N.K. Sanghi,
Partner of M/S Sanghi Brothers Vs. Controller of Estate Duty, Rajasthan [1988]
INSC 148 (6 May 1988)
Kania,
M.H. Kania, M.H. Pathak, R.S. (Cj)
CITATION:
1988 AIR 1426 1988 SCR Supl. (1) 210 1988 SCC Supl. 384 JT 1988 (2) 481 1988
SCALE (1)893
ACT:
Estate
Duty Act, 1953-Sections 10-Assessee-Gifted Rs. 1 Lack to four sons-Amount
invested by sons in partnership firm-Assessee and sons had shares in
partnership-Amount given as Gift-Whether includible in estate of assessee-
Liability for estate duty-Whether arises.
HEAD NOTE:
One Motilal
Sanghi made a gift of Rs.25,000 each to his four sons, on September 1, 1955. These amounts were invested by the
sons in the firm known as Sanghi Brothers which was constituted by the said Motilal
soon after the gifts were made. Motilal Sanghi had an 8 annas share in the
firm; the four sons had a share of 2 annas each. Motilal Sanghi died on July 21, 1961. The Assistant Controller of Estate
Duty took the view that the sum of Rs.1 lac was liable to be included in the
estate of Motilal Sanghi in view of the provisions of Section 10 of the Estate
Duty Act as that amount was not retained by the donees to the entire exclusion
of the donor. The Appellate Controller, however, held that section 10 was not
attracted to the circumstances of the case. the Division Bench of the Rajasthan
High Court in a reference made to it held that section 10 was attracted. It
took the view (1) that the said amount was brought back into the partnership
business of the donor and the donees and hence it was difficult to say that
during the continuance of the partnership the donees enjoyed the amounts gifted
to the entire exclusion of the donor and (2) that the donor, in one sense or
the other, had dominion over that property, and the property was utilised both
for the benefit of the donor and the donees.
Before
this Court it was contended by the appellant that when the amounts were
invested by the donees in the said firm, the interest which the deceased got in
the amounts invested by the donees, as a partner of the firm, was in no way
related to the gifts and hence, merely by reason of that investment, it could
not be said that the donees had not retained the said amount to the entire
exclusion of the donor for the purposes of section 10. It was, on the other
hand, contended on behalf of the respondent that as the said amounts were
immediately thereafter invested in the firm, it could not be said that the
amounts were retained by the donees 211 to the entire exclusion of the donor
who had a certain dominion over that property as a partner.
Allowing
the appeal, this Court, ^
HELD:
(1) The interest which the deceased father retained or obtained in the
aggregate sum of Rs.1 lac invested by the said four sons in the said firm, was
an interest merely as a partner in the said firm and was not related to the
gifts made by him to his sons. [220D-E] (2) It cannot be said that by reason of
constitution of the said partnership and the investment of the said amount by
the sons in the partnership, the sons had not assumed bona fide possession and
the enjoyment of the amounts gifted to them or that they had not retained the
same to the entire exclusion of their father. [220E-F] (3) The said amount of
Rs.1 lac could not be included in the estate of the said deceased under the
provisions of section 10 of the Estate Duty Act. [220G] George Da Costa v. CED,
[1967] 63 ITR 497 (SC); H.R. Munro v. Commissioner of Stamp Duties, [1934] AC
61; 2 EDC 462; Clifford John Chick v. Commissioner of Stamp Duties, [1958] AC
435; (1959) 37 ITR (ED) 89; 3 EDC 915; CED v. C.R. Ramachandra Gounder, [1973]
88 ITR 448 (SC); CED v. N.R. Ramarathnam, [1973] 91 ITR 1 (SC); CED v. Kamlavati
and CED v. Jai Gopal Mehra, [1979] 120 ITR 456 (SC); CED v. R.V. Viswanathan,
[1976] 105 ITR 653 and CED v. Godavari Bai, [1986] 158 ITR 683 referred to.
CIVIL
APPEALLATE JURISDICTION: Civil Appeal No. 608 (NT) of 1975.
From
the Judgment and Order dated 8.5.1973 in the High Court of Rajasthan in D.B.
Civil Estate Duty Reference No. 46 of 1967.
G.C.
Sharma and P.K. Mukharjee for the Appellant.
G. Ramaswami,
Additional Solicitor General, Ms. A. Subhashini and K.P. Bhatnagar for the
Respondent.
The
Judgment of the Court was delivered by KANIA, J. This is an appeal against the
judgment of a Division 212 Bench of the High Court of Rajasthan rendered on a
reference made to the Rajasthan High Court under section 64(1) of Estate Duty
Act, 1953. The question referred to the Rajasthan High Court for determination
was as follows:
Whether
on the facts and in the circumstances of the case the provisions of section 10
of the Estate Duty Act, 1953 were applicable to this case.
