Beneficial possession governs estate duty where a vested trust share with income rights passes on death.

Beneficial possession and enjoyment, not merely legal title, determine whether trust property passes on death for estate duty under the Estate Duty Act, 1953. The Gujarat HC treated the deceased's vested half-share, with entitlement to the whole income of that share, as an interest in possession because beneficial enjoyment existed before death and the brothers became entitled to the whole income only after death. On that basis, the settled property was treated as passing on death. The exemption for interests failing before possession did not apply because the deceased's interest had already reached the stage of beneficial possession and did not fail before possession was attained.

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Issues: Whether the deceased's interest under the settlement was an interest in possession chargeable to estate duty under section 5 of the Estate Duty Act, 1953, and whether the exemption under section 23 of the Act applied so as to prevent the settled property from being treated as passing on death.

Analysis: The settlement gave each beneficiary a vested share in the trust property and an entitlement to the whole income of that share, though enjoyment of the corpus and accumulation was postponed until attaining the age of 25. The Court held that the relevant test under section 5 was whether there was a change in beneficial possession or enjoyment on death, not whether the deceased had a legal or equitable estate capable of transmission. On the facts, the deceased enjoyed beneficial possession of the one-half share before death and, after death, the brothers became entitled to the whole income, so the property changed hands in substance on death. The Court also held that section 23 applied only where the deceased's interest failed before becoming an interest in possession and subsequent limitations continued to subsist. Since the deceased was beneficially entitled to the whole income of his share, his interest was an interest in possession and the exemption failed.

Conclusion: The inclusion of the trust funds in the estate was justified in law, and the answer to the referred question was in the affirmative.

Final Conclusion: The settled share was held to have passed on the deceased's death for estate duty purposes, and the statutory exemption for interests failing before possession was held inapplicable.

Ratio Decidendi: For estate duty, property passes on death when there is a real change in beneficial possession or enjoyment, and an interest is an interest in possession where the beneficiary has present beneficial enjoyment of the property or its whole income; section 23 applies only when such interest ends before possession is reached.

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