that even though the property falls within section 5 and does not come within section 7, section 23 would yet be operative for it occurs in Part III headed " Exceptions from the charge of duty " and the exception contained in it is a general exception to the charge of estate duty imposed by section 5 and explained and refined upon by the succeeding sections 6 to 16. The contention is not without force but it is not necessary to determine it since we are of the view that the present case is indubitably covered by section 7. The interest of Manubhai which extended to the whole income of one-half of the said 160 shares ceased on his death and by the cessor of such interest a benefit accrued or arose to the extent of the whole income of such one-half share and such one-half share could, therefore, in any event be deemed to have passed under section 7. This position was clear and indisputable and was in fact admitted by the learned Advocate-General. It must, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was at the time of his death not competent to dispose of his one-half share in the said 160 shares and that the limitations under the settlement did not, therefore, come to an end on the death of Manubhai and that the subsequent limitations set out in clause 7 of the settlement in any event continued to subsist. Turning now to the question whether the first condition could be said to have been fulfilled, we find that the first condition consists of two parts, namely, that the interest of the deceased under the settlement must fail or determine by reason of his death and that it must so fail or determine before becoming an interest in possession. Now the interest of Manubhai certainly determined by reason of his death. This could with no colour of reason be disputed by the learned Advocate-General. But the learned Advocate General joined issue with Mr. I. M. Nanavati on the second part of the condition. He contended that the interest of Manubhai under the settlement was an interest in possession and that it could not, therefore, be said to have determined before becoming an interest in possession. Now that raises the question : What is an interest in possession within the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 38 of our Act, Romer L. J. stated in Fry v. Inland Revenue Commissioners [1958] 3 All E. R. 90 ; [1960] 38 I. T. R. (E. D.) 21, 36 ; 3 E. D. C. 938, 953: " It speaks of an interest in expectancy falling into possession, whereas such an interest always is in possession from the date when the instrument which creates it takes effect. What does, or may, fall into possession is the property in respect of which the interest in expectancy has been created ; and it was presumably in that sense that the legislature referred to the interest itself falling into possession. " It is, therefore, clear that interest in possession signifies the present beneficial possession or enjoyment of the property in respect of which the interest is created. It is only when the deceased has beneficial possession or enjoyment of the property that the concept of passing of property could become appropriately applicable and that is why section 23 enacts that if the interest of the deceased fails or determines before becoming an interest in possession, the property shall not be deemed to have passed. The test which must, therefore, be applied in every case in which the point for determination arises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion debated was as to whether the interest of Hubert Power determined before it became an interest in possession. Palles C. B. negatived the claim of the Crown holding that there was no interest in possession at the date of his death. The learned Chief Baron founded himself on the proviso in the settlement which provided that the trustees should during the minority of Hubert Power receive the rents and apply such sum or sums as they thought proper in or towards his maintenance, education, advancement or benefit and accumulate the surplus and hold the same in trust for him if he should attain the age of 21 but if he died under 21, then upon trust for the person or persons who would become indefeasibly entitled to the property. He pointed out that the question for decision before him depended upon this proviso and said: " . . . . . it has been admitted by the Crown, and, as I think, rightly, that although this proviso may not vest a legal estate in the trustees, it was sufficient in equity to effectually capture the rents and profits of Hubert's (Power's) third share, from his father's death in 1892, to his own death in 1898, and to dedicate them to the trusts thereby declared ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained irrespective of its application, that the learned Chief Baron held that the interest of Hubert Power was not an interest in possession. If Hubert Power had been entitled to the whole income of the property or to any defined and ascertained part of it, the learned Chief Baron would have certainly held that the interest of Hubert Power was an interest in possession. This becomes clear when we turn to the following passage from the judgment of the learned Chief Baron and particularly the portions italicized by us : " The principle of In re Bowlby [1904] 2 Ch. 685 is more in point, although that case was antithetical to the present. The judgments there very markedly show the distinction in the ownership of the surplus, after payment of maintenance, of the interest, during minority, on a legacy to a child, between the cases, on the one hand of the legacy being vested, and, on the other, of the legacy being contingent, with an express direction for the child's maintenance. In the one case, the surplus is the property of the child ; in the other, it forms an accretion to the capital, and does not necessarily go to the child or his representatives. The present is a correlative c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of his one-half share in the said 160 shares and his interest was, therefore, an interest in possession. His interest was not an estate in remainder or reversion nor was his interest a future interest. He was presently entitled to the whole income of his one half share in the said 160 shares and after provision of maintenance and advancement if any surplus remained, it was to be accumulated and he was the beneficial owner of the accumulation of such surplus income and but for clause 5 he could dispose it of as he willed and if he died, it was heritable by his heirs. If the provisions of the settlement had been that the accumulation of surplus income should be held by the trustees in trust for Manubhai, only if Manubhai attained the age of twenty-five and if he died before attaining the age of twenty-five the accumulation of surplus income should go to others along with the one-half share of Manubhai in the said 160 shares, the position would have been the same as in Power's case [1906] 2 I. R. 272 and it would not have been possible to say that the interest of Manubhai was an interest in possession. But Manubhai being entitled to the accumulation of surplus income in any e ..... 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