Property derived from the deceased includes gifted funds and converted proceeds, sustaining disallowance and deemed inclusion for estate duty.

Amounts traceable to property gifted by the deceased, including rents, income and converted proceeds, were treated as property derived from the deceased and therefore disallowable under section 46(1)(a) of the Estate Duty Act. The court applied a broad construction of "property derived from the deceased" by reading it with the statutory definition, and treated the deposits in the sons' and daughters' names as within that provision despite changes in form. It further held that repayment or discharge of such disallowable debts within the statutory period attracted section 46(2) as a deeming provision, so the sums repaid or discharged were includible for estate duty purposes.

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Issues: (i) Whether the debts of Rs. 22,820 standing in the names of the sons were disallowable under section 46(1)(a) of the Estate Duty Act, (ii) whether the debts of Rs. 20,000 standing in the names of the daughters were disallowable under section 46(1)(a) of the Estate Duty Act, and (iii) whether the sums of Rs. 23,500 and Rs. 59,112 were includible under section 46(2) of the Estate Duty Act.

Issue (i): Whether the debts of Rs. 22,820 standing in the names of the sons were disallowable under section 46(1)(a) of the Estate Duty Act.

Analysis: The sum credited to the sons arose out of rents from property gifted by the deceased and deposited in his concern. The expression "property derived from the deceased" was read with section 16(2), which defines it broadly to include property that is the subject-matter of a disposition, including periodic payments. On that construction, the deposits had a direct statutory nexus with the gifted property. The clauses in section 46(1)(a) and section 46(1)(b) were treated as mutually exclusive, so once clause (a) applied, clause (b) had no role.

Conclusion: The disallowance of Rs. 22,820 was valid and was rightly upheld under section 46(1)(a), in favour of the Revenue.

Issue (ii): Whether the debts of Rs. 20,000 standing in the names of the daughters were disallowable under section 46(1)(a) of the Estate Duty Act.

Analysis: The amounts credited to the daughters were the very gifts made by the deceased, though they had later been converted from fixed deposits into deposits in the deceased's concern. A change in the form of the gifted property did not take it outside the statutory expression, and the earlier decision on converted property was applied. The substituted property continued to remain property derived from the deceased for the purpose of disallowance.

Conclusion: The disallowance of Rs. 20,000 was valid under section 46(1)(a), in favour of the Revenue.

Issue (iii): Whether the sums of Rs. 23,500 and Rs. 59,112 were includible under section 46(2) of the Estate Duty Act.

Analysis: Section 46(2) treats repayment or discharge within two years of a debt which would otherwise have been disallowable under section 46(1) as property deemed to pass on death. Since the underlying debts were themselves within section 46(1)(a), the later repayments and discharges within the statutory period attracted the deeming provision. The provision was applied as an anti-avoidance measure to prevent escape from estate duty by repayment shortly before death.

Conclusion: The inclusion of Rs. 23,500 and Rs. 59,112 was valid under section 46(2), in favour of the Revenue.

Final Conclusion: All the referred questions were answered against the accountable person, and the estate duty additions were sustained on the footing that the impugned amounts were covered by the statutory disallowance and deeming provisions.

Ratio Decidendi: Amounts traceable to property gifted by the deceased, including income or converted proceeds from that property, are property derived from the deceased for section 46(1)(a), and repayment or discharge of such disallowable debts within the statutory period attracts section 46(2).

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