PETITIONER:
CONTROLLER OF ESTATE DUTY, KERALA
Vs.
RESPONDENT:
M/S. R.V. VISHWANATHAN & ORS.
DATE OF JUDGMENT21/09/1976
BENCH:
KHANNA, HANS RAJ
UNTWALIA, N.L.
SINGH, JASWANT
CITATION:
1977 AIR 463 1977 SCR (1) 649
1977 SCC (1) 90
ACT
Estate Duty Act (34 of 1953), s. 10--Gift of property
when deemed to be part of the estate of the deceased-donor.
HEADNOTE
The deceased, with a view to convert his proprietary
business into partnership business with his four major sons,
transferred a sum of Rs. 45,000/- from his personal account
to the credit of each of them. Five days later the partner-
ship deed was executed, treating the sums transferred by the
deceased to each of his four sons as their share capital in
the partnership. A day later, the two minor sons of the
deceased were also admitted to the benefit of the partner-
ship. On the same day, the deceased transferred a stun of
Rs. 45,000/- from his personal account to each of these two
minor sons and an agreement was also executed on that day.
That agreement recited that the capital of the partnership
would be Rs. 3,15,000 made up by the contribution of Rs.
45,000 by the deceased and each of his six sons and that the
share of the deceased and his six sons in profits would be
1/7th each.
In the estate duty proceedings that followed the death
of the deceased. the Assistant Controller of Estate Duty
applied the provisions of s. 10 of the Estate Duty Act,
1953, and included in the estate of the deceased the
capital of Rs. 2,70,000 which was the value of the shares
of the six sons in the business. The Tribunal however held
that what the deceased gifted to his sons was only a share
in the business and not a gift of cash and that therefore,
the stun of Rs. 2,70,000 could not be included in estate of
the deceased. On reference the High Court confirmed the
decision of the Tribunal.
In appeal to this Court, it was contended on behalf of
the Revenue that there was an absolute gift of Rs. 45,000/-
by the deceased in favour of each of his sons and as that
amount was, subsequent to the gift, utilised for the purpose
of business of which the deceased-donor was at first pro-
prietor and then a partner, the case was covered by s. 10.
Dismissing the appeal,
HELD: (1) Property, which is the subject matter of gift,
would not be deemed to be a part of the estate of the de-
ceased, under s. 10, if each of the two following conditions
is satisfied, namely, (a) the donee has bonafide assumed
possession and enjoyment of the property, to the exclusion
of the donor, immediately upon the gift, and (b) the donee
has retained such possession and enjoyment of the property
to the entire exclusion of the donor or of any benefit to
him, by contract or otherwise. The two conditions are
cumulative. The second part has two limbs: the deceased
must be entirely excluded, (i) from the property and, (ii)
from any benefit by contract or otherwise. The word ’other-
wise’ should be construed ejusdem generis and should be
interpreted to mean some kind of legal obligation or some
transaction enforceable at law or in equity which, though
not in the form of a contract, may confer a benefit on the
donor. But the words by contract or otherwise’ in the-second
limb of the section do not control the words ’to the entire
exclusion of the donor’ in the first limb. Therefore,
property gifted will deem to pass on the death of the donor
and be subject estate duty, even if the possession of the
donor of the gifted property is not referable to. some
contractual or other arrangement enforceable. in law or in
equity but only to mere filial affection of his sons. [654
A--D]
(2) (a) Whether gifted property should be held to be a part
of the estate the deceased-donor passing on his death for
the purpose of s. 10, would
650
depend upon the fact as to what precisely was the subject
matter of the gift and whether the gift was of an absolute
nature or whether it was subject to certain rights. If the
gift of property be made without reservation or qualifica-
tion or condition, that is, where the gift carries the
fullest right known to the law of exclusive possession and
enjoyment, any subsequent enjoyment of the benefit of that
property by the donor, in the nature of possession or other-
wise, would according to s. 10, attract the levy of the
estate duty on the death of the donor. [655 D--E]
George de Costa v. Controller’ of Estate Duty 63 ITR 497
and Controller of Estate Duty v. Smt. Parvati Ammal 97 ITR
621 followed.