The
relevant facts are that one Motilal Sanghi (deceased) made a gift of Rs.1 lac
on September 1, 1955 in favour of his four sons. Each of
the sons was given a gift of Rs.25,000. These amounts were invested by the sons
in the firm known as Sanghi Brothers which was constituted by the said Motilal
soon after the said gifts were made. Motilal Sanghi was a partner in the said
firm and had an 8 annas share in the firm; each of his four sons had a share of
2 annas in the profits and losses of the firm. It was stated by learned counsel
appearing for the accountable person before the Rajasthan High Court that the
firm was managed not by Motilal Sanghi but it was managed by the eldest son,
namely, N.K. Sanghi. Motilal Sanghi died on July 21, 1961. A question arose whether the sum of Rs.1 lac gifted by him
as aforesaid was liable to be included in his estate for purposes of
computation of estate duty under the provisions of the Estate Duty Act. The
Assistant Controller of Estate Duty took the view that the sum was liable to be
included in the estate of the said deceased in view of the provisions of
Section 10 of the Estate Duty Act as that amount was not retained by the donees
to the entire exclusion of the donor.
An
appeal preferred by the accountable person to the Appellant Controller of the
Estate Duty was allowed by him holding that Section 10 was not attracted to the
circumstances of the case and an appeal preferred by the revenue to the
Appellant Tribunal was dismissed. A reference was, thereafter, made to the High
Court at the instance of the revenue. After considering the provisions of
Section 10 of the Estate Duty Act, the Division Bench of the High court which
decided the reference came to the conclusion that the provisions of Section 10
were attracted and the amount in question was liable to be included in the
estate of the deceased for the purpose of assessment of estate duty. The High
Court took the view that the said amount gifted by Motilal Sanghi to his sons
was brought back into the partnership business of the donor and the donees and
hence it was difficult to say that during the continuance of the partnership
the donees enjoyed the amounts gifted to the entire exclusion of the donor. The
donor, in one sense or the other, had dominion over that property and that
property was utilised both for 213 the benefit of the donor and the donees and
hence Section 10 of the Estate Duty Act was attracted.
Before
considering the arguments of the learned counsel, we may note the relevant
portion of Section 10 of the Estate Duty Act. The said portion runs as follows:
"Property
taken under any gift, whenever made, shall be deemed to pass on the donor's
death to the extent that bona fide possession 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 contract or otherwise." In
the present case there is no dispute that when the amount of Rs. 1 lac was
gifted by way of gifts of Rs.25,000 to each of the four sons of the deceased
they immediately assumed bona fide possession and enjoyment thereof but it is
contended by Mr. Ramaswamy, learned Addl. Solicitor General, that as the said
amounts of Rs.25,000 were immediately thereafter invested in a firm of which
the donees and the donors were partners it could not be said that those amounts
aggregating to Rs.1 lac were retained by the donees to the entire exclusion of
the donor. When the amounts were invested in the partnership in which the
donor, namely, the deceased was a partner he got a certain interest and benefit
in that amount which was liable to be used for purposes of partnership. The
deceased had a certain dominion over that property as a partner in the said
firm and hence it could not be said that the amount gifted was retained by the donees
to the entire exclusion of the donor and, in these circumstances, the
provisions of Section 10 of the Estate Duty Act were attracted. It was, on the
other hand, contended by Mr. Sharma, learned counsel for the accountable
person, who is the appellant before us, that when the amounts were invested by
the donees in the said firm, the interest which the deceased got in the amounts
invested by the donees, as a partner of the firm in which the amounts were
invested, was in no way related to the gift and hence, merely by reason of that
investment, it could not be said that the donees had not retained the said
amount to the entire exclusion of the donor for the purposes of Section 10 of
the Estate Duty Act. It is the correctness of these submissions which has to be
examined in the light of the provisions of Section 10 and the decided cases.
In
George Da Costa v. CED, [1967] 63 ITR 497(SC) analysing the Section 10 of the
said Act this court observed as follows:
214
"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) the 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.
