TMI Blog1973 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... re were included amongst other assets in the free estate, moneys received on various policies of insurance on the life of the deceased totalling Rs. 2,36,779. In computing the principal value of the estate the Deputy Controller of Estate Duty, who was the assessing officer, included a sum of Rs. 2,00,000 received from the United India Fire and General Insurance Company Ltd. on a personal accident insurance policy taken out by the deceased on his life on February 21, 1954, treating it as property passing on the death of the deceased. It was contended by the accountable persons that the said sum of Rs. 2,00,000 accrued only on the death of the deceased, that this was not the property of the deceased during his lifetime or at the time of his death and that, therefore, it did not pass or deem to pass on his death under any of the provisions of the Act. The amount was payable only to the legal representatives which the legal representatives could claim as their own property and not as the property passing from the deceased. The amount became payable to the legal representatives under one of the terms of the policy itself and not on any disposition by the deceased as the policy itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... natural family on adoption and that, therefore, the deceased had a half share in the family properties. It was further observed by the assessing authority that in the income-tax return filed in respect of the income of the family of which the deceased was the karta, the family was shown as consisting of himself and his son, Pethachi, and Muthiah was not included as a member of the family. On appeal, the Central Board of Direct Taxes came to the conclusion that the deceased was competent to dispose of the moneys received under the policy since he had a right to nominate with regard thereto and that he was also competent to make a will and direct manner of the distribution of these moneys in any way he liked till the moment of his death. The Board accordingly held that the provisions of section 6 of the Estate Duty Act was clearly attracted. In the appeal, the revenue also contended that the case would be covered under section 15 of the Act but the Board considered that since in its view the provisions of section 6 were attracted it was not necessary to examine the application of section 15 of the Act. It also concurred with the view of the assessing authority that the amount is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y becomes worthless. The insured has no right to assign, mortgage or otherwise deal with the policy. Clause 5 of the policy makes the policy unassignable and, therefore, even under the terms of the policy the deceased had no power of disposition. Power to nominate should not be equated to the competency to dispose of and the deceased never had any right to execute a will with regard to the amount payable under the policy. Therefore, it was not property which the deceased was competent to dispose of. On the other hand, the learned counsel for the revenue contended that accident policy is " property ", that the right under the policy to claim and be paid the policy money on death is an interest in property, that this right is vested in the insured during his lifetime, that the deceased has a right to assign or otherwise dispose of the rights under the policy unless it was prohibited by the terms of the policy itself, that in any case a right to will away the benefits under the policy could not be disputed and this amounts to a power of disposal of the moneys under the policy and that, therefore, the fatal accident policy is property which the deceased was competent to dispose of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst question, therefore, for consideration is whether a personal accident policy is property and whether the deceased was competent to dispose of the moneys payable on death under a personal accident policy within the meaning of section 6 of the Estate Duty Act, 1953. The terms of the policy which are relevant to the present issue are to the following effect. It states that by a proposal and a declaration the deceased applied to the United India Fire and General Insurance Company for an insurance as therein contained and had paid the premium as consideration for such insurance. The insurance is designated as personal accident insurance. Under the terms of the policy, the company has agreed upon proof of title to its satisfaction, to pay to the legal representatives of the insured or to the insured himself, as the case may be, such sum as according to the table of benefits contained in the schedule thereof. The schedule gives the table of benefits as follows : Rs. Section A on death or permanent total disablement 2,00,000 Section B on permanent partial disablement 1,00,000 Section C on temporary total disablement for each week of its continuance not exceeding 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had become and was in the hands of the deceased teacher, a sum or property which actually passed on. Section 2(1)(d) of the Finance Act, 1894, was also held not applicable on the ground that the " other interest purchased or provided by the deceased " in that section means something which the deceased purchased or provided voluntarily and since the contribution by a teacher