Commissioner of Stamp Duties v. Owens [1953] 88 CLR
67 (88) and Clifford John Chick & Anr. v. Commissioner of
Stamp Duties [1958] AC 435 (also reported in 37 ITR 89.
Estate Duty Section) referred to.
(b) Where the gift is subject to certain rights or the
subject matter of the gift is property shorn of certain
rights, and the possession, or enjoyment of some benefit in
that property by the donor can be ascribed to those rights,
that is, the rights subject to which the gift is made or the
rights shorn of which the property is gifted, in such cases,
the subject-matter of the gift shall not be deemed to pass
on the death of the deceased donor. If the deceased donor
delimits the interest he is parting with and possesses and
enjoys some benefit in the property not on account of the
interest parted with but because of the interest still
retained by him, the interest parted with shall not be
deemed to be part of the estate of the deceased-donor pass-
ing on his death for the purpose of s. 10. The principle is
that by retaining something which he has never given, a
donor does not bring himself within the mischief of that
section, nor would the provisions of the section be attract-
ed because of some benefit accruing to the donor on account
of what was retained by him. [657 C--E]
H.R. Munro & Ors. v. Commissioner of Stamp Duties [1934] AC
61 applied. Controller of Estate Duty, Madras v.C.R.
Ramachandran Gounder 89 ITR 448 followed.
(3) In the present case, according to the Tribunal’s
finding the deceased transferred 6/7th share in the busi-
ness in favour of the sons and retained 1/7th share and
there is no infirmity in this finding. The transfer of Rs.
45,000 in favour of each of the sons was by book entries and
not in cash. The transfer, the execution of the partnership
deed and the. agreement, were all parts of one integrated
transaction, the object of which was to bring about a trans-
fer of 6/7th share of the deceased in his business in favour
of his sons, so that he and his sons might have each 1/7th
share in the business. There was no absolute transfer of
Rs. 2,70,000 in favour of his sons but the transfer was made
subject to the condition that the sons would use it as
capital nor for any benefit of the. deceased donor but for
each of them becoming entitled to 1/7th share in the busi-
ness. No benefit of any kind was enjoyed by way of posses-
sion or otherwise of the subject-matter of the gift, by the
deceased. Whatever benefit was enjoyed by him subsequent to
the date of the gift was on account of the fact that he held
1/7th share in the business which share he retained through-
out and never parted with. Therefore, no question can
possibly arise for the inclusion of the said 6/7th share
or of the amount of Rs. 2,70,000/- in the estate of the
deceased.
[660 D--F]
JUDGMENT
CIVIL APPELLATE JUriSDICTION: Civil Apeal No. 1576 of 1971.
(From the Judgment and Order dated 27-10-1970 of the
Kerala High Court in I.T.R. No. 42/68).
R.M. Mehta, P.L. Juneja and R.N. Sachthey, for the Appel-
lant.
K.S. Ramamurthi and S. Balakrishnan for the Respondents.
The Judgment of the Court was delivered by
KHANNA, J. This appeal on certificate is by the Con-
troller of Estate Duty against the judgment of the Kerala
High Court whereby
651
the High Court answered the following question referred to
it under section 64 (1 ) of the Estate Duty Act’ (hereinaf-
ter referred to as the Act) in favour of the accountable
persons and against the revenue:
"Whether on the facts and in the circum-
stances of the case, the Appellate Tribunal was
right in holding that the sum of Rs. 2,70,000 is
not includible in the estate of the deceased under
section 10 of the Estate Duty Act ?"
The matter relates to the estate of R.V. Veeramani Iyer
who died on November 18, 1960. The accountable persons are
the six sons of the deceased. The deceased was the proprie-
tor of two business concerns, one dealing in yarn and carry-
ing on money-lending business under the name and style of
P.R.N. Ramanatha Iyer & Co. and the other dealing in piece-
goods under the name and style of R.V. Veeramani Iyer.
With a view to convert the business of the aforesaid two
concerns into partnership business with his four major
sons,. the deceased transferred a sum of Rs. 45,000 from his
personal account to the credit of each of his four adult
sons on September 12, 1955. On September 17, 1955 a part-
nership deed was executed by the deceased and his four
adult sons constituting a partnership firm under the name
and style of P.R.N. Ramanatha Iyer & Co. The sums of Rs.
