Reddy Vs. The Controller of Estate Duty  INSC 339 (20 July 1998)
V. Manohar, D.P. Wadhwa Mrs. Sujata V. Manohar, J.
appeals arise out of the estate duty proceedings in respect of the estate of
the deceased P. Madhusudhan Reddy. During his lifetime the deceased had taken
out three life insurance policies of Rs. 50,000/- each. Two policies were from
the phoenix Assurance Company, Bombay and one
policy was taken from the Standard Life Insurance Company, Calcutta. During his lifetime the deceased
had obtained loans on the security of his tow life insurance policies taken out
from Phoenix Assurance Company, Bombay. It seems that the total loan amount was Rs. 78,400/- . the deceased
had also, from time to time, repaid a part of the loan. The amount due in
respect of the loans so taken at the time of the death of the deceased was Rs.
his lifetime on or about 29th of August, 1954 the deceased executed an
assignment in respect of each of these three life insurance policies in favour
of his grand children. the deeds of assignment have been registered on
27.9.1954. A notice of the assignment was given to the insurance company in
accordance with the provisions of Section 38 of the Insurance Act, 1938 and the
assignments were registered with the Insurance Companies.
Deceased made a will dated 4.2.1959 in respect of all his properties. In his
will, in the list of properties he mentioned, at item no. 30, as follows:-
" There are three Policies of Life Insurance, as detailed below of
Rs.50,000/- each, which are already assigned in favour of my six grandsons and
a grand daughter (i.e. the sons and daughter of my two sons).
Standard Life Insurance Co., Fifty thousand.
Phoenix Assurance Co., two policies of Fifty thousand each."
will, he also mentioned in the list of dues, payment of dues to insurance
companies amounting to Rs. 71,250/-.
his will he provided that after his death the amount of his three life
insurance policies, that is to say, Rs.1,50,000/- plus bonuses that will be
received thereon, should be distributed equally among his surviving six
grandsons and grand daughter in whose favour he had already assigned
irrevocably and transferred the policies. He also provided that the dues of the
insurance companies (inter alia) should be paid out of the general estate.
estate duty proceedings the Assistant controller of Estate Duty initially
treated the three policies as a separate estate for the purpose of calculation
of the rate of estate duty. In appeal, before the appellate Tribunal held that
each of the three policies should be separately assessed to estate duty.
However, after reopening the assessments the Assistant Controller of Estate
Duty treated the three policies as a part of the main estate of the deceased
and levied estate duty accordingly. In the several proceedings which took place
dealing with the initial assessment as well as the reopening of the assessment,
the Appellate tribunal ultimately held that the two insurance policies taken
out from Phoenix Insurance Company formed a part of the general estate of the
deceased while the third policy constituted a separate estate. The Appellate
Tribunal, however, rectified its order as a mistake and ultimately held that
all the three policies formed a part of the general estate of the deceased and
could not be separately assessed.
respect of these various proceedings, depending on the view then taken, three
sets of questions were framed by the Tribunal and referred to the High court in
three reference applications which arose from these proceedings.
three sets of questions are as follows:- "
Whether on the facts and in the circumstances of the case, the Appellate
Tribunal was justified in law in holding that there should be separate
assessments in respect of each of the three insurance policy amounts assigned
by the deceased in favour of his grand-children (At the instance of the
Whether the loan amount of Rs.78,400/- taken on the insurance policies by the
deceased is liable to be deducted as a debt under section 44 of the Estate Duty
Act from the General estate as distinct from the separate estate of the three
insurance policies; and
Whether the estate duty payable is liable to be deducted while computing the
net estate exigible to duty? (At the instance of the accountable person).
Whether on the facts and in the circumstances of the case, the Tribunal has
acted within its jurisdiction in allowing the department's appeal and revering
its earlier order passed on 27.10.77.
Whether on the facts and in the circumstances of the case, the Tribunal was
justified in holding that the amount of Rs.1,39,284/- in respect of Standard
Life Assurance co. policy was to be included in the main estate of the deceased
under Section 34(3) of the Estate Duty Act.