As a
matter of construction we are of opinion that 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. It was argued for the appellant that the expression 'by contract or
otherwise' should be construed ejusdem generis and reference was made to the
decision of Hamilton J. in Attorney- General v. Seccombe, [1911] 2 KB 688; 1
EDC 589 (KB). On this aspect of the case, we think the argument of the
appellant is justified. In the context of the section, the word 'otherwise'
should, in our opinion, be construed ejusdem generis and it must 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." We may also at this stage very briefly refer to two leading cases
decided by the Privy Council on a provision analogous to Section 10 of the
Estate Duty Act. In one of these cases namely, H.R. Munro v. Commissioner of
Stamp Duties, [1934] AC 61; 2 EDC 462 the Judicial Committee held that the
property comprised in the transfers was the land shorn of the rights therein
belonging to the partnership and was excluded 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 entered into earlier than the
gifts and not to the gifts. In that case a father, who was the owner of a large
plot of land on which he carried on the business of a grazier, entered into a
partnership with his six children to carry on the said business. The
partnership business was to be managed solely by the father, and each partner
was to receive a specified share of the profits. Subsequently, the father
transferred by way of gift all his right, title and interest in separate
portions of his land to each of his four sons and 215 the trustees of each of
his two daughters and their children. This transfer was subject to the
partnership agreement and was on the understanding that any of the partners
could withdraw and work the portion of the land gifted to him separately. The
partnership was an oral one and about six years after these deeds of gifts were
executed, a written partnership agreement was drawn up during the lifetime of
the father under which no partner was entitled to withdraw from the partnership.
On the death of the father, the land which he had transferred by way of gift to
his six children was included in his estate in the assessment of death duties
under the Stamp Duties Act (N.S.W.) 1920 which contained a provision in pari materia
with section 10 of the Estate Duty Act. On appeal, the Judicial Committee of
the Privy Council held that such inclusion was not justified and laid down the
principle which we have set out earlier.
The
other leading case in this connection decided by the Privy Council is the case
of Clifford John Chick v. Commissioner of Stamp Duties, [1958] AC 435; [1959]
37 ITR (ED) 89; 3 EDC 915. The same provision, namely, Section 102 of the New
South Wales Stamp Duties Act, 1920-56, came up for consideration in that case.
The facts were that a father transferred, by way of gift, to one of his sons a
pastoral property, the gift being made without any reservation or qualification
or condition. Some months later, the son to whom the gift was made and another
son of the donor entered into an agreement to carry on in partnership the
business of graziers and stock dealers. The agreement, inter-alia, provided
that the father should be the Manager of the business and that his decision
would be final and conclusive in matters connected with the conduct of the
business. The agreement further provided that the capital of the business would
consist of the livestock and plant owned by the respective partners and that
the business would be conducted on the respective holdings of the partners and
such holdings should be used for the purposes of the partnership only and that
all lands held by any of the partners at the date of the agreement should
remain the sole property of such partner and should not be deemed to be an
asset of the partnership, and such partner should have the sole and free right
to deal with it. Each partner brought into partnership inter alia his livestock
and plant, and their combined properties were thenceforth used for the depasturing
of the partnership stock. On the death of the father, the question arose as to
whether the land gifted was liable to be added to his estate for the purpose of
assessment of death duty.
The
Judicial Committee took the view that the land gifted to the son was liable to
so included in computation of father's estate because, although the son has
assumed bona fide pos- 216 session and enjoyment of the property immediately
upon the gift to the entire exclusion of the father, he had not, thenceforth
retained the property to the father's entire exclusion, as under the
partnership agreement the partners and each of them were in possession and
enjoyment of the property as long as the partnership subsisted, whatever force
and effect might be given to that part of the partnership agreement which gave a
partner the sole and free right to deal with his own property.
For
some years, the principles laid down in Munro's case and in the case of
Clifford John Chick v. Commissioner of Stamp Duties, referred to above, were
followed by the courts of this country in construing Section 10 of the Estate
Duty Act. However, the decision in Chick's case came up for consideration
before this court in CED v. C.R. Ramachandra Gounder, [1973] 88 ITR 448(SC).
Two different types of property were gifted in Gounder's case. The first type
of property gifted was a house which the deceased owned and which was let to
the firm in which the deceased was a partner as a tenant. He gifted this house
to his two sons absolutely. After the deed of gift the firm paid the rent not
to the deceased but to the donees by crediting the amount in the donees'
accounts in equal shares. The second type of property gifted consisted of
money. This gift was effected by the deceased by directing the firm in which he
was a partner 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 of account with effect from a
particular date.
He
gave intimation of this transfer to his sons. Pursuant to the directions given
by the deceased a sum of Rs.20,000 was credited in each of the sons' account
with the said firm.
The
amounts remained invested with the firm for which the firm paid them interest.
The deceased continued as a partner of the firm till dissolution. Within one
month of its dissolution, the deceased died. The question arose as to whether
value of the house property and the sum of Rs. 1 lac should be included in the
property deemed to pass on the death of the deceased under Section 10 of the
Estate Duty Act. The Court held that neither the house property nor the sum of
Rs.1 lac could be deemed to pass under Section 10.