45,000 transferred by the deceased to each of his four sons
were treated as their share capital in the partnership
business. A day later on September 18, 1955 two minor sons
of the deceased were also admitted to the benefit of the
said partnership. Agreement dated September 18, 1955 was
executed in this connection and in that agreement the
deceased acted as guardian of his minor sons. The deceased
also transferred on September 18, 1955 a sum of Rs. 45,000
from his personal account in the firm to each of his two
minor sons who were admitted to the benefits of partner-
ship. One of the minor sons attained majority on Decem-
ber 21, 1957 and he was taken as a regular partner by agree-
ment dated March 29, 1958. The other son continued to be a
minor till the dale of the death of the deceased. The share
of the deceased and each of his six sons, including the
minor son, was one-seventh in the profits of the partnership
till the date of the death of the deceased.
In the estate duty proceedings that followed the death
of the deceased, the accountable persons included the value
of a one-seventh share in the partnership business in the
estate of the deceased which along with the movables was
declared at Rs. 1,0.5,236. The assessment was completed on
January 18, 1962. The Assistant Controller of Estate Duty
by applying the provisions of section 10 of the Act
included the following items in the estate of the deceased:
(1) The capital of Rs. 2,70,000;
(2) Subsequent accretion in the form of profits
till the date of death of the deceased; and
(3) 6/7th share of goodwill, the quantum of good
will being computed at Rs. 1 lakh.
234SCI/76
652
The principal value of the estate was determined at Rs.
8,43,214.
The accountable persons preferred appeal before the
Appellate Controller of Estate Duly. It was contended on
their behalf that the value of the share of the sons in the
business should not be included in the estate of the de-
ceased under section 10 and that the valuation of such
shares as determined by the Assistant Controller was exces-
sive. The Appellate Controller held that so far as the gift
of the share in the business was concerned, it could not be
included in the estate of the deceased under section 10 of
the Act. Regarding the gift of Rs. 2,70,000 by the
deceased in favour of his sons, the Appellate Controller
held that the same could be included in the estate of the
deceased under section 10. Accordingly the Appellate Con-
troller sustained the inclusion of Rs. 2,70,000 and delet-
ed the balance of Rs. 3,40,054 which amount also included
six-seventh share of the goodwill. The value of the good-
will was reduced by the Appellate Controller from Rs. 1 lakh
to Rs. 75,000.
Against the decision of the Appellate Controller the ac-
countable .persons filed appeal to the Appellate Tribunal
and claimed that the inclusion of Rs. 2,70,000 in the estate
of the deceased was wrong in law. It was urged that al-
though the deceased purported to transfer a sum of Rs.
45,000 in favour of each of his sons, it did not represent a
transfer of cash and the transfer really represented a
transfer of a share in the business. The Tribunal elabo-
rately went into the clauses in the partnership deed and
came to the conclusion that what the deceased gifted to his
sons was only a share in the business and not a gift of
cash. The Tribunal, therefore, held that the sum of Rs.
2,70,000 could not be included in the e.state of the de-
ceased, and ordered the deletion of that sum.
On application made by the Controller of Estate Duty,
the question reproduced above was referred to the High
Court. The High Court held that the subject-matter of the
transfers in favour of each of the sons of the deceased were
the assets to the extent of Rs. 45,000 "subject to the
rights of those assets being available for the continued use
of the business". The contention advanced on behalf of the
revenue that there had been complete transfer of the assets
to the extent of Rs. 45,000 to each of the sons and that
thereafter the sons allowed the subject matter of the gift
to be made use of by the donor, was rejected. It was
further observed as under:
"The Tribunal has taken the view that the subject
matter of the gift was property which was subject
to the rights of the business to have that property
being utilised for the purpose of business and they
have expressed themselves by saying that the trans-
fer was shorn of the rights of the partnership. The
decision, we think, is correct. We therefore
answer the: question referred to us in the affirma-
tive, that is, in favour of the assessee and
against the department."