under the School Teachers' (Superannuation) Act 1922-1925, was compulsory it cannot be said that she had purchased or provided any interest. The Revenue then relied on section 2(1)(a) of the Act which provided that the property passing on the death of the deceased shall be deemed to include property which the deceased was at the time of his death competent to dispose. Rowlatt J. held that in view of the special definition of the words " deemed to be competent to dispose of the property " and " general power " under section 22(2)(a), the case was within section 2(1)(a). In the Court of Appeal, it was contended on behalf of the defendant, accountable person, that at the time of the death the deceased was not possessed of anything which falls within the word " property " ; she had only an interest in what may be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my judgment, property. " With reference to the argument that the deceased was not competent to dispose at the time of her death, the Master of the Rolls held : " Counsel for the defendant was compelled to admit that the deceased could dispose of a sum ultimately to be received, or could dispose of this interest by her will, although he said she could not raise any money on it in the sense that there could not be an assignment of it while she was alive, but it would appear to me that to suggest that the deceased had no power to dispose of this sum by will would be to take away half the merit of the gratuity on her decease. If and when it is received it must be subject to her will, and her absolute right is of benefit and of comfort to her, because she is, by means of that knowledge and that competence to dispose of it, able to make some provision for those who are the objects of her disposing power. It appears to me, therefore, that in view of the right which this lady had, she had power to dispose of the sum by will, and thus, when one looks at section 1, the charging section of that Act of 1894 and section 2 which I have referred to as a section which sweeps into the charge u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an air crash while on duty, under section 6 of the Estate Duty Act, was considered. Under Rule 159 of the Indian Airlines Corporation (Flying Crew) Services Rules, a member of the flying crew was entitled to compensation at specified rates in the event of his death or an injury caused by an accident during or as a result of air journey. The compensation payable under this rule was in addition to the compensation which the Corporation had agreed to pay under an agreement described as the pilot agreement. In accordance with the agreement between the deceased and his employer a sum of Rs. 68,300 was received by the widow of the deceased as compensation. The Tribunal held that in this case as the compensation came into being only by reason of the death of the deceased it could not be said that the deceased had any interest in it during his lifetime. The Tribunal, therefore, held that the property in question was not one over which the deceased had any power of disposition. On a reference the Delhi High Court held that though the deceased was not required to make any contribution for the purpose of earning the compensation as was required to be made by a teacher under the Teachers' (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... William Worsley (the deceased) under a group accident insurance policy, provided by the deceased's employer, should be included in computing the aggregate net value of the property passing on the death of the deceased. The group accident insurance policy was a contract between the employer and an insurance company. Neither the deceased nor any of his fellow employees who happened to be named in the policy was a party to the contract. The employer was under no legal obligation to provide such insurance. The policy was, according to its terms, to be in force for a particular period. As per the policy, in the event of bodily injury caused to any one of the employees named therein " by an accident occurring while this policy was in force " varying amounts determined in a manner set out in the policy were agreed to be paid by the insurance company. The policy provided that in the event of loss of life of an employee, the indemnity was to be payable to the estate of that person and that all other indemnities were to be payable to the employee himself. The provision in the policy that in the event of loss of life of an insured person the indemnity was payable to his estate was subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37) and the Canadian and British Insurance Companies Act, R.S.C. 1952, c. 31 (see, for example, section 81), there is a contrast between 'life insurance' and 'insurance against death as a result of accident' even where the latter is included in a policy of 'life insurance'. In the appeal, the revenue put forward the alternative claim that the assessment could be maintained under Paragraph (m) of sub-section (1) of section 3 of the Estate Tax Act. The argument on behalf of the revenue was that by virtue of section 244 of the Ontario Insurance Act set out above, the deceased did have the right, immediately prior to his death, to designate a beneficiary and, if he had done so, the effect would have been that the $ 100,000 indemnity that became payable after his accidental death would have