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TMI Blog1981 (3) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of valuation. The principal value of all the joint family properties was determined at Rs. 1,06,854. In particular the value of the village dwelling house was also fixed at an agreed figure of Rs. 20,000. The family bad certain outstandings to clear : these were estimated to be Rs. 15,000. The funeral expenses of the deceased was also determined at an agreed estimate of Rs. 1,000. On these figures, the estate duty liability had to be worked out. Under the E.D. Act, the duty is arrived at by applying the rates prescribed in the Second Schedule. The rates are to be applied to the principal value of the estate. For rate purposes, all properties passing or deemed to pass on the deceased's death must be aggregated so as to form " one estate ", vide s. 34(1). The Act names certain properties as exempted properties ; but these properties also are to be aggregated. The aggregation, however, is for rate purposes only. The actual impact of the estate duty will not cover these exempted properties-vide s. 34(2). One way of describing this process of calculation of duty is to say that the unexempted estate is charged to duty at a rate (or more precisely, at the average rate) pertaining to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r who has an undivided share and who dies leaving a lineal descendant. The provision enacts that the deceased's undivided share must be clubbed along with the lineal descendant's share also for purposes of aggregation. This provision, as applied to the present case, would mean that the half share of the son and the half share of the deceased must be clubbed together for rate purposes. Although s. 34(1) enjoins that the deceased's undivided share in the coparcenary property must be clubbed along with the share of the lineal descendant, the lineal descendant's share will not be actually subjected to .the impact of the estate duty, and will fall within the formula of s. 34(2) to which we have earlier adverted. Explanation (iii) to s. 34(2) lays down that for purposes of actual calculation of duty, the share of the lineal descendant included in the aggregated share must be regarded as exempted property. The position thus is that the rate pertaining to the aggregate family estate (which consists of the deceased's undivided half share plus the son's half share) must be applied to the deceased's estate. The accountable person, in the present case, does not contest these propositions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- Net family estate 91,854.00 ----------- & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the son) which he worked out at Rs. 45,927 by applying the average rate applicable to Rs. 80,854. The accountable person objected to the above method of arriving at the quantum of liability. According to him, the proper method to apply in this case was to exempt the value of the house in its entirety (namely, Rs. 20,000) while arriving at the principal value of the joint family properties and then work out the share of the deceased and the share of the son as the lineal descendant, respectively. According to the accountable person, the calculation would have to be as under, Rs. Principal value of the joint family properties 1,06,854.00 Less value of residential house 20, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------- Deceased's net dutiable estate 34,927.00 Add lineal descendant's half share 35,927.00 --------- &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residence. These words are inapt to apply to a family dwelling house because the house is not the property of the deceased, but the property of the family. Besides, it is a family dwelling house and not the exclusive home of any coparcener, much less the exclusive home of any one coparcener. The problem, therefore, is to fit s. 33(1)(n) of the E.D. Act to the peculiar situation of the death of an undivided member in a Mitakshara coparcenary. But the problem is not a new problem in the field of taxation in our country. Our taxation laws apply to all and sundry people. But they seldom lose sight of the peculiar incidents of the law relating to Mitakshara coparcenaries, which accounts for a good part of our legal system. While taxation laws, for the most part, respect the peculiarities of the Mitakshara system, they at the same time, do not hesitate to bend its principles, wherever necessary, for the service of the exchequer. The E.D. Act, as we earlier mentioned, concentrates on the death of a human being and makes the passing of property on the occasion of his death as a taxable, or a dutiable, event. The textual Hindu law governed by the Mitakshara lays down certain rules for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even that doctrine could be pushed into one of the deeming provisions which Parliament had found it expedient to adopt from the English statutory provisions. Under the English legal system, there is nothing comparable to a Mitakshara coparcenary, although " coparcenary " itself was an expression borrowed from English real property law. In the nineteenth century, if not earlier, Anglo-Hindu lawyers and judges borrowed this expression " coparcenary " and misapplied it to the Mitakshara undivided family, with its quite different incidents. When the E.D. Act came to be enacted, Parliament decided to deem, as a taxable event, the death of a Mitakshara coparcener who dies possessed of an undivided interest in the coparcenary property. For effectuating the charge on this peculiar taxable event, Parliament adopted some of the provisions of the English Act. Chief among such provisions is s. 7 of our E.D. Act. The section was fashioned to catch coparcenary interests within the tax net. It was largely modelled on s. 2(1)(b) of the United Kingdom Finance Act, 1894. That provision, in short, dealt with a case where the deceased had an interest in property, which ceased on his death. A simple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property of Hindu family governed by the Mitakshara law. Having thus laid down that a coparcenary interest is a kind of interest which ceases with the coparcener's death and produces a benefit, Parliament had to make other appropriate provision for measuring the benefit. For, under s. 7 of the E.D. Act, what is deemed to pass is not the interest ceasing on the deceased's death, but the benefit which accrues on the cesser of the said interest. Parliament accordingly fashioned ss. 39(1) and 39(2), as the machinery provisions for s. 7. Under those sections the benefit accruing on the cesser of a coparcener's interest must be taken to be the share of the deceased coparcener in the family property. This share has to be ascertained under s.39 on the basis of a notional partition of the entire joint family estate a moment before the coparcener dies. The E.D. Act was passed in 1953. Two years afterwards, the Hindu Succession Act, 1956, came into the statute book. Section 6 of the Hindu Succession Act declares that subject to the exception in the proviso to that section, the rules of inheritance in that Act will not apply where a coparcener dies possessed of an undivided interest in a Mit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased's death, excepting to find out who would be the proper persons accountable for the payment of the estate duty. Since the charge to estate duty is on the estate as such, passing on the deceased's death, it is in that sense not strictly an inheritance tax, but only a mutation tax, or, in other words, a tax on property changing hands. If the present understanding of the nature of the devolution of coparcenary interest on the death of a coparcener is that it is itself, per se, an interest in property and that it passes to the surviving coparceners on his death, then the coparcenary interest may be regarded as property straightaway passing on his death to some one or other either under the enacting part of s. 6 or under the proviso to s. 6 of the Hindu Succession Act, 1956. This is precisely the situation for which the charge to estate duty directly attaches under the opening words of s. 5 of the E.D. Act which is usually regarded as the charging section. In that sense, there is no need whatever for deeming, no need for fictions of any kind, to bring the coparcenary interest to charge for estate. The one-time judicial view of the deeming provisions of the estate duty law in Engla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seek. The idea is that in order to arrive at the principal value of the deceased's undivided share or the deceased's undivided interest in the coparcenary properties, it is necessary to take stock of the value of all the properties of the coparcenary and after arriving at the aggregate value of the said properties as a whole, then arrive at the precise value of the deceased's interest in the coparcenary by dividing the value of the entire joint family property by his fractional share therein. Although the idea is simple to understand, the actual wording in the section employs the familiar drafting mechanism of a statutory fiction. The fiction is used in this manner. The entire joint family property will have to be evaluated as though the joint family property had belonged to the deceased. This fiction is necessary because almost in every section, elsewhere in the text, the statute has addressed itself only to the principal value of the property belonging to the deceased. By this method of deeming the whole of the joint family property as if it had belonged to the deceased, the implication of the statute is that all the provisions which have to do with the evaluation of the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is really a joint family residence is the individual residence of the individual coparcener. As a matter of construction, learned counsel said, s. 39(3) does not require the computation to be made as if all the provisions in the E. D. Act applied, but only such provisions which can be applied so far as they may be. These words, according to him, are cautionary words which have been purposely introduced in s. 39(3) to work the statutory fiction within legislative limits. Learned counsel further submitted that the provisions in the statute dealing with computation of the value of properties cannot by their own force be held to incorporate or adopt the different sets of provisions in the Act governing the grant