In appeal before us Mr. Mehta on behalf of the appellant
has argued that there was absolute gift of Rs. 45,000 by the
deceased in favour of each of his sons and as that amount
was subsequent to the gift utilised for the purpose of
business of which the deceased was at
653
first a proprietor and then a partner, the deceased should
be held to have enjoyed the benefit of the gifted amount
subsequent to the date of gift. The case, it is accordingly
submitted is covered by section 10 of the Act, and the High
Court was in error in answering the question referred to it
against the revenue. As against that, Mr. Ramamurthy on
behalf the respondents has controverted the above contention
and has canvassed for the correctness of the view taken by
the Tribunal and the High Court. It has also been submitted
by Mr. Ramamurthy that the findings of fact arrived at by
the Tribunal on consideration of material facts regarding
the subject matter of the gift must be accepted as correct
in these advisory proceedings. It may be appropriate at
this stage to refer to the provisions of the Act having
bearing on the question with which we are
concerned.According to section 9 of the Act, as it stood at
the relevant time,property taken under a disposition made by
the deceased purporting to operate as an immediate gift
inter vivos whether by way of transfer, delivery, declara-
tion of trust, settlement upon persons in succession, or
otherwise, which shall not have been bona fide made two
years or more before the death of the deceased shall be
deemed to pass on the death: Provided that in the case of
gift made for public charitable purposes the period shall be
six months. Section 10 of the Act which has a material
bearing read as under at the relevant time:
"10. Gifts whenever made where donor not
entirely excluded.--Property taken under any gift,
whenever made, shall be deemed to pass on the
donor’s death to the extent that bona fide pos-
session and enjoyment of it was not immediately
assumed by the donee and thenceforward retained to
the entire exclusion of the donor or of any benefit
to him by contract or otherwise:
Provided that the property shall not be deemed to
pass by reason only that it was not, as from the
date of the gift, exclusively retained as afore-
said, if, by means of the surrender of the
reserved benefit or otherwise, it is subsequently
joyed to the entire exclusion of the donor or of
any benefit to him for at least two years before
the death."
The intention of the legislature in enacting section 10 of
the Act was to exclude from liability to estate duly certain
categories of gifts. Property, which is the subject matter
of gift, would however be deemed to be a part of the estate
of the deceased donor under section 10 unless the donee
assumes immediate exclusive and bona fide possession and
enjoyment,of the subject-matter of the gift, and there is no
beneficial interest reserved to the donor by contract or
otherwise. The section must be grammatically construed as
follows:
"Property taken under any gift,’ whenever made, of
which property bona fide possession and enjoyment
shah not have been assumed by the donee immediately
upon the gift, .and of which property bona fide
possession and enjoyment shall not have been
thenceforward retained by the donee. to the entire
exclusion of the donor from such possession and
enjoyment, or of any benefit to him, by contract or
otherwise ...... "
654
The crux of the section lies in two parts: (1 ) the donee
must bona fide have-assumed possession and enjoyment of the
property, which is the subject-matter of the gift, to the
exclusion of the donor, immediately upon the gift, and (2)
donee must have retained such possession and enjoyment of
the property to the entire exclusion of the donor or of any
benefit to him, by contract or otherwise. Both these
conditions are cumulative. Unless each of these conditions
is satisfied, the property would be liable to estate duty
under section 10, of the Act.
The second part of the section has two limbs the deceased
must be entirely excluded, (i) from the property, and (ii)
from any benefit by contract or otherwise. The word "other-
wise" should be construed ejusdem generis and should be
interpreted to mean some kind of legal obligation or some
transaction enforceable at law or in equity which, though
not in the form of a contract, may confer a benefit on the
donor.The words "by contract or otherwise" in the second
limb of the section do not control the words "to the entire
exclusion of the donor" in the first limb. In order to
attract this section, it is consequently not necessary that
the possession of the donor of the gifted property must be
referable to some contractual or other arrangements en-
forceable in law or in equity. Even if the donor is con-
tent to rely upon the mere filial affection of his sons with
a view to enable him to continue to reside in the house,
it cannot be said that he was "entirely excluded from pos-
session and enjoyment" within the meaning of the first limb
of the section and, therefore, the property will be deemed
to pass on the death of the donor and will be subject to
levy of estate duty (see George da Costa v. Controller of
Estate Duty(1) and Controller of Estate Duty v. Smt.
