1979 (8) TMI 25 - HC - Income Tax

Inclusion of Trust Properties in Estate Duty Assessment Examined by High Court

The High Court held that the value of trust properties should be included in the estate duty assessment under Section 10 of the Estate Duty Act. It found ... Appeal To Supreme Court, Gift Issues Involved:1. Inclusion of the value of trust properties in the estate duty assessment.2. Applicability of Section 10 of the Estate Duty Act.3. Deduction of liabilities under Section 46(1) of the Estate Duty Act.4. Interpretation of 'entire exclusion' and 'benefit' under Section 10.5. Proportionate taxation of the estate under Section 10.6. Certificate of fitness for appeal to the Supreme Court under Section 65 of the Estate Duty Act and Article 134A of the Constitution.Issue-Wise Detailed Analysis:1. Inclusion of the Value of Trust Properties in the Estate Duty Assessment:The primary question referred was whether Rs. 11,05,387, being the value of the properties dedicated to the trust, should be included in the estate duty assessment. The deceased had created a trust and dedicated his properties to it, retaining the right to draw remuneration. The Assistant Controller included the value of the trust properties in the estate duty assessment, asserting that the deceased had reserved an interest in the properties under the trust deeds.2. Applicability of Section 10 of the Estate Duty Act:Section 10 of the Estate Duty Act was central to the judgment. It states that property taken under any gift shall be deemed to pass on the donor's death if bona fide possession and enjoyment were not immediately assumed by the donee and retained to the entire exclusion of the donor. The Tribunal initially held that the provisions of Section 10 were not satisfied because the deceased's borrowings from the trust were not lawful and constituted a breach of trust. However, the High Court disagreed, stating that the unlawful nature of the transactions did not negate the application of Section 10. The court emphasized that the possession and enjoyment by the donor, even if unlawful, would still attract the provisions of Section 10.3. Deduction of Liabilities under Section 46(1) of the Estate Duty Act:The Assistant Controller disallowed the deduction of liabilities amounting to Rs. 7,00,644 owed to the trust under Section 46(1) of the Act. The Appellate Controller upheld this disallowance. The High Court did not delve deeply into this issue but noted that the liabilities were not deductible under the specific provisions of the Act.4. Interpretation of 'Entire Exclusion' and 'Benefit' under Section 10:The court examined whether the deceased was entirely excluded from the possession and enjoyment of the trust properties. It was argued that the deceased's right to draw Rs. 5,000 per annum for personal expenditure constituted a benefit. The court referred to the Privy Council's decisions, which clarified that the possession and enjoyment contemplated under Section 10 must be beneficial possession and enjoyment by the donee. The court concluded that the deceased's right to draw remuneration and the borrowings from the trust constituted benefits, thereby negating the 'entire exclusion' required under Section 10.5. Proportionate Taxation of the Estate under Section 10:The court addressed whether the entire value of the trust properties should be included in the estate duty assessment or only a proportionate part. It referred to previous judgments, including the Supreme Court's decision in CED v. Smt. Parvati Ammal, which clarified that the words 'to the extent' in Section 10 indicate that estate duty is payable only on the part of the property from which the donor was not excluded. However, in this case, the court found that the deceased had enjoyed a substantial portion of the trust's income, making it impractical to apply proportionate taxation. Therefore, the entire value of the trust properties was included in the estate duty assessment.6. Certificate of Fitness for Appeal to the Supreme Court:An oral application for a certificate of fitness for appeal to the Supreme Court was made under Section 65 of the Estate Duty Act and Article 134A of the Constitution. The court noted that Article 134A applies to judgments, decrees, or final orders, and references under the Estate Duty Act are advisory in nature. The Supreme Court had previously held that advisory opinions in tax references are not judgments, decrees, or final orders. Consequently, the court determined that a certificate of fitness for appeal was not warranted in this case.Conclusion:The High Court answered the referred question in the negative, holding that the value of the trust properties should be included in the estate duty assessment under Section 10 of the Estate Duty Act. The court emphasized that the deceased was not entirely excluded from the possession and enjoyment of the trust properties, and the borrowings and right to draw remuneration constituted benefits. The court also clarified that proportionate taxation was not applicable in this case due to the substantial enjoyment of the trust's income by the deceased. The application for a certificate of fitness for appeal to the Supreme Court was rejected.