of absolute or qualified exemption of properties from the ambit of the charge. The last argument advanced by the learned counsel for the Department can be met on the very language of the statute. For, the property which is exempt under s. 33(1)(n) is also property which must be excluded from aggregation under s. 34(1)(a) of the Act. Hence, a necessary and dispensable part of the process of computing the principal value of the concerned property is that the exemption provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking note of the exemption under s. 33(1)(n) of the Act. The Department's approach to the question, in our judgment, is quite in keeping with the scheme, the purpose, and even the language of s. 39(3) of the Act. The principal aim of s. 39(3) is to derive the precise value of the deceased coparcener's undivided interest. Since this item of dutiable property is a mere fractional interest, and it is also undivided, it was necessary for Parliament to devise a working formula to ascertain its principal value. This could only be done by reference to the totality of the properties of the joint family and by ascertaining the principal value of the entire joint family estate and deriving therefrom the share of the deceased coparcener. In this scheme of computation provisions, therefore, it would be illogical and incorrect, and it would also lead to inequalities of tax burdens, if any, of the exemption provisions, which are precisely relatable to the computation of the principal value, were either completely, or to any extent, left out of account. In the strict theory of Mitakshara coparcenary, no coparcener, while remaining undivided, can point to any particular asset of the family and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total value of all the properties, valuing each of them separately, must be determined under section 39(3). After having determined that, such of those properties to the extent to which exemption has been given under the various clauses in section 33(1) will be taken out to that extent. The aggregate of the remaining must be divided as if at the time of death there was a partition and the share due to the deceased determined. The share so determined will be the share on which duty can be imposed under the Act and on no other ". Earlier in the judgment, the learned judges specifically addressed themselves to the question whether in determining the value of the joint family properties, the exemption granted under s. 33(1)(n) can be brought into the reckoning. The following are the observations of the learned judges (p. 205): " The question is then whether in determining the value of the joint Hindu family properties, the properties mentioned in section 33(1) which are exempt from the charge should be omitted and then the share of the deceased member determined. A reading of section 33 makes it clear that subject to the limitations introduced by the various clauses regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, there is no indication in the order of assessment whether the Asst. CED had particularly invoked the provisions of s. 7 of the Act. On the other hand, a reading of the order would show that he had gone into the making of the assessment by regarding the share of the deceased coparcener as dutiable as such, that is to say, under s. 5 of the Act. Even while adopting this approach to the assessment, the Asst. Controller had applied the provisions of s. 33(1)(n) of the Act by deducting one-half of the value of the house, viz., Rs. 10,000 out of Rs. 20,000 as deduction legitimately to be granted under s. 33(1)(n) of the Act. The only mistake in the different steps taken by the Asst. Controller in the working out of the principal value is that, according to the Division Bench ruling, which we have earlier referred to, the entire value of the exempted house must be deducted from the principal value of all the properties of the joint family and from the net principal value of the properties of the joint family, the share of the deceased must be worked out. In his assessment order what the Asst. Controller did was first to work out the principal value of the estate and then divide it int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich they handed down for that particular case cannot be regarded as inconsistent with their enunciation of the law in the earlier part of the judgment. After all, if there are arithmetical mistakes, they can and must be rectified suitably in order to accord with the enunciation of the law. The decision in CED v. Estate of Late R. Krishnamachari [1978] 113 ITR 200 (Mad), may well be regarded as falling into two parts, the one containing an enunciation of the law under s. 39 read with s. 33(1)(n) of the Act, and the other carrying the actual directions to the Tribunal, in the particular case on hand, to compute the principal value of the share of the deceased coparcener on the basis of the enunciation of the general law. As we observed, it is in the latter part of the judgment that there is a likelihood of some misunderstanding of the true purport of the basic decision in that case. That the latter part of the judgment was prone to be misunderstood was an apprehension expressed by the learned counsel for