TMI Blog1986 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... , the fourth daughter, was unmarried. The deceased with his two brothers had sold large extent of rubber gardens and coconut thopes to Messrs. Palkulam Estates Private Limited by a sale deed dated March 23, 1953, for Rs. 10, 50,000. Out of this consideration, Rs. 6 lakhs was directed to be paid to one R. H. Crowther from whom the rubber gardens had been purchased. For the balance of Rs. 4.50 lakhs, the deceased and his two brothers were each allotted 1,500 shares of Messrs. Palkulam Estates Private Limited, each share being Of the face value of Rs. 100. On May 23, 1956, the deceased sold certain lands to Messrs. Nagammal Mills Limited for Rs. 16,66,425. In consideration of this sale, the deceased was allotted 1,664 shares in the said company of the face value of Rs. 100 each. Out of this, 664 shares were taken by the deceased in his own name and 250 shares in the name of each of his four daughters. The deceased was a director and shareholder of the two companies, Messrs. Palkulam Estates Private Limited and Messrs. Nagammal Mills Limited. Admittedly, both these companies were controlled companies within the meaning of section 17(4) of the Estate Duty Act. Finding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 6,364 equity shares of the value of Rs. 100 each fully paid up in Messrs. Nagammal Mills Limited. The Assistant Controller valued the 3,250 preference shares at Rs. 3,25,000. The equity shares were valued at Rs. 159.64 each as against Rs. 119.63 as contended by the accountable persons. The value of the estate of the deceased was determined by the Assistant Controller at Rs. 87,46,162 and the estate duty payable thereon was computed at Rs. 28,75,072.41. He also rejected the contention that the estate duty should be deducted from the principal value of the estate. In appeal, the Appellate Controller held that the shares in Messrs. Palkulam Estates Private Limited should be valued at Rs. 1,167 per share. The value of the shares held in Messrs. Nagammal Mills was not modified. The Appellate Controller rejected the argument that the Revenue was not entitled to invoke the provisions of section 17 of the Estate Duty Act but accepted the contention of the assessee that the moneys borrowed by the deceased from Messrs. Palkulam Estates Private Limited could not be treated as " benefit " but held that the sum of Rs. 78,149 received by the deceased from the said company and deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of the equity shares held by the deceased in the said company, the same was not dutiable ; (6) repayment of loans by Messrs. Nagammal Mills Limited to the deceased could not be considered as a benefit; (7) since the slice of the assets of the company, Messrs. Nagammal Mills Limited, that would be attributable to Rs. 53,520 which alone could be taken as the benefit, would be less than the value of 6,364 equity shares held by the deceased in the company, no duty is payable thereon; (8) the proceedings instituted against the two controlled companies could not be said to be time-barred; and (9) the estate duty payable cannot be deducted in determining the principal value of the estate. Since the accountable persons as well as the Revenue were aggrieved by the findings recorded against them, both of them asked for reference to be made to this court. Accordingly, the Tribunal has referred the following eight questions to this court for opinion under section 64 of the Estate Duty Act: " 1. Whether in view of article 3(c) of the articles of association of the company, M/s. Palkulam Estates Private Limited, the value of the shares held by the deceased therein arrived at by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been reproduced. It was found as a fact by the Tribunal that the net assets of the company, Messrs. Palkulam Estates Private Limited, had to be taken as Rs. 47,23,885 and on this footing, the market value of each share of the company worked out to Rs. 946. The Tribunal, however, found that article 3(c) of the articles of association provided that no share of the company shall be transferred to any person without obtaining the consent of the company in general meeting. This restriction which was a constraint on the free marketability of the shares was taken into account by the Tribunal and the Tribunal took the view that a discount of 15 per cent. should be given while determining the value of each share and accordingly the Tribunal determined the value of each share at Rs. 800 and computed the value of 1,700 shares held by the deceased at Rs. 13,60,000 as against Rs. 20,00,900 fixed by the Assistant Controller. Learned counsel for the Revenue contended before us that there was no justification whatsoever for reducing the value of the share by further amount equivalent to 15 per cent. and that the appellate authority had properly determined the value of the share. The pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. But the Tribunal, however, has taken the view that the value of the cumulative preference shares could not be increased merely because in respect of such shares, the company had a liability to pay arrears of dividend. In the instant case, the Assistant Controller had valued 3,250 the preference shares held by the deceased in Messrs. Nagammal Mills at Rs. 3,25,000. It appears that in the books of the company, there was a liability of Rs. 34,577 on account of dividend payable in respect