Ammal(2).
The object underlying a provision like section 10 of the
Act was explained by Isaacs J. in the case of John Lang v.
Thomas Proat Webb(3) decided by the High Court of Australia
while dealing with a similar provision as under:
"The owner of property desiring to make a
gift of it to another may do so in any manner known
to the law. Apparent gifts may be genuine or co-
lourable, and experience has shown that frequently
the process of ascertaining their genuineness
is attended with delay, expense and uncertainty-all
of which are extremely embarrassing from a public
revenue standpoint.
With a view to avoiding this inconvenience,
the legislature has fixed two standards, both of
them consistent with actual genuineness, but prima
facie indicating a colourable. attempt to escape
probate duty. One is the standard of time. A gift,
however, real and bona fide, if made within twelve
months before the donor’s death is for the purpose
of duty regarded as not made. The other is conduct
which at first sight and in the absence of explana-
tion is inconsistent with
(1) 63 I.T.R. 497. (2) 97 I.T.R.
621.
(3) [1912] 13 C.L.R. 503.
655
the gift. The prima facie view is made by the
legislature conclusive. If the parties to the
transaction choose to act so as to be in appar-
ent conflict with its purport, they are to be
held to their conduct.
The validity of the transaction itself is
left untouched, because it concerns themselves
alone. But they are not to embarrass the public
treasury by equivocal acts."
It may be mentioned that there has been amend-
ment of section 10 of the Act by Finance Act, 1965
(Act 5 of 1965) and a second proviso has been added
to that section, according to which a house or part
thereof taken under any gift made to the spouse,
son, daughter, brother or sister, shall not be
deemed to pass on the donor’s death by reason only
of the residence therein of the donor except where
a right of residence therein is reserved or
secured directly or indirectly to the donor under
the relevant disposition or under any collateral
disposition. We are, however, concerned with
section 10 as it stood before the amendment.
The question as to whether gifted property should be
held to be a part of the estate of the deceased donor pass-
ing on his death for the purpose of section 10 of the Act is
not always free from difficulty. It would depend upon the
fact as to what precisely was the subject matter of the gift
and whether the gift was of an absolute nature or whether it
was subject to certain rights. There is a fine but real
distinction between the two types of cases. All the same,
it is quite often a vexed question to determine on what side
of the line the facts of the case fall. The line, though
clearly demarcated, is thin and the cases near the border-
line often pose problem, the solution of which calls for a
touch of judicial refinement and forensic subtlety.
Broadly speaking, if the gift of property be made with-
out reservation or qualification or condition, or to put it
in the words of Dixon CJ. in the case of Commissioner of
Stamp Duties v. Owens(2), where the gift carries the fullest
right known to the law of exclusive possession and enjoy-
ment, any subsequent enjoyment of the benefit of that
property in the nature of possession or otherwise would
attract the levy of estate duty on the death of the donor
according to section 10 of the Act. Such were the cases of
Clifford John Chick & Anr. v. Commissioner of Stamp Duties.
(2) decided by the Judicial Committee and George da Costa
v. Controller of Estate Duty (supra) and Controller Estate
Duty v. Smt. Parvati Ammal (supra) decided by this Court.
The case of Clifford John Chick (supra) was under sec-
tion 102 of the New South Wales Stamp Duties Act, 1920-56
similar to section 10 of the Act. In that case a father
transferred in 1934, by way of gift, to one of his sons
pastoral property. The gift was made without reservation or
qualification or condition. In 1935, some 17 months after
the gift, the father, the donee-son and another son entered
into an agreement to carry on in partnership the business of
graziers and
(1) [1953] 68 C.L.R. 67, 88.
(2) [1958] A.C 435--37 I.T.R. 89.
656
stock dealers. The agreement provided, inter alia, that
the father should be the manager of the business and that
his decision should be final and conclusive in connection
with all matters relating to its conduct; that the capital
of the business should consist of the livestock and plant
then owned by the respective partners; that the business
should be conducted on the respective holdings of the
partners and such holdings should be used for the purposes
of the partnership only; that a11 lands held by any of the
partners on the date of the agreement should remain the sole
property of such partner and should not on any consideration
be taken into account as or deemed to be an asset of the
partnership and any such partner should have the able and
free right to deal with it as he might think fit. Each of
the three partners owned a property, that of the donee-son
being that which had been given to him by his father in
1934. Each partner brought into the partnership, livestock
and plant, and their three properties were thenceforth used
for the de-pasturing of the partnership stock. This ar-
rangement continued up to the death of the father in 1952.