been payable to the named beneficiary instead of to his estate. This, according to counsel for the appellant, was a power or authority to appoint or dispose of the contingent right to receive $ 100,000 on the accidental death of the deceased during the policy period. This contingent right to receive the $ 100,000 death benefit is the deceased's interest in the policy of insurance and is the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket value. But this does not dispose of the matter, for immediately after the assignment of the policy of insurance Men Ritter Papp had a chose-in-action. It is true that she could not sell it or borrow on it or get any surrender value for it, but it did have value, for if Gordon Papp had died she would immediately have had the right to receive payment of the amount of the policy. " As seen from the facts, Quixley's case, Sahani's case and Worsley Estate's case related to fatal accident policies and D'Avigdor's case and Papp Estate's case related to life insurance policies. It may be seen from the passages extracted above that in Quixley's case the Court of Appeal held that the sum of money when paid was property, though the availability itself was subject to the fulfilment of certain conditions. It appears that the right to the death gratuity could not be assigned under the terms of the statute and any such assignment thereof was void. But the Court of Appeal was of the view that the deceased was, by virtue of the provisions of the scheme of death gratuity and in particular section 5(1) of the School Teachers' (Superannuation) Act, 1925, competent to dispose of this amount by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to dispose of. " Thus, in the case of a personal accident policy, the property is the ultimate money that is paid and that shall be deemed to pass on death of the deceased because of his competency to dispose of the same by will. But the learned counsel for the accountable persons contended that in the case of a fatal accident policy the right to claim and be paid the policy money is dependent on an uncertain contingent event and, therefore, the interest created is only, if at all, an uncertain contingent interest which is something like a chance of an heir-apparent succeeding to an estate, a chance of a relation obtaining a legacy on the death of a kinsman or any other mere possibility of like nature which cannot be transferred under section 6 of the Transfer of Property Act. He also contended that a death benefit under an accident policy could not be disposed of by a will in view of restriction No. 1 of Schedule III to the Indian Succession Act, 1935. The effect of that restriction was that the testator would not be competent to bequeath property which he could not have alienated inter vivos. That means, if the property is of the type falling under section 6(a) of the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of section 6 of the Transfer of Property Act. We are not concerned as to the nature of the right of the legal representatives under an accident policy. The right of the deceased is a right flowing under the terms of the policy itself and not an uncertain contingent right dependent on an uncertain event. Therefore, the prohibition under section 6 of the Transfer of Property Act and the restriction in Schedule III to the Indian Succession Act are not applicable. Under section 3(1)(a) of the Estate Duty Act, a person shall be deemed competent to dispose of property if he has such an estate or interest therein or such general power as would, if he were sui juris, enable him to dispose of the property. " General power " is defined in its wider terms as including a power to appoint or dispose of property, whether exercisable by instrument inter vivos or by will or both. The words " power to appoint property " is defined in section 2(13) as meaning power to determine the disposition of property of which the person invested with the power is not the owner. There could be no doubt that the amount payable on death is property. The deceased had the right to have this amount paid to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ife insurance business " does not cover a policy covering death by accident. Section 38 also specifically mentions that a transfer or assignment of a policy of life insurance may be made only by an endorsement upon the policy or by a separate instrument. Section 39 refers to " nomination " by the holder of a policy of life insurance. It is because of the distinction between a transfer or assignment and nomination made in sections 38 and 39, that a nomination in the case of a life insurance policy was held to merely mean that the person nominated is the one to whom moneys secured by the policy shall be paid in the event of the death of the assured. These two sections are not applicable to an accident policy covering the death by accident. " Nomination " in the case of a personal accident policy, in our opinion, amounts to a disposition by will as the property itself is to come into existence on death of the insured. Therefore, nomination could be cancelled or changed during the life-time of the insured. In this respect, nomination also differs from an assignment of a life insurance policy which is irrevocable under the provisions of section 38 of the Insurance Act. We may also giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t such disposition by will or otherwise could not prejudicially affect the rights of the company. In fact, the latter portion of the clause recognises the creation of a trust or assignment or creation of a charge or lien over the policy. It says that the company shall not be affected by notice of any such trust or assignment and the receipt of the executors or administrators of the insured for any moneys payable shall be an effective discharge to the company. In this connection, we may also refer to a passage in Halsbury's Laws of England, volume IV, 3rd Edition, page 520 : " 1076. Condition against assignment.