of the cumulative preference shares. While ascertaining the value of the assets of the company for the purpose of determining the value of the equity shares, the figure of this liability, namely, Rs. 34,577, was deducted and the assets of the company came to be valued at Rs. 24,94,608. The value of 6,364 equity shares held by the deceased was also determined at the rate of Rs. 159,64 per share. Learned counsel appearing on behalf of the Revenue has fairly stated before us that the only basis for the contention which is raised and is the subject-matter of question No. 2 is the observation made in Nanavati's Estate Duty Act, 3rd edition, at page 505. That observation is as follows: " As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 17(1) could not be invoked. The provisions of section 17(1) read as follows: " Where the deceased has made to a controlled company a transfer of any property (other than an interest limited to cease on his death or property which he transferred in a fiduciary capacity), and any benefits accruing to the deceased from the company accrued to him in the three years ending with his death, the assets of the company shall be deemed for the purposes of estate duty to be included in the property passing on his death to an extent determined in accordance with sub-section (2). " Section 17(1) provides that where there is a transfer made to a controlled company of any property by the deceased and there are any benefits which accrued to the deceased from the company in the three years ending with his death, the assets of the company shall be deemed for the purpose of estate duty to be included in the property passing on his death to an extent determined in accordance with sub-section (2) of section 17. It is not necessary for the present to refer to section 17(2). The bracketed portion in section 17(1) excludes from the operation of section 17 the transfer of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deceased by the firm on those very dates. The Appellate Controller had worked out the aggregate value of the assets of the company at Rs. 68,84,885 and the total income of the company for the three years preceding the death of the deceased at Rs. 9,81,581. Having found that the benefit received by the deceased from the company was Rs. 5,08,382, the value of the slice of the assets which was includible in the estate of the deceased was computed at Rs. 34,07,628. The Tribunal, however, took the view that for the applicability of section 17(2) and rule 5(a) of the Estate Duty (Controlled Companies) Rules, 1953, the income of the company and any periodical payment by the company received by the deceased as referred to in rule 5(a) should be income or periodical payment actually received by him by virtue of being entitled to receive the same. The Tribunal observed as follows: " In other words, rule 5(a) covers cases of actual receipts by a deceased being entitled therefor and sub-rule (b) covers cases where the deceased though entitled to receive such income or periodical payment had not actually received it ...... " The Tribunal while construing rule 5 applied the rule of ejus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three accounting years with the aggregate amount of the net income of the company for the said years." The proviso is not material for our purpose. We have already reproduced section 17(1) earlier and pointed out that where the deceased had made a transfer of any property to a controlled company and such property is not an interest limited to cease on the death of the deceased or the property is not transferred in a fiduciary capacity and any benefits accrued to the deceased from the company in the three years ending with his death, then to certain extent, the assets of the company are fictionally deemed to pass for the purpose of estate duty and is to be included in the property passing on his death. To what extent the assets of the company shall form part of the estate of the deceased is laid down in section 17(2). The extent of the assets of the company is found out by comparing the aggregate amount (Of the benefits which have accrued to the deceased from the company in the last three years with the aggregate amount of the net income of the company for the said years. If benefits are indicated by (b) and the aggregate is indicated by (c) and the net assets of the company are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me or of varying amounts and whether payable at regular intervals or otherwise." The argument of the learned counsel for the accountable person is that section 20 specifically refers to " benefits accruing to the deceased from any such controlled company ". It also refers to the " time at which they are to be treated as accruing ". Learned counsel then refers to rule 5 and it is argued that the opening words of rule 5 contemplate that for the purpose of section 17, the benefits enumerated in clauses (a), (b) and (c) of rule 5 shall be treated as " benefits accruing to the deceased from the company". Our attention is also invited to sub-rule (2) of rule 5 which gives the meaning of " periodical payment ". The argument is that which payment should be considered as periodical payment is expressly stated in sub-rule (2) of rule 5. Such periodical payment must be a payment by way of remuneration not being a single lump-sum payment, and any other payment being one of a series of payments whether interconnected or not, whether of the same