the Department particularly on the basis of subsequent judgment of this court, to which as it happens, one of us was a party. In T. Sundaresa Mehta v. CED [1981] 127 ITR 107 (Mad), w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pass the order in accordance with the terms of the judgments in Krishnamachari's case [1978] 113 ITR 200 (Mad) and Sundaresa Mehta's case [1981] 127 ITR 107 (Mad). This is another indication to show that there was really no inconsistency in the line of decisions. Mr. J. Jayaraman, learned counsel for the Department, brought to our notice a decision of the Karnataka High Court in CED v. K. Nataraja [1979] 119 ITR 769. The question there was precisely that which had been considered and determined in Krishnamachari's case [1978] 113 ITR 200 (Mad). The learned judges of the Karnataka High Court, after quoting the two passages which we have ourselves extracted earlier in our judgment proceeded to observe that those passages were not quite consistent with the other portions of the judgment of this court in CED v. Estate of Late R. Krishnamachari [1978] 113 ITR 200 (Mad), a doubt which we have already expressed earlier in our own judgment. But, what is to be taken note of in this judgment of the Karnataka High Court is the enunciation by the learned judges and what, according to them, is the inter-relation between ss. 39 and 33(1) of the Act. They laid down three propositions as summing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz., valuation, aggregation and also exemption, are all tied up together for the purpose of effectuating the charge. Even on the terms of s. 33(1)(n), as we have earlier pointed out, it is difficult to separate exemption from aggregation and valuation in a case where the dwelling house is situate in place having a population of less than 10,000, and the value of the house as a whole will stand exempted. But where the house is situate in place with a population of more than 10,000, then the entire property as such is not exempt, but the value of the property up to a limit of Rs. 1,00,000 alone will have to be exempted. The exemption under s. 33(1)(n), therefore, would depend necessarily and inevitably on the process of ascertaining the principal value. This is one illustration to show that there cannot be a clear-cut distinction between a valuation provision and an exemption provision. Even otherwise, when s. 39(3) provides that for the purpose of estimating the principal value of the joint family property, the whole of the joint family property shall be valued as if it had belonged to the deceased, the section imports a statutory fiction and, while doing so, the section enjoins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier stated that the net principal value of the joint family estate was arrived at by the Asst. Controller in the sum of Rs. 91,854 and the half share of the deceased therein being Rs. 45,927. From this figure were deducted the funeral expenses of Rs. 1,000 ; and the half share of the deceased in the family dwelling house in the sum of Rs. 10,000 ; and the net value of the deceased's share in the joint family property was arrived at in the sum of Rs. 34,927. But, this amount was subjected to estate duty at a rate which took note of the aggregation of the lineal descendant's share also in the computation. The lineal descendant's share was computed in this case at Rs. 45,927 which, as we pointed out, was before the deduction of his half share in the dwelling house, viz., Rs. 10,000. The effect, therefore, of this computation was that whereas the deceased's share in the joint family property was arrived at in the sum of Rs. 34,927, the share of the lineal descendant was taken to be Rs. 45,927, although there was no dispute that the father and son possessed exactly equal shares in the joint family properties. The illogicality of this manner of ascertaining the lineal descendant's sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the accountable persons is that the share should be taken of the Hindu undivided family properties as ascertained after excluding the exempt items like section 33(1)(n), while the Department wants the share to be ascertained without such exclusion. We are of opinion that the plea of the accountable persons is correct and has to be upheld. In the first place, though there is no statutory definition of the shares of the lineal descendants, logic and analogy require that it should be done on the same basis as for the interest of the deceased. For example, in EDA No. 44/MDS/of 72-73, the family consists of the father and son having equal shares and, when the share of the deceased was taken under section 39(1) and (3) to be Rs. 1,50,737, it is difficult to see how the equal share of the son could be taken at a different (higher or lower, in this case the higher) figure of Rs. 2,20,737. Secondly, the plea that the principal value of the joint family property for this purpose shall be taken without reference to the exemptions and inclusions, would lead to absurd results. Not merely the residential house property, but several other assets are exempt from duty. For example, suppose the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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