It was held that the value of the property given to the son
in 1934 was to be included in computing the value of the
father’s estate for the purpose of death duty. While it was
not disputed that the son had assumed bona fide possession
and enjoyment of the property immediately upon the gift to
the entire exclusion of the father, it was found that he had
not thenceforth retained it to the father’s entire exclu-
sion, for under the partnership agreement the partners and
each of them were in possession and enjoyment of the proper-
ty so long as the partnership subsisted. The Judicial
Committee held that where the question is whether the donor
has been entirely excluded from the subject-matter of the
gift, that is the single fact to be determined, and, if he
has not been so excluded, the eye need look no further to
see whether his non-exclusion has been advantageous or
otherwise to the donee. In the opinion of the Judicial
Committee, it was irrelevant that the father gave full
consideration for his rights as a member of the partnership
to possession and enjoyment of the property that he had
given to his son.
In the case of George da Costa (supra) the deceased had
purchased a house in the joint names of himself and his wife
in 1940. They made a gift of the house to their sons in
October 1954. The document recited that the donees had
accepted the gift and that they had been put in possession.
The deceased died on September 30, 1959. The Controller
included the value of that house in the principal value of
the estate that passed on the deceased’s death, under sec-
tion 10 of the Estate Duty Act, 1953. The Board found that,
though the deceased had gifted the house four years before
his death, he still continued to stay in the house till his
death as the head of the family and was also looking after
the affairs of the house; and, further, that though the
property stood in the joint names of the deceased and his
wife, the wife was merely a name-lender and the entire
property belonged to the deceased. It was held by this
Court that the value of the property was correctly included
in the estate of the deceased as property deemed to pass on
his death under section 10, and that the whole property and
not merely half of it could be deemed to have passed for
the purposes of the estate duty assessment.
In the case of Smt. Parvati Ammal (supra) on March 11,
1955 the deceased executed a deed whereby he gave the
property in which
657
he was carrying on the business of boarding and lodging
absolutely to his five sons in equal shares. Thereafter, on
June 25, 1955 he took the property on lease from the sons
and carried on the business as before. Later on, the
deceased gave the boarding house on sub-lease to a third-
party. The deceased died on April 6, 1957, and the question
was whether the entire value of the property was liable to
be included in the principal value of the estate of the
deceased as property deemed to pass on his death under
section 10 of the Estate Duty Act, 1953. It was held by
this Court that the entire value of the property and not
merely the value of the right to possession and enjoyment in
the hands of the deceased as a lessee was liable to be
included in the principal value of the estate of the de-
ceased as property deemed to pass on his death under section
10. The subject-matter of the gift was found to be the
full ownership in the property without any diminution.
The other type of cases are those where the gift is
subject to certain rights or the subject matter of the gift
is property shorn of certain rights and the possession or
enjoyment of some benefit in that property by the donor can
be ascribed to those rights, i.e., rights subject to
which the gift is made or rights shorn of which the property
is gifted, in such cases the subject matter of the gift
shall not be deemed to pass on the death of the deceased
donor. To put it in other words, if the deceased owner
delimits the interest he is parting with and possesses and
enjoys some benefit in the property not on account of the
interest parted with but because of the interest still
retained by him, the interest parted with shall not be
deemed to be part of the estate of the deceased donor pass-
ing on his death for the purpose of section 10 of the Act.
The principle is that by retaining something which he has
never given, a donor does not bring himself within the
mischief of that section, nor would the provisions of the
section be attracted because of some benefit accruing to the
donor on account of what was retained by him.
Two cases, one decided by the Judicial Committee and
another by this Court, would furnish illustrations of mat-
ters falling in this category. The case decided by the
Judicial Committee is H.R. Munro & Ors. v. Commissioner of
Stamp Duties(1) and that decided by this Court is Con-
troller of Estate Duty, Madras v. C.R. Ramachandra Gound-
er (2).