or of varying amounts and whether payable at regular intervals or otherwise. Emphasis is laid by learned counsel for the accountable person on the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , section 2, Schedule D, fell for consideration and the observations of Lord justice Fry quoted by the Supreme Court were as follows: " In the first place, I would observe that the tax is in respect of ' profits or gains arising or accruing'. I cannot read those words as meaning 'received by'. If the enactment were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all her Majesty's subjects as to foreigners residing in this country. The result would be that no income-tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued to the kingdom. think, therefore, that the words 'arising or accruing ' are general words descriptive of a right to receive profits. " After quoting the above passage with approval, the Supreme Court observed as follows: " It is clear, therefore, that the income may accrue to an assessee without actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to accrue to him, though it may be received later, on its being ascertained. The basic conceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y received apart from the fact that such benefits may in a given case be in the nature of enjoyment in specie of land or other property of the company or of a right thereover. By the very nature of the benefit contemplated by clause (a), such benefit must be referable to a right under an agreement with the company. Clause (b) refers to a case where the deceased was entitled to receive any such income or payment or enjoyment. In other words, the entitlement to income or payment is the concept which is contained in clause (b) and having regard to the use of the words " such income or payment or enjoyment ", those words necessarily must refer to the income or payment or enjoyment referred to in clause (a). The concept of entitlement, therefore, has to be imported even in clause (a) by virtue of the subject-matter of clauses (a) and (b), being the same income, periodical payment or enjoyment. Clause (c) once again refers to income, payment or enjoyment, which means, of the nature referred to in clause (a) which the deceased would have become entitled to receive or had the same by an exercise in the three years ending with his death of any power exercisable by him or with his consent. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his death, the assets of the company shall be deemed for the purposes of estate duty to be included in the property passing on his death to an extent determined, in accordance with sub-section (2) of this section, by reference to the proportion that the aggregate amount of the benefits accruing to the deceased from the company bore to the net income of the company.' Section 47(1) corresponded to rule 5. Indeed, it appears that rule 5 is a verbatim reproduction of section 47(1) which read as follows: " The following shall be treated as benefits accruing to the deceased from the company, that is to say : (a) any income of the company and any periodical payment out of the resources or at the expense of the company, which the deceased received for his own benefit whether directly or indirectly, and any enjoyment in specie of land or other property of the company or of a right thereover which the deceased had for his own benefit whether directly or indirectly ; ..... (2) In this part of this Act, the expression 'periodical payment' means a payment by way of dividend or interest, a payment by way of remuneration not being a single lump sum payment, and any other payment being o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing observations (p. 501 of [1951] 2 All ER) : " During the three years preceding his death he received from the company sums amounting in the aggregate to pounds3,000 in each year by way of loan. These loans carried interest at the rate of four per cent. per annum, but the company could not call for repayment of either principal or interest until the expiration of two years after Lord St. Levan's death. Were the sums so received 'benefits' accruing to him from the company within the meaning of section 46 ? I would answer this question by saying that they were benefits because section 47 of the Act has declared them so to be. That section does in terms declare that among the things to be treated as benefits accruing to a deceased transferor from a company are any periodical payments out of the resources of the company which the deceased received for his own benefit. A man receives for his own benefit moneys paid to him on an advance by way of loan, not the less because the transaction involves an obligation to repay an equivalent amount at a future date with interest in the meantime. A 'periodical payment' is defined by section 47(2) in terms which give it the widest possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stive definition of the word 'benefits', but merely as enumerating certain matters which are 'to be treated as benefits'. It does not, I think, exclude other transactions, such as the present, which in the circumstances of particular cases may clearly confer benefits on the deceased in the natural and ordinary meaning of that word." It is undoubtedly true that the House of Lords in St. Aubyn's case [1951] 2 All ER 473, has taken the view that the loans made by the company to the deceased during the statutory period at 4% per annum