--The mere insertion in a contract, as, for example, in a policy of life insurance, of an express condition that it shall not be assignable in any case whatever will not necessarily prevent the assignment of the beneficial interest in the contract, but parties to a contract can by express stipulation render the benefit of the contract incapable of being assigned. " We are unable to read clause 5 as a stipulation rendering the benefit of the contract incapable of being assigned. In MacGillivray on Insurance Law, 5th edition, volume II, paragraph 1186, we also find the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw Reforms Act the right of action is for the benefit of the deceased's estate ; under the Fatal Accidents Act the right of action is for the benefit of the deceased's dependants though in both cases the cause of action is the negligence of the third party which has caused the deceased's death. This distinction is also kept up in India as pointed out by the Supreme Court in Gobald Motor Service Ltd. v. Veluswami in a case arising under the Fatal Accidents Act of 1855. We are unable to agree with the learned counsel for the accountable persons that the case of an accident policy is in the nature of a claim by a dependant under the Fatal Accidents Act of England or section 1 of the Indian Fatal Accidents Act, 1855. These decisions were concerned with the interpretation of a statutory provision and the rights considered there are statutory rights and not rights under a policy. The learned counsel for the revenue invited us to consider the applicability of sections 5 and 15 of the Estate Duty Act in respect of the sum of Rs. 2,00,000 received by the accountable persons under the personal accident insurance policy. The learned counsel for the accountable persons objected to the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal value of the estate and that question was before the Board the applicability of section 5 would arise especially when the law is argued on the basis of the facts found and no consideration of special facts is necessary in the reference. We accordingly proceed to consider the question of applicability of sections 5 and 15 of the Act. It may be mentioned that at one stage it was considered in England that sections 1 and 2 of the Finance Act, 1894, were mutually exclusive but in PublicTrustee v. Inland Revenue Commissioners the House of Lords authoritatively held that the provisions are to be read as having concurrent application and not as mutually exclusive. Section 1 of the Finance Act corresponds to section 5 and section 2(1)(a) and (d) of the Finance Act correspond to sections 6 and 15 of the Estate Duty Act, 1953. Section 5 imposes estate duty on the principal value of the property passing on death and sections 6 to 17 deal with properties that shall be deemed to pass on death. Section 3(3) states that for avoidance of doubts it is declared that reference in the Act to property passing on the death of a person shall be construed as including references to property deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igdor's case, the House of Lords held that the life insurance policy is a piece of property and that the right to claim and be paid the policy money on death of the person whose life is assured is the beneficial interest that comes within the expression " other interest purchased or provided by the deceased ". In the words of Viscount Simon : " A life policy is a piece of property which confers upon the owner of it the right, if certain conditions continue to be satisfied, to claim and be paid the policy moneys on the death of the person whose life is assured. These rights, therefore, belonged to the appellant from 1934 and were the beneficial interest in the policy which belonged to him from that moment. When the death occurred, he held these rights, and the quality of these rights was not changed by the death, which was merely the occasion when the rights were realised. There was, therefore, no new or additional beneficial interest in the policy which arose on the death of the appellant's father. " Lord Morton expressed his view in the following terms : " The only 'other interest' purchased or provided by the deceased (Sir Osmond) was the policy. That was what he owned in O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of payment has come in a new right different from the right which he had before that date. That seems to me to be a novel doctrine and to neglect the fact that the rights of contracting parties flow from the contract : a new right would require a new contract. From the beginning the creditor's right was to be paid on a certain day, and the coming of that day does not create a new right, it merely enables him to enforce his old right. And I do not see why it should make any difference if the date of payment is determined not by the calendar but by the occurrence of an event such as death, whose date cannot be predicted. Nor do I see why it should make any difference that the creditor has had to perform his part of the contract between the date when it was made and the date of payment. " Lord Asquith held : " It turns on the meaning, in section 2(1)(d) of the Finance Act, 1894, of two terms : 'other interest' and 'beneficial interest'. 