Mahendra Rambhai Patel Vs. Controller of
Estate Duty, Gujarat  INSC 239 (28 October 1966)
28/10/1966 SHAH, J.C.
CITATION: 1967 AIR 578 1967 SCR (1) 991
CITATOR INFO :
F 1973 SC2150 (18)
Estate Duty Act, 1953 (34 of 1953), ss.
2(15), 5 and 23Property settled by deed of trust-Beneficiaries entitled to
maintenance but not to hold the property before attaining age of 25 years--One
of the beneficiaries dying before that age-His interest whether 'property'
under 2(15)-Whether passes under s 5.-Applicability of s. 23.
Under a deed of trust 160 shares of a company
were settled equally upon the appellant and his younger brother.
According to the deed the trustees were to
hold the shares of each beneficiary till he attained the age of twenty-five
years. Before that the income from the shares was to be applied for the benefit
and advancement of the beneficiaries. If either of them died before attaining
the age of twenty-five years his shares were to devolve on persons named in
cls. 6 and 7 of the deed but the accumulated income was to devolve on his
heirs. Clause 5 of the deed laid down that the beneficiaries could not before
attaining the age of twenty-five years mortgage or encumber the shares or sell
the same. The appellant's younger brother died in 1954 while he was still a
minor and unmarried. The Assistant Controller of Estate Duty held that the,
deceased's interest passed to the appellant under s. 5 of the Estate Duty Act,
1952 and levied tax accordingly. The Central Board of Revenue and the High
Court upheld the finding. The: appellant contended before this Court that
before attaining age of twenty-five years neither beneficiary had any interest
in the property being entitled under the deed only to maintenance. Reliance was
also placed on s. 23 of the Act.
HELD : Though the shares were not to be
delivered to the deceased until he attained the age of twenty-five years, the
shares belonged to him since the execution of the deed of trust, and he was
also beneficially entitled to the income of the shares. His interest in the
shares and the income was not an estate in remainder or reversion, nor was his
interest a future interest. He was presently entitled to the whole income of
his one-half share in the said 160 shares, and -after provision of maintenance,
if any surplus remained, he was the beneficial owner of the accumulation of
such surplus income But for cl. 5 he could disposed it of as he willed, and if
he died it was heritable by his heirs.
[996 G-H] In the circumstances, the interest
of the deceased in the shares and in the accumulated income was 'property'
within the meaning of s. 2(15) of the Act. On his death the property passed to
the appellant who was liable to estate duty. [995 D-E] Since the interest of
the deceased did not fail or determine before it became an interest in
possession s. 23 of the Act had no application to the case. [995 H]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1067 of 1965.
Appeal from the judgment and order dated
October 28, 1963 of the Gujarat High Court in Estate Duty Reference No. 1 of
992 A. K. Sen, G. L. Sanghi and B. R.
Agarwala, for the appellant.
S. T. Desai, A. N. Kirpal and R. N. Sachthey,
for the respondent.
The Judgment of the Court was delivered by
Shah, J. Under a deed of trust dated June 26, 1941, one Rambhai Patel settled
under a deed subject to certain terms and conditions 80 shares of the Central
Cotton Trading Company (Uganda) Ltd. for the advancement and maintenance of his
son Manubhai, and an equal number of shares for the benefit of his son Mahendra
Manubhai died on June 7, 1954, when he was a minor and unmarried. The
Deputy-Controller of Estate Duty, by order dated August 26, 1959 brought the
interest of Manubhai in the settlement to tax in the hands of his brother
Mahendra on the footing that it was vested in possession in Manubhai and was
chargeable to estate duty under s. 5 of the Estate Duty Act 34 of 1953. The
'order of the Deputy Controller was confirmed in appeal to the Central Board of
The Central Board of Revenue referred the
following question to the High Court of Gujarat under s. 64 of the Estate Duty
Act 34 of 1953 :
"Whether on the facts and In the
circumstances of the case, the inclusion, in the estate of the deceased, of the
amount of Rs. 10,43,050/being the trust fund, was justified in law ?" The
High Court recorded an affirmative answer to that question. Against that order,
with certificate granted by the High Court, this appeal has been preferred.