Jaganmohan
Reddy, J. who spoke for the court said (page 452 of the report):
"There
is no doubt, on the facts of this case, the first two conditions are satisfied
because there is an unequivocal transfer of the property and also of the money,
in the one case by a settlement deed, and in the other by crediting the amount
of Rs.20,000 in each of the sons' account with the 217 firm which thenceforward
became liable to the sons for the payment of the said amount and the interest
at 7 1/2 % per annum thereon." As far as the house property was concerned,
it was observed that the donor, on the day when he gifted the property to his
sons, which property was leased out to the firm, had two rights, namely, of
ownership in the property and the right to terminate the tenancy and obtain the
possession thereof. There is no dispute that the ownership had been
transferred, subject to the tenancy at will granted to the firm, to the donor's
two sons because the firm from thenceforward had attorned to the donees as
their tenant by crediting rent of Rs.300 to the respective accounts in equal
moiety. The donor, could, therefore, only transfer possession of the property
which the nature of that property was capable of, which in that case was
subject to tenancy.
What
is pertinent to note in the case is that this Court took the view that
"the benefit the donor had as a member of the partnership was not a
benefit referable in any way to the gift but is unconnected therewith".
This decision shows that the principle laid down in Chick's case was departed
from by the Court in cases in which the property gifted was brought into a
partnership in which the donor had an interest merely as a partner. The
decision in Gounder's case was followed by this court in CED v. N.R. Ramarathnam,
[1973] 91 ITR 1 (SC) and several other decisions.
An
analysis the decision of Supreme Court in Gounder's case, in our opinion, shows
that the Supreme Court in that decision referred to Munro's case and also
referred to Chick's case. It, however, made a certain departure from the
principle laid down in Chick's case. This would appear clear from the decision
of this Court in CED v. Kamlavati, [11979] 120 ITR 456(SC) and CED v. Jai Gopal
Mehra's, [1979] 120 ITR 456(SC) cases. Both these decisions involved the
question of applicability of Section 10 of the Estate Duty Act. In Kamlavati's
appeal, the facts were that Maharaj Mal, the deceased, was a partner in a firm
which carried on business under the firm name and style of M/s Maharaj Mal Mana
Raj.
Maharaj
Mal had one-half share in the partnership, and the other two partners had
one-fourth share each. Maharaj Mal made a gift of Rs.1 lac to his son, Lalit
Kumar, and of Rs.50,000 to his wife Kamlavati. In the books of account of the
firm the sums of Rs. 1 lac and Rs.50,000 were debited to the account of Maharaj
Mal and credited to the accounts of the son and wife respectively. Almost
simultaneously the son was taken as a partner in the said firm by giving him
one- fourth share out of the 218 one-half share of Maharaj Mal. On the death of
different partners the firm was reconstituted and some other partners admitted.
On the death of Maharaj Mal the question arose regarding the applicability of
Section 10 of the said Act.
In the
other appeal, namely Jai Gopal Mehra's appeal the deceased donor made gifts of
Rs.20,000 each in favour of his son and four daughters-in-law. Thereafter, the donees
invested the sums gifted to them in the partnership firm in which the deceased
was a partner. The donees were not partners in the firm nor were they taken as
partners after the gifts were made in their favour. When the case came up in a
reference before a Full Bench of the Punjab and Haryana High Court (1972 85 ITR
175), it answered the reference in favour of the accountable person, namely,
Jai Gopal Mehra.
The
decision in Kamlavati's case merely followed the Full Bench decision in Jai Gopal
Mehra's case. In its judgment the Supreme Court first dealt with the appeal in Kamlavati's
case and after referring with approval to the analysis of Section 10 of the
Estate Duty Act in George Da Costa v. CED, it referred to the decision in
Chick's and Munro's cases. It then turned to the earlier decision of the
Supreme Court in Gounder's case. After setting out the later part of the
passage in its judgment in that case, which we have quoted earlier, the Supreme
Court observed that:
"It
should be noticed that, though not explicity but implicitly, some departure was
made from the ratio of the Privy Council in Chick's case (1959) 37 ITR (ED) 89;
3 EDC 915; when the principle of Munro's case (1934) AC 61; 2 EDC 462 (PV) was
applied, it was on the basis that what was gifted by the donor was the whole of
the property minus the rights of the partnership which were shared and enjoyed
by the donor also; the donor enjoying the same bundle of rights in the
partnership which he was enjoying before the gift did not bring the case within
the ambit of Section 10. But the implicit departure from Chick's case was when
it was said that the benefit the donor had as a member of the partnership was
not a benefit referable in any way to the gift but is unconnected therewith.