'Other interest' in this context seems to me to cover, and on the facts of this case specifically to denote, the benefit of the policy : viz., the contractual rights conferred by it, whether on its original holder or its assignee. These r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icy and a life insurance policy. We have already seen that the personal accident policy by itself is not property but it is the policy money that is paid under the policy that is property. But, for the application of section 15, what is to be considered is the beneficial interest that is purchased or provided by the deceased and whether the beneficial interest accrues or arises on death. We are of the view that the beneficial interest in the case of a personal accident policy purchased or provided by the deceased is the policy money itself. It may be seen from the passages extracted above from D'Avigdor's case, that the House of Lords held therein that the interest in the contract of life insurance represented by the policy is a beneficial interest in the policy. But later, in Westminster Bank Ltd. v. Inland Revenue Commissioners the learned law Lords clarified this decision and stated that the beneficial interest of the third parties so provided by the deceased in the case of a life insurance policy is not only the policy but also the policy moneys so that when an insured settled the policy on some other, the settlement covers both the policy and the policy moneys. But this statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the applicability of this rule one must have regard for the sense or object of the enactment. We are not satisfied that in the context in which the words " other interest " is used in section 15 of the Act, the application of the ejusdem generis doctrine is called for. An incidental question also arises, that is, regarding the value of the interest that shall be deemed to pass on the death. Under section 36 of the Act the principal value of the property shall be estimated to be the price which, in the opinion of the Controller, it would fetch, if sold in open market at the time of the deceased's death. The question for consideration is whether the words " at the time of death " mean " immediately after death " or " a moment before death ". If it is to be understood as " a moment before the death ", then also the moneys would not have become payable and the property deemed to pass on death cannot be valued at Rs. 2,00,000. In Commissioners of Inland Revenue v. Graham decided on December 8, 1970, the words " at the time of death of the deceased " in section 7(5) of the U. K. Finance Act, 1894, which corresponds to section 36 of the Indian Estate Duty Act, 1953, came up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the moment ; but in nature one preceded the other. The passing of the property was the effect of the death ; the death was the event upon which it passed, and in nature the event must precede the effect which is to ensue upon it. This is so, not only metaphysically, but it is a recognised principle of our law ". Section 36 of the Estate Duty Act, 1953, as already stated, requires the value to be made as at the time of the deceased's death. In the case of a personal accident policy the full amount becomes payable the moment after death. The value of the estate in this case is, therefore, Rs. 2,00,000. We reach the following conclusions as a result of the foregoing discussions : Property passing on death is deemed to include property of which the deceased at the time of his death was competent to dispose of. A person is deemed competent to dispose of property when he has such an estate or interest therein or such general power as would, if he were sui juris, enable him to dispose of it. General power includes every power or authority enabling the holder thereof to appoint or dispose of property as he thinks fit, whether exercisable by instrument inter vivos or by will or both. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able with the other estates and it is an estate by itself falling under section 34(3) of the Estate Duty Act. That section is in the nature of an exception to section 34(1) and provides that any property passing, in which the deceased never had an interest, shall not be aggregated with any property but shall be an estate by itself and the estate duty shall be levied at the rate or rates applicable in respect of the principal value thereof. The learned counsel for the revenue relied on Quixley's case, Attorney General v. Pearson and Tennant v. Lord Advocate in support of his contention that the sum of Rs. 2,00,000 is aggregatable with the other estate. In Quixley's case, the facts of which have already been noticed, Rowlatt J. held that the death gratuity paid under the School Teachers' (Superannuation) Act, 1925, was aggregatable and not exempt from aggregation