Whether on the facts and circumstance of the case, the Tribunal was correct in
law in holding that Section 34(3) of the Act was not applicable.
Whether on the facts and in the circumstances of the case, the Tribunal was
correct in holding that the Assistant Controller could reopen the assessment
under section 59(b) of the Estate Duty Act?
the answer to the first question No. 1 is in the affirmative, whether the two
insurance policies could be assessed as separate estates under Section 34(3) of
High Court by its impugned judgement (reported in 156 ITR 45) has upheld the
ultimate finding of the Tribunal that the three insurance policies have to be
considered as a part of the general estate of the deceased and they cannot be
aggregated individually or collectively to form a separate estate or estates
for the purposes of calculating the rate of estate duty. The three sets of
questions were accordingly answered in favour of the revenue. The High Court
also upheld the exercise of power in the present case by the Assistant
Controller of Estate Duty in reopening the assessment and it also upheld the
exercise of power by the Tribunal for rectifying the mistake.
present appeals are filed from the above impugned judgment of the High Court. Before
us, the question relating to the exercise of power by the Assistant Controller
of Estate Duty for reopening the assessments as also the question relating to
the power of the Tribunal exercised in the present case to rectify the mistake,
have not been pressed.
first set of questions, question no. 3 has been correctly answered by the High
Court against the assessee in view of two decisions of this Court, one in the
case of p. Leelavathamma v. Controller of Estate Duty (188 ITR 803) and other
in the case of Nawab Mir Barkat Ali Khan Bahadur v. Controller of Estate of
Duty (222 ITR 612).
remaining questions deal with two issues; 1) whether after the assignment of
the three insurance policies by the deceased in favour of his grandchildren, it
could be said that the deceased had any interest in the life insurance policies
which passed on his death; and 2) if the three insurance policies are held to
pass on the death of the deceased whether
of the three insurance policies should be separately assessed to estate duty or
three insurance policies taken together should be separately assessed to estate
the three insurance policies have to be aggregated with the main estate of the
deceased for the purposes of estate duty.
Section 2(15) of the Estate Duty Act, 1953, "property" includes any
interest in property movable or immovable, and also includes, inter alia, any
property converted from one species into another by any method. The
Explanations to Section 2(15) are not relevant for our purposes. Section 2(16)
defines "property passing on death".
includes property passing either immediately on death or after an interval; and
he phrase "on death" includes "at a period ascertainable only by
reference to the death".
counsel for the appellants contended before us that in view of the assignments
of the life insurance policies by the deceased during his lifetime to his grandchildren,
it cannot be said that the deceased had any interest in the life insurance
policies which could pass on his death. Hence under Section 34 of the Estate
Duty Act, 1953, the life insurance policies cannot be treated as property
passing on the death of the deceased.
drew our attention to Section 38 of the insurance Act, 1938. Section 38(1)
provides that a transfer or assignment of a policy of life insurance can be
made only by an endorsement upon the policy or by a separate instrument in the manner
provided there. In sub-section (2) it is provided that the transfer and
assignment shall be complete and effectual upon the executions of such
endorsement or instrument in the manner provided but shall not be operative as
against an insurer and shall not confer upon the transferee or assignee or his
legal representatives any right to sue for the amount of such policy until a
notice in writing of the transfer or assignment and either the said endorsement
or instrument itself or a certified copy thereof have been delivered to the
insurer. Under sub-section (5), subject to the terms and conditions of the
assignment, the insurer shall, from the date of the receipt of the notice
referred to in sub-section (2) , recognise the transferee or assignee named in
the notice as the only person entitled to benefit under the policy, such person
shall be subject to all liabilities and equities to which the transferor or
assignor was subject on the date of the transfer or assignment. Since the
deceased had duly assigned the policies in accordance with the provisions of
Section 38 and by complying with all its requirements, the assignee alone, it
is contended, had an interest in these policies at the time of the death of the
deceased. Hence no interest was left in the deceased in respect of these
policies which passed on his death.
considering this contention, one must bear in mind Section 14(1) of the Estate
Duty Act, 1953. It provides as follows:
14(1): Money received under a policy of insurance effected by any person on his
life, where the policy is wholly kept up by him for the benefit of a donee,
whether nominee or assignee, or a part of such money in proportion to the
premiums paid, by him, where the policy is partially kept up by him for such
benefit, shall be deemed to pass on the death of the assured.