In the first of these two cases, in 1909 Munro, the
owner of 35,000 acres of land in New South Wales on which
he carried on the business of a grazier, verbally agreed
with his six children that thereafter the business should be
carried on by him and them as partners under a partnership
at will, the business to be managed solely by Munro, and
each partner to receive a specified share of the profits. In
1913, Munro transferred by way of gift all his right title
and interest in portions of his land to each of his four
sons and to trustees for each of his two daughters and their
children. The evidence showed that the transfers were taken
subject to the partnership agreement and on the understand-
ing that any partner could withdraw and work his land
(1)[1934] A.C.61. (2) 88 I.T.R. 488.
658
separately. In 1919 Munro and his children entered into a
formal partnership agreement, which provided that during the
lifetime of Munro, no partner should withdraw from the
partnership. On the death of Munro in 1929 the land trans-
ferred in 1913 was included in assessing his estate to death
duties under section 102 of the Stamp Duties Act, 1920-1931
(N.S.W.). The Judicial Committee held that the property
comprised in the transfers was the land separated from the
rights therein belonging to the partnership, and was exclud-
ed from being dutiable because the donees had assumed and
retained possession thereof, and any benefit remaining in
the donor was referable to the partnership agreement of
1909, not to the gifts.
The relevant provisions of section 102 referred
to above, it may be stated, were similar to those
of section 10 of the Act. Lord Tomlin, speaking
for the Judicial Committee, observed:
"It is unnecessary to determine the precise
nature of the right of the partnership at the time
of the transfers. It was either a tenancy during
the term of the partnership or a licence coupled
with an interest. In either view what was com-
prised in the gift was, in the case of each of the
gifts to the children and the trustees, the proper-
ty shorn of the right which belonged to the part-
nership, and upon this footing it is in their
lordship’s opinion plain that the donee in each
case assumed bona fide possession and enjoyment of
the gift immediately upon the gift and thencefor-
ward retained it to the exclusion of the donor."
In the case of Controller of Estate Duty,
Madras v. C.R. Ramachandra Gounder (supra), the
deceased who was a partner in a firm owned a house
property let to the firm as tenant-at-will. In
August, 1953, he executed a deed of settlement
under which he transferred the property let to the
firm to his two sons absolutely and irrevocably
and, therefore, the firm paid the rent to the
donees by crediting the amount in their accounts
in equal shares. The deceased further directed
the firm to transfer from his account a sum of Rs.
20,000 to the credit of each of his five sons in
the firm’s books with effect from April 1, 1953,
and he also informed them of this transfer. An
amount of Rs. 20,000 was credited in each of the
sons’ accounts with the firm. The sons did not
withdraw any amount from their accounts in the’
firm and the amounts remained invested with the
firm for which interest at 7-1/2 per cent was paid
to them. The deceased continued to be a partner of
the firm till April 13, 1957, when the firm was
dissolved and thereafter he died on May 5, 1957.
The question was whether the value of the house
property and the sum of Rs. one lakh could be
included in the principal value of the estate of
the deceased as property deemed to pass under
section 10 of the Estate Duty Act, 1953. It was
held by this Court that neither the house property
nor the sum of Rs. one lakh could be deemed to
pass under section 10. The first two conditions of
the section were satisfied because there was an
unequivocal transfer of the property by a settle-
ment deed and of the sum of Rs. one lakh by cred-
iting the amount in each of the sons’ accounts with
the firm which thenceforward became liable to the
sons for payment of that amount and the interest
thereon; the possession which the donor
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could give was the legal possession which the
circumstances and the nature of the property could
admit and this the donor had given. The benefit the
donor had as a member of the partnership was not a
benefit referable in any way to the gift but was
unconnected therewith.
Coming to the facts of this case, we find that
according to the agreed statement of the case, the
deceased transferred the sum of Rs. 45,000 from his
personal account to the credit of each of his four
sons on September 12, 1955 with a view to convert
the business carried on by him into a partnership
business with his major sons. Clause 4 of the deed
of partnership which was executed by the deceased
and his four adult sons on September 17, 1955 was
as under:
"4. The capital of the partnership for the
present, shall be Rs. 2,25,000/- contributed equal-
ly by the five partners at Rs. 45,000/- each but
the partners shall have the option to increase the
capital as and when required, each partner contrib-
uting the additional capital required in the same
proportion as the original contribution and all
such contributions including the original invest-
ment shall carry no interest for any duration.
