1981 (9) TMI 80 - HC - Income Tax

Estate duty not deductible from estate value on date of death

The court held that estate duty payable on the property passing on the date of death is not a debt and is not deductible from the principal value of the ... Estate Duty, Property Passing Issues Involved:1. Whether estate duty payable on the property passing on the date of death is a debt and deductible from the principal value of the estate.Detailed Analysis:Issue 1: Whether estate duty payable on the property passing on the date of death is a debt and deductible from the principal value of the estate.Facts and Background:The deceased, who was the karta of an HUF, passed away, and the estate duty was computed on the property. The accountable person (the adopted son) claimed that the estate duty payable should be deducted from the gross value of the estate. This claim was rejected by the Appellate Controller and subsequently by the Tribunal. The accountable person then sought a reference to the High Court.Arguments by the Accountable Person:The accountable person argued that the liability to estate duty should be deducted to arrive at the correct value of the property passing on death. Reliance was placed on the Supreme Court decision in H. H. Setu Parvati Bayi v. CWT and other cases, arguing that both wealth-tax and estate duty enactments consider liability on the net asset. It was contended that estate duty, being a charge on the property under Section 74 of the Act, should be considered an encumbrance and deductible under Section 44 of the Act.Arguments by the Department:The department argued that estate duty is a duty on the property passing on death, not on any particular person, and does not constitute a debt or encumbrance of the deceased. It was emphasized that Section 44 allows for certain liabilities, but these are clearly those of the deceased himself, and estate duty does not fall under this category.Legal Provisions and Interpretation:- Section 5(1) of the Estate Duty Act: This is the charging section, which levies estate duty on the principal value of all property passing on death.- Section 36 of the Act: This section provides that the principal value of any property is the price it would fetch if sold in the open market at the time of the deceased's death.- Section 44 of the Act: This section allows for deductions of debts and encumbrances in determining the value of the estate but does not include estate duty as a deductible item.- Section 74(1) of the Act: This section makes estate duty a first charge on the immovable property passing on death, after the debts and encumbrances allowable under Part VI of the Act.Court's Analysis:The court noted that the property passing on death must be valued as it was at the time of death, without considering the estate duty as a liability of the deceased. The obligation to pay estate duty arises only after the death and attaches to the property as it vests in the heirs, not while the deceased was alive.The court further explained that Section 74(1) clearly indicates that estate duty is not considered a debt or encumbrance under Section 44, as it ranks after the debts and encumbrances allowable under Part VI of the Act. This legislative intent is evident from the provision that estate duty is a first charge on the property only after these allowable debts and encumbrances.Judicial Precedents:The court referred to several decisions, including:- Mrs. Blanche Nathalia Pinto v. State of Mysore: The court distinguished this case, noting it dealt with court fees under a different Act and did not provide a correct basis for determining the principal value under the Estate Duty Act.- Smt. Shantaben Narottamdas v. CED: The Gujarat High Court rejected the contention that estate duty is deductible under Section 44.- K. Bhoomiamma v. CED: The Karnataka High Court held that estate duty is not an encumbrance created by the deceased and cannot be deducted while assessing the principal value of the estate.Conclusion:The court concluded that the estate duty payable on the property passing on the death of the deceased is neither a debt nor an encumbrance deductible under Section 44 of the Estate Duty Act. The property must be valued as it was at the time of death, without considering the estate duty. Consequently, the question referred was answered in the negative and against the accountable person.Costs:The accountable person was ordered to pay the costs of the department, with an advocate's fee of Rs. 200.Separate Judgment:DAs J. concurred with the judgment.Summary:The court held that estate duty payable on the property passing on the date of death is not a debt and is not deductible from the principal value of the estate under the Estate Duty Act, 1953. The property must be valued as it was at the time of death, and the estate duty, being a charge that arises post-death, does not qualify as a deductible encumbrance under Section 44 of the Act.