Explanation. - A policy of insurance on the life
of a deceased person effected by virtue or in consequence of a settlement made
by the deceased shall be treated as having been effected by the deceased."
The remaining part of Section 14 is not relevant for the present purpose. By
virtue of Section 14(1) money under a life insurance policy which is kept up by
the donee for the benefit of his nominee or assignee is deemed to pass on the
death of assured. This is a clear deeming provision whereby even after the
assignment of his policy by the assured, if the assured keeps up the policy for
the benefit of his assignee, the insurance policy will constitute a part of the
estate of the deceased.
the statements of Case which are before us in the three references, as also the
facts found, the assignees have not contended that after the assignment of the
policies in their favour, the assignees paid the premium or any part of the
premium on the policies so assigned or the assignees kept the policies alive.
The policies were entirely under the control of the deceased. The deceased had
taken loans and repaid loans or parts thereof on these insurance policies. From
the tenor of the will it is apparent that it was the deceased who had retained
possession of the policies and had kept them up during his life time even after
the assignment. The provisions of Section 14 are, therefore, directly attracted
in the present case.
contention of the appellants that the deceased did not have any interest in the
insurance policies passing on his death must, therefore be rejected in the
light of Section 14. Learned counsel for the appellants drew our attention to a
decision of the Madras High Court in D. Mohanavelu Mudaliar and Anr. V. Indian
Insurance and Banking Corporation Ltd., Salem and Anr. (AIR 1957 Mad. 115). The Madras High Court, however, was not
concerned with the question whether on assignment of a life insurance policy by
the insurer during his life time, the insurer had any interest left in the life
insurance policy which could pass on his death under the provisions of the
Estate Duty Act, 1953. The Court was concerned with the effect of assignment
and whether a creditor of the insurer could attach the policy which was already
assigned. The provision so of the Estate Duty Act are not considered in the
appellants also drew our attention to two decisions of this Court dealing with
accident policies. One is a decision in the case of M. CT. Muthiah and Anr. V. Controller
of Estate Duty, Madras (161 ITR 768) and the other is the
decision in the case of Bharat Kumar Manilal Dalal v. Controller of Estate
Duty, Gujarat (164 ITR 231).
former case, the deceased , prior to flying by air, took out a personal
accident policy under which the insurance company agreed that if, any time
during the currency of the policy, the deceased should sustain an accident
resulting in any injury of injuries leading to death, the insurance company
would pay to the assured or to his legal representatives in the case of his
death, such sum as was specified. The deceased effected a nomination in favour
of M. The deceased died following the crash of the airline in which he was travelling.
On his death, the insurance company paid the nominee M a sum of Rs. 2 lakhs
which was the benefit stipulated to be paid. The question was whether the sum
of Rs. 2 lakhs should be included in the estate of the deceased as property
passing on the death of the deceased for the purposes of state duty. This court
held that the insurance amount became property only on the death of the
deceased in an accident during the subsistence of the policy. During the life
time of the deceased interest was vested totally and irrevocably in the hands
of the nominee.
death did not cause the property to change hands.
the sum of Rs. 2 lakhs was not includible in the principal value of the estate
of the deceased for the purpose of estate duty. This Court also observed that
though it was not necessary to decide the point , had it become necessary to
decide, it would have held that the sum of Rs.2 lakhs was a separate estate
from the other estate of the deceased. The same view has been taken by this
Court in the subsequent case of Bharat Kumar Manilal Dalal (supra). Both these
cases deal with policies of accident insurance where the amount became payable
only on the death of the insurer in an accident. In such a situation, there was
no question of any amount ever coming to the deceased, the amount under the
policy being payable only to a nominee on insurer's death in an accident.
cases cannot apply to the present case which deals with assignments of life
insurance policies. In view of the express provisions of Section 14, the
deceased must be considered to have an interest in these policies passing on
his death for the purposes of estate duty.