The present capitals represented by the assets,
outstandings, liabilities and goodwill of the
businesses P.R.N. RAMANATHA IYER & CO. and R.V.
VEERAMANI IYER which have been taken over as going
concerns and made part and parcel of the partner-
ship business hereby constituted."
The agreement which was entered into on the
following day by the deceased and his four adult
sons relating to the admission of the two minor
sons of the deceased to the benefits of partnership
expressly recited that Rs. 45,000 had been trans-
ferred by the deceased from his personal account to
the credit of each of the minor sons. It was also
stated that the capital of the partnership would be
Rs. 3,15,000 made up by contribution of Rs. 45,000
by the deceased and each of his six sons and that
the share of the deceased and his six sons in
profits would be one-seventh each. The transfer
of Rs. 45,000 by book entries in favour of each of
the four adult sons on September 12, 1955 and in
favour of each of the minor sons on September 18,
1955, the execution of the partnership deed on
September 17, 1955 and of the other agreement on
September 18, 1955, in our opinion, were all parts
of one integrated transaction, the object of which
was to bring about transfer of six-seventh share of
the deceased in his business in favour of his sons
so that he and his sons might have each one seventh
share in the business. The Tribunal has expressly
recorded a finding that what the decased gifted to
his sons was only a share in the business. The
Tribunal also expressed its full agreement with the
following observations made by the Assistant Con-
troller:
"From the facts of the case it is clear that
the gift in favour of the sons represented amounts
transferred by book entries to the account of each
of the sons who were admitted
660
to the partnership and that it does not actually
represent cash sums of Rs. 45,000/- as such. By
virtue of these transfer entries the sons of the
deceased got a share in the business. Thus the
gift cannot be construed as a gift of cash but it
only represented a gift of a share in the business.
By virtue of this gift, the sons had necessarily to
become partners. The subject matter of the gift
is the investment in the business and such invest-
ment was compulsory or in other words gift was for
the specific purpose of admission into the business
as partners and for no other purpose."
The above finding of the Tribunal has been arrived at
upon the material facts and relevant circumstances of the
case and in answering the question referred to by the Tribu-
nal, we must proceed upon the basis of the correctness of
the above finding. Although Mr. Mehta has tried to assail
that finding, nothing cogent has been brought to our notice
as might indicate any,infirmity in that finding. The
circumstances of the case indeed point to the conclusion
that the said finding is well founded.
In the light of the finding that the deceased trans-
ferred six-seventh share in the business in favour of the
sons and retained only oneseventh share, no question can
possibly arise for the inclusion of the said six-seventh
share or of the amount of Rs. 2,70,000 in the estate of the
deceased. The transfer of Rs. 2,70,000 by the deceased in
favour of his sons was not in cash but was by means of book
entries. The transfer of that amount was a part of the
scheme, as stated above, to transfer six-seventh share in
the business in favour of the sons. There was no absolute
transfer of Rs. 2,70,900 in favour of the sons but the
transfer was made subject to the condition that the sons
would use it as capital not for any benefit of the de-
ceased donor but for each of them becoming entitled to one-
seventh share in the business. No. benefit of any kind was
enjoyed by way of possession or otherwise by the deceased
under the gift of the subject matter of the gift. Whatever
benefit was enjoyed by the deceased subsequent to the date
of the gift was on account of the fact that he held one-
seventh share in the business, which share he retained
throughout and never parted with. No extra benefit was
also conferred under the deed of partnership upon the de-
ceased although some extra benefit was conferred upon two of
the major sons in the form of remuneration because of their
active and full participation in the business. Keeping in
view the position of law discussed earlier, it is plain
that the facts of the case would not fall within the ambit
of section 10 of the Act.
We, therefore, agree with the High Court that the ques-
tion referred to by the Tribunal should be answered in
favour of the accountable persons and against the revenue.
The appeal fails and is dismissed with costs.
V.P.S. Appeal dis-
missed.
661