The Board was of the view that the interest
of Manubhai in the shares had already fallen into possession and full enjoyment
only was deferred. The Board also held that the accumulated unused income
falling to the share of each beneficiary passed according to the normal law of
succession on his death before he attained the age of twenty-five years, and
since there had been change in the person beneficially interested before and
after death, the value of shares was liable to be added to the estate of Manubhai
on his death. The Board rejected the argument that the interest enjoyed by the
deceased was not an interest in property, but only an ancillary right, and
further held that Manubhai was entitled to the half share of the income from
the date of the deed of trust, and the deed provided for the disposition of the
corpus only in the event of premature death, while the deceased's heirs would
be entitled to the savings from the income upto the date of death. The
correctness of that view was challenged before the High Court, but without
993 Determination of the question in dispute
depends upon the provisions of the deed of trust, which may in the first
instance be set, out :
"NOW THESE PRESENTS WITNESS that in consideration
of the above premises and in consideration of natural love and affection the
Settlor bears towards the said Beneficiaries............. the settlor himself
shall transfer to the name of the trustees the said 160 fully paid up shares to
hold in trust for the benefit and advantage of the said beneficiaries in equal
2. The trustees shall stand possessed of the
said shares. until each of the said beneficiaries shall complete the age of 25
years and until the said time, out of the profits arising there from to apply
either the whole or part thereof as the said trustees may deem fit and proper
in the maintenance and advancement of the said beneficiaries. The trustees are
hereby authorized to invest such unused or accumulated funds from the profits
in any security or concern as they may deem fit and proper.
3. The trustees are further authorised to
sell the said shares and invest the same in any other security or concern as
they may deem fit and proper.
4. If and when each of the said beneficiaries
complete the age of 25 years the trustees shall transfer out of the said 160
shares his portion of the shares and the accumulation thereof or any other
investment in lieu thereof as provided in clause 2 and 3 hereof absolutely.
5. The said beneficiaries shall not have any
right to mortgage or create any in cumbrance of any description or sell the
same until each of them complete the age of' twenty-five years.
6. In event the said beneficiaries or any of
them shall die before completing the age of twenty-five years leaving male
issue or issues, the trustees shall stand possessed of the said shares in trust
for such male issue or issues (if more: than one in equal shares) till each of
them completes the age of twenty-one years.
7. In event of said beneficiaries or any of
them shall die before completing the age of twenty-five years without leaving
any male issue, the trustees shall stand possessed. of the said shares in trust
for the other then living sons of the said Rambhai Somabhai Patel in equal
shares after making the following provisions:" 994 [Clauses (a) & (b)
make provision for the benefit of the widow of the beneficiary dying before the
age of twenty-five years and the female children of the beneficiary in the
event of his death before attaining the age of 25 years].
"8. The trustees shall not charge,
mortgage or otherwise in cumber the said shares in any manner whatsoever."
Under the terms of the deed of trust, each beneficiary was entitled to 80
shares of the Central Trading Company. The trustees were to hold 80 shares for
each beneficiary till he attained the age of twenty five years, and the
trustees were to apply either the whole or part of the profits arising from the
shares, as the trustees deemed "fit and proper", for the maintenance
and advancement of the beneficiaries, and to invest the surplus in securities
or concerns as they deemed proper. In the event of death of either beneficiary
before he attained the age of twenty-five the shares settled on him, but not
the accumulated surplus income, were to devolve on the persons mentioned in
cls. 6 & 7. Till each beneficiary attained the age of twenty-five years,
management of the shares was to remain with the trustees and provision for
maintenance and advancement for the benefit of the beneficiary was to be made
by the trustees. But the income which remained unused after providing for
maintenance and advancement was not directed in the event of death of the
beneficiary before he attained the age of twenty-five years to go to the
persons named in cls. 6 & 7 and was to devolve upon the heirs of the
beneficiary according to the personal law of succession and inheritance. This
clearly indicates that the entire income accruing to each beneficiary in
respect of his 80 shares belonged to him.
Clause 5 also indicated that but for that
clause the beneficiaries would have been entitled to exercise the right to
mortgage or create any encumbrance or sell the shares and the accumulations
thereof By cl. 4 it was expressly provided that on the attainment of the .age
of twenty-five years by each beneficiary the trustees shall transfer 80 shares
and the accumulations thereof or any other investment in lieu thereof as
provided in cls. 2 & 3 of the deed.
On the clauses set out earlier, we are unable
to accept the contention that each beneficiary, until he attained the age of
twenty-five years, was entitled merely to receive maintenance and provision for
advancement, and had no interest in the corpus of the shares. We are of the
opinion that under the deed of trust the right to 80 shares and to the income
thereof arose from the date on which the -deed of trust became operative and it
was not deferred till the beneficiary attained the age of twenty-five years.