case of Controller of Estate Duty v. Bomansha Framji Cama and Ors. (170 ITR
600), the Bombay High Court held that the provisions of Section 14(1) were
attracted in a case where the deceased had settled on trust five policies of
insurance on his life, when the premiums on the said policies after their
assignment under the settlement, were paid by the deceased. The policies became
fully paid up during the life time of the deceased On his death, the moneys
received by his assignees were held to be property passing on the death of the
deceased by virtue of Section 14(1). The Court said that the words] "kept
up" mean that the policy has been and is kept valid by payment of premiums
by the donee and is not allowed to lapse. In the case of a paid up policy, no
further payment of premium is required to prevent it from lapsing. The past
payments of premium kept the policy valid and such a policy must be considered
as having been kept up by the assured for the purpose of Section 14.
the contention of the learned counsel for the appellants that the policies do
not form part of the estate of the deceased must be rejected.
Section 34 of the Estate Duty Act, 1953, for the purpose of determining the
rate of estate duty to be paid on any property passing on the death of the
deceased the properties specified in subsection (1) and (2) shall be aggregated
as provided therein. Sub-section (3) of Section 34, however, provides as follows:
34(3): Notwithstanding anything contained in sub-section (1) or sub-section (2)
any property passing in which the deceased never had an interest, not being a
right or debt or benefit that is treated as property by virtue of the
Explanations to clause (15) of section 2, shall not be aggregated with any
property, but shall be an estate by itself, and the estate duty shall be levied
at the rate or rates applicable in respect of the principal value
thereof." It is, therefore, contended by learned counsel for the
appellants that even if the life insurance policies constitute a part of the
estate of the deceased, they should be separately assessed under section 34(3).
Now, only such property passing on the death of the deceased in which the
deceased "never had an interest" will constitute a separate estate
under Section 34(3) for the purpose of determining the rate of estate duty.
What is meant by the phrase "in which deceased never had an
interest"? The language of Section 34(3) is similar to the language of
Section 4 of the English Finance Act of 1894 as amended by the Finance Act of
1990. Section 4 of the Finance Act, 1894 is as follows:
For determining the rate of estate duty to be paid on any property passing on
the death of the deceased, all properties so passing in respect of which estate
duty is leviable shall be aggregated so as to form one estate, and the duty
shall be levied at the proper graduated rate on the principal value thereof:
that any property so passing in which the deceased never had an interest shall
not be aggregated with any other property, but shall be an estate by itself and
the estate duty shall be levied at the proper graduate rate on the principal
value thereof ............ " In the case of Attorney General v. Pearson and
Ors. (1924 (2) K. B. 375 ) the English court considered a case where the settlor
had assigned to trustees a policy of assurance on his wife, reserving interest
for himself until marriage, and thereafter to hold the moneys payable under the
policy in trust to pay the income thereof to his wife during her life time and
after the decease of the settlor and his wife, in trust for the children of the
marriage as therein mentioned and if there is no child of the marriage, for the
settlor absolutely. The court, inter alia, considered whether the money under
the policy should be aggregated with the other estate of the deceased under
Section 4 determining the rate of estate duty. The court asked, (page 388)
"Had the deceased even an interest within the meaning of the Act in the
moneys which were to become payable under the policy"? The court answered,
one could not hold that the deceased never had an interest in this property.
"On the contrary he had an interest in the policies before he settled
them. Moreover after he settled them he had an interest in the benefit which
was going to accrue or arise from them on his death, though it may have been a
remote interest which he never could enjoy in possession. He had an interest
during all his married life contingently upon the failure of the trusts in favour
of his wife and children. If his wife and children had predeceased him the
legal position would have altered, but his interest would then have become a
very proximate and extremely valuable interest, and he would have died worth
the capital value of the insurance money". Of course, on the facts of that
case since the settlor had reserved to himself an interest in the eventuality
of the failure of the trust in favour of his wife and children, it was easy for
the court to come to the conclusion that the deceased had an interest in the
insurance money during his life time.