under section 4 of the Finance Act, 1894, which corresponds to section 34(1) of our Estate Duty Act, 1953. The passage relies on in his judgment is : " Now comes the question whether it is aggregatable, and that depends on section 4 of the Act of 1894, i.e., whether it is property in which the deceased had an interest. I a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd arising on his death are not aggregatable. The learned counsel for the revenue pointed out that this passage related to small estates and not to the general principle of non-aggregation. It is true that that passage occurs while considering the legal position of small estate. But what is stated there is that, to ascertain whether the limit of pound 2,000 fixed for small estate was exceeded, property in which the deceased never had an interest had also to be taken into account although such property remained non-aggregatable for determining its own liability to duty. One of the items falling to be included for finding out the limit of small estate was annuities and other interest provided by the deceased and arising on his death though that is an estate by itself and non-aggregatable. We are, therefore, unable to agree with the learned counsel for the revenue. In fact, we find almost every one of the text book writers treating the cases falling under section 15 of the Act as non-aggregtable. Thus in Beatties's Elements of Estate Duty 6th edition, at page 132, it is stated : " Annuities or other interest purchased or provided by the deceased are in general exempt from aggregatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Muthiah, continued to be a member in his natural father's family with all rights of succession as a son. Though the genuineness of this document was doubted by the assessing authority, as already stated, the Board held that it is a genuine document. As far as the legal effect is concerned, the assessing authority held that under the Hindu law an adoptive son loses all his rights in the natural family on adoption and a document evidencing a right in the natural father's family could not be relied on for any purpose. The Board held that a primary condition for the validity of such an adoption must be an agreement between the natural father and the adoptive father and since the muri produced in this case was executed by the natural father and the widowed adoptive mother the agreement could not be given effect to. The learned counsel for the accountable persons contended that secular motives are predominant in adoptions affected among Nattukottai Chettiars, that the form of adoption chosen by the parties in this case as evidenced by the muri is to the effect that even after the adoption the adopted son retains all his rights in the natural family as a son of the natural father and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. It only states that it appears to be obsolete in Madras and the East Coast but it is fully recognised in Bombay, United Provinces and Bengal and also in the West Coast of Madras. Further, we are unable to see how this contention of the learned counsel for the revenue could support the assessment of one-half of the joint family properties as passing on the death of the deceased. If the adoption was invalid Muthiah continues to be a member of the natural family and as such only one-third share in the joint family properties would have passed on the death of the deceased. The learned counsel for the revenue was, therefore, forced to contend that the adoption was valid but no effect could be given to the terms of the muri. Adoption accouring to him, stands by itself. We are afraid we cannot accept this argument of the learned counsel. We cannot consider the adoption de hors the agreement. The terms of the muri form part of the adoption itself. That the adopted son should retain his rights in the natural family is an integral part of the agreement and the whole thing constitutes the form of adoption. The agreement could not be considered to be a post-adoption agreement nor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achi, as the members of the joint family excluding Muthiah. As against this, the learned counsel for the accountable persons pointed out that subsequent to the death of the deceased, Muthiah and his brother, Pethachi, divided the entire properties of the natural family and the adoptive family into two equal halves as provided in the muri and wealth-tax returns were submitted for 1957-58 by Muthiah and Pethachi on this basis which was accepted by the department. These considerations may be relevant for the purpose of finding out the genuineness of the muri, as was considered by the assessing authority. But we are wholly unable to see how these facts could vary the terms of the adoption agreement itself. It was not the case of the revenue that subsequent to the adoption there was a further agreement by which the adopted son relinquished all his rights in the natural family nor was it the case of the accountable persons that there was a reunion of the adopted son in the natural family. Therefore, we have to consider only the effect of the adoption agreement and not these conflicting subsequent conducts. Though the assessing authority considered these subsequent conducts as throwing a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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