The departure can be attributed to the very subtle distinction in the facts of
the two cases and it is necessary to highlight them. In Chick's case, the donor
as a partner came to share the possession and enjoyment of the property by the
partnership firm long after the gift, while in Gounder's case the benefit which
the donor was enjoying as a partner in the property gifted was existing at the
time of the gift itself and continued to exist even
thereafter............." 219 It is important to note that the principle in
Munro's case was applied in the case of Jai Gopal Mehra, although, the donees
invested the amounts gifted in the firm in which the donor was a partner after
the gifts were made.
The
same Bench which decided Gounder's case followed it in the case of CED v. N.R. Ramarathnam.
In this case, the facts in relation to the gifts of money by the donor in favour
of his three sons and the daughter were materially similar to those of Gounder's
case except that the three sons and daughter were also partners in the firm.
Yet applying the ratio in Gounder's case it was held that the amounts gifted
were not chargeable to Estate Duty under section 10.
In Kamlavati's
case, this Court referred the decision of this Court in CED v. R.V. Viswanathan,
[1976] 105 ITR 653 and observed as follows:
"In
other words, the mere fact that the partnership may make use of the sums of
money gifted in which the donor also was a partner did not mean that he was
allowed to enjoy or derive any benefit in the money gifted, which could be
referable to the gift itself." The Court clarified the position as follows
(P463):
"When
a property is gifted by a donor the possession and enjoyment of which is
allowed to a partnership firm in which the donor is a partner, then the mere
fact of the donor sharing the enjoyment or the benefit in the property is not
sufficient for the application of Section 10 of the Act until and unless such
enjoyment or benefit is clearly referable to the gift, i.e. to the parting with
such enjoyment or benefit by the donee or permitting the donor to share them
out of the bundle of rights gifted in the property. If the possession,
enjoyment or benefit of the donor in the property is consistent with the other
facts and circumstances of the case, other than those of the factum of gift,
then it cannot be said that the donee had not retained the possession and
enjoyment of the property to the entire exclusion of the donor in any benefit
to him by contract or otherwise." The court pointed out that distinction
between the capital of the 220 partnership and the property of the partnership
and that whether an amount forms the part of the capital of the partnership or
part of its property, it does not belong to co-partner in the sense of his
being a co-owner. (Page 464 of 120 ITR (1979).
Even
in the recent decision of this Court in CED v. Godavari Bai, [1986] 158 ITR p.
683 where the decision in the Chick's case has been cited and discussed at some
length, the decisions in Kamlavati's and Jai Gopal Mehra's cases have been
referred to without any indication that the ratio of the same was not accepted
as good law. In fact, that decision has been referred to as one in which the
principle in Chick's case was applied.
In the
case before us the deceased gifted Rs.25,000 to each of his four sons and
almost immediately thereafter the firm of Sanghi Brothers was constituted as
aforesaid in which the said four sons invested Rs.25,000 each received from the
father. As already pointed out, the father as well as the sons had shares in
the said partnership. Applying the decision in the case of Kamlavati and Jai Gopal
Mehra, discussed at some length by us earlier, it must be held that the
interest which the deceased father retained or obtained in the aggregate sum of
Rs. 1 lac invested by the said four sons in the said firm, was an interest
merely as a partner in the said firm and was not related to the gifts made by
him to his said sons. In these circumstances it cannot be said that by reason
of constitution of said partnership and the investment of the said amounts by
the sons in the partnership the donees sons had not assumed bona fide
possession and the enjoyment of the amounts gifted to them or that they had not
retained the same to the entire exclusion of their father. In our opinion, the
said amount of Rs.1 lac could not be included in the estate of the said
deceased under the provisions of Section 10 of the Estate Duty Act. In our view
the Division Bench of the High Court was in error in applying the ratio of
decision in Chick's case to the present case and holding that the said amount
of Rs.1 lac was liable to be included in the estate of the said deceased for
the purposes of computation of estate duty in view of the provisions of Section
10 of the said Act. The learned judges of the High Court have, with respect,
failed to appreciate the true effect of the decision of this Court in Kamlavati's
case and failed to appreciate that the interest which the donor retained in the
amount gifted, and invested by the donees in the partnership in which the donor
was a partner is not an interest which can be said to be related to the gift.
221 In
the result, the appeal is allowed. In our opinion, the question which was
referred to the High Court for determination, which we have set out earlier,
must be answered in the negative and in favour of the accountable person
(appellant). The respondent must pay the costs throughout.
R.S.S.
Appeal allowed.
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