interest constituted benefits within section 46(1). We must, however, point out that this decision cannot be read as laying down a general principle of law that in all cases where loans are made by the company to the deceased, they should be construed as benefits for the purpose of section 17(1) of the Estate Duty Act. That decision must be read in the light of the facts of that case. The facts of that case will show that the deceased in that case had mortgaged by mortgage deed dated January 30, 1933, certain property and by virtue of this mortgage, the company covenanted to advance to Lord St. Levan on March 25, June 24, September 29, and December 25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the definition of" dividend" in section 2(22) of the Income-tax Act, 1961. The Legislature while giving an artificial definition of " dividend " has, inter alia, included within the definition of " dividend " in clause (e) " any payment by company ..... by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." In the Indian Income-tax Act, 1922, also, a similar artificial definition of " dividend " was made in section 2(6A)(e) which is a clause similar to clause (e) of the definition of " dividend " in section 2(22) of the Income-tax Act, 1961. The absence of reference to any loan in section 17 as well as in rule 5 of the Controlled Companies Rules is, in our view, significant. Having regard to the history of taxing legislation, the absence of a provision including loan by making it artificially a benefit in rule 5 must be treated as a circumstance against the Revenue. We have already pointed out that the concept of entitlement to the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... governing director for life at a salary of Rs. 50,000 per year and the residential house, whose annual value is Rs. 5,000, is let to him as governing director at a rent of Rs. 1,000 per year. On A's death more than two years later, estate duty would, but for the provisions of this section, be payable only in respect of the 50,000 shares which he retained. There was no gift to the company, for the company gave full consideration. The only gift was a gift of the shares to his wife and children and that gift was not subject to any reservation (and had been made two years prior to his death). But according to this provision, the estate duty payable would be not on the market value of 50,000 ordinary shares but on such proportion of the assets of the company as the aggregate amount of benefits accruing to the deceased for the three years ending with his death bear to the income of the company for the same three years ........" The illustration will make it clear that the benefit which is contemplated by section 17 must accrue to him as a part of the arrangement for the transfer of his assets to the company. In the instant case, it is not possible to say that the loans taken by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot justified. On a reference, this court held that the payments received by the deceased from the current account could not be regarded as a " series " of payments within the meaning of rule 5(2) of the Controlled Companies Rules and if rule 5(2) did not apply, rule 5(1)(a) could not be applied either, so as to regard any of the payments as " benefits " within the meaning of section 17 of the Estate Duty Act. This decision, in our view, squarely covers the point raised in question No. 5 against the Revenue. Accordingly, question No. 5 has to be answered in the negative and against the Revenue. So far as question No. 6 is concerned, it is conceded that if questions Nos. 4 and 5 are answered against the Revenue, question No. 6 need not be answered. Accordingly, we are not answering question No. 6. Question No. 7 is concluded against the accountable persons by the decision of the Allahabad High Court in Padampat Singhania v. CED [1980] 122 ITR 162. The contention is mainly raised on behalf of the controlled companies and the contention is that notices were issued to the controlled companies for the first time on September 24, 1970, i.e., beyond a period of five years from the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions which can be made while determining the value of estate for the purpose of estate duty. Section 44 is, therefore, exhaustive of the deductions made permissible by statute for determining the value of an estate for the purpose of estate duty. Since the estate which becomes liable for payment of estate duty is the estate which passes on the death of the deceased, the value of the estate has to be determined at the point of time of the death of the deceased. Section 5(1) which is the charging section and deals with the extent of the charge provides, inter alia, that " in the case of every person dying after the commencement of the Act, there shall, save as hereinafter expressly provided, be levied and paid upon the principal value ascertained as hereinafter provided of all property, settled or not settled ...... which passes on the death of such person, a duty called 'estate duty' at the rates fixed in accordance with section 35 ". Section 5(1), therefore, contemplates that the principal value of the estate has to be ascertained as provided in the Act. If there is no express provision which permits deduction of estate duty from the principal value of the estate, then it is diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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