We may now consider whether estate duty in
respect of the shares and the accumulated income thereof became payable when
995 Manubhai died on June 7, 1954. Section 5 of the Act, sub-s.
(1), provides "In the case of every
person dying after the commencement of this Act, there shall, save as
hereinafter expressly provided, be levied and paid upon the principal value
ascertained as hereinafter provided of all property, settled or not settled, .
which passes on the death of such person, a duty called "estate duty"
at the rates fixed in accordance with section 35." The expression "property"
is defined in s. 2(15) as inclusive of "any interest in property, movable
or immovable, the proceeds of sale thereof and any money or investment for the
time being representing the proceeds of sale and also includes any property
converted from one species into another by any method" Explanations 1
& 2 are not relevant Section 2(16) defines "property passing on the
death" as inclusive of "property passing either immediately on the
death or after any interval, either certainly or contingently, and either'
originally or by way of substitutive limitation, and "on the death"
includes "at a period ascertainable only by reference to the death"
Interest of Manubhai in the shares and in the accumulated income was 'property'
within the meaning of s. 2(15). That property did, as we have already pointed
out, vest in ownership in Manubhai immediately on the execution of the deed of
trust. On Manubhai dying unmarried, the property as to the shares under cl. 7
of the deed and as to the accumulated income under the law of inheritance devolved
upon his brother Mahendra. On Manubhai's death there was under the deed of
trust a change in the person who was beneficially interested in the shares.
Counsel for the appellant relied upon s. 23
of the Estate Duty Act, which insofar as it is material, provides :
"In the case of settled property where
the interest of any person under the settlement fails or determines by reason
of his death before it becomes an interest in possession, and one or more
subsequent limitations under the settlement continue to subsist, the property
shall not be deemed to pass on his, death by reason only of the failure or
determination of that interest." That the 80 shares under the deed of
trust were settled property is not disputed; and Manubhai had an interest in
those 80 shares. But the interest of Manubhai in the shares did not, for
reasons already set out, fail or determine before it became an interest in
possession. Section 23 therefore has no application to the present case.
996 Counsel for the appellant relied upon an
Irish case reported in The Attorney-General v. Power and Another(1). In that
case, under a settlement, one H took a vested legal estate as tenant in common
in fee, with a limitation over on his dying under the age of twenty-one. The
legal estate was subject to the proviso that during minority of the trustees
were to enter into receipt of the rents, providing there out for his
maintenance etc. and to accumulate the surplus upon trust, if He should attain
Ms age, for him, and if He should die under-age, for the persons who should
ultimately become indefeasibly entitled. He died under-age, and the defendants
became indefeasibly entitled as tenants-in-common in fee of all the lands in
the settlement, including H's share. It was held that estate duty was not
payable as on a property passing on H's death that H's interest had not become
a beneficial interest in possession in the land at his death, and that
accordingly, s. 5, sub-s. (3) of the Finance Act, 1894, was inapplicable.
Section 5(3) of the Finance Act, 1894, which was later amplified by s. 48 of
the Finance Act, 1938, was substantially in the same terms as s. 23 of the
Estate Duty Act. But Power and Another's case(1) was decided on the footing
that the settlor's interest was not vested in H in possession during his
minority. The Court held that mere possibility of receiving maintenance at the
discretion of the trustees was not per se an interest in possession for the
purpose of s. 5(3) of the Finance Act, 1894. An interest in property liable to
be divested on the death before the beneficiary attains a certain age, coupled
with' a direction to accumulate the income in the meantime, so far as it is not
required for maintenance so as to make the accumulated income an accretion to
the capital is in substance a contingent interest, and the property may be
exempt from estate duty, if the beneficiary dies before the attains the age
specified. But where, as in the, present case, he income of the property
absolutely belongs to the beneficiary and such part of the interest as is not
applied for the benefit of the beneficiary, is liable to be accumulated for his
benefit, and in the event of his death before he attains the age specified in
the deed of trust, it is to devolve upon his heirs, creates in the beneficiary
an interest in possession and not an interest in expectancy.
The High Court was in our judgment, right in
holding that though the shares were not to be delivered over to Manubhai until
he attained the age of twenty-five years, the shares belonged to him since the
execution of the deed of trust, and he was also beneficially entitled to the
income from the shares, that his interest in the shares and the income was not
an estate in remainder or reversion, nor was his interest a future interest,
and that he was presently entitled to the whole income of his one-half share in
the said 160 shares and after provision of maintenance and advancement, if any
surplus (1)  2 1. R. 272 997 remained, it was to be accumulated and he
was the beneficial owner of the accumulation of such surplus income and but for
cl. 5 he could dispose it of as he willed, and if he died it was heritable by
his heirs. The appeal therefore fails and is dismissed with costs.
G.C. Appeal dismissed.