In Re Hodson's
Settlement, Brookes v. Attorney General (1939 (1) AER 196 ) the settlor had
vested a trust fund in trustees upon trust that they should, if the income were
sufficient, pay yearly sum of $1,200 to one $ during her life time. He also
made certain other settlements under none of which there was any chance of
anything accruing to the settlor. The court, in examining the application of
Section 4 of the Finance Act of 1894 to decide whether the amount under the
settlement could be aggregated with the other estate of the deceased-settlor,
formulated a test to decide when it could be said that the property was such
that the deceased never had an interest in it. The Court observed (page 210)
that in different circumstances different tests may well be applicable. however,
there was one test which was properly applicable to the facts of the case
test is to ask in whose favour there would be a resulting trust of the
accumulations in case all the beneficiaries under the disposition under which
the property passes were do disclaim the benefits conferred on them by the
disposition." If the answer is that the resulting trust would be in favour
of the deceased or in favour of his representatives as such representatives,
the court would be bound to hold that the property is property of which it
would be untrue to say the deceased never had an interest in it.
test so laid down in this case has been repeatedly applied by the English
courts. In the case of Tennant and Ors. V. Lord Advocate (1939 (1) AER 672) the
deceased effected a policy of insurance on his own life. Later on he assigned
the policy to trustees whom he directed, inter alia, (i) to pay to his
testamentary trustees the proceeds of the policy in satisfaction of all death
duties payable by reason of his death, and (ii) to pay any residue to his
children. On his death the whole proceeds of the policy were paid to the
testamentary trustees for payment of death duties. The House of Lords said that
for the purpose of determining the rate of estate duty, the sum realised under
the policy had to be aggregated with the other estate of the deceased. Lord Russel
for Killowen in his judgment observed (page 675): "I feel no doubt that
the deceased had, from the commencement of the policy's existence, an interest,
and for many years the sole interest, in the proceeds thereof. He could, before
the assignation, have assigned or charged the entirety of those proceeds, ad
even after the assignation he had a contingent interest therein by way of
resulting trust, of which he could have disposed inter vivos or by will. The
word 'interest' is a word capable of wide meaning, and I see no valid reasoning
for limiting its scope in Section 4 as was suggested in the course of the
argument. The case is really covered by the decision of Rowlatt, J., in A-G v. person..........
" In Westminster Bank Ltd. V. Attorney General (1939 (1) Chancery 610),
the court of Appeal in England considered a case where a settlor assigned to
bank as trustee life policy and investments on trust to accumulate the income
of the investment for 21 years or during his life whichever should be shorter
and thereafter to hold the settled property on trust to pay the income to other
persons specified there. In considering the application of Section 4 to the
amounts so settled by the deceased -settlor, the Court of Appeal followed the
test laid down in Re Hodson's Settlement (supra) and the decision of House of
Lords in Tennant and ors. (supra) observing that it was not possible to
predicate regarding policy moneys paid in respect of a policy at one time
belonging to the deceased, that the deceased never had any interest in that
attention was drawn to a decision for the House of Lords in D'A Vigdor-Goldsmid
v. Inland Revenue Commissioners (1953 A.C. 347). In that case, the settlor,
inter alia, appointed a policy taken on his life and other settled property
being free hold premises to his son absolutely.
the date of that appointment the premiums previously paid by the settlor were
paid by his son. To the extent of the income from the free hold, premiums
thereafter were paid by the son from such income. The premiums so paid were, by
the Finance Act, 1939, Section 30, attributed to the settlor. The settlor died
and his son received under the policy $48,765. The Court, for the purposes of
Section 2(1)(d) of the Finance Act, 1894, came to the conclusion that the money
received by the son under the policy did not from part of the estate of the
deceased. The question, therefore, of the aggregation of this amount with other
properties of the deceased did not arise for consideration before the House of
Lords in that case. In fact, the decisions in Attorney General v. Pearson and Ors.,
Tennant and Ors. and Westminster Bank Ltd. (supra) were referred to and it was
observed that the issue in those cases was one of aggregation and, therefore,
none of these three cases were directly in point. The decision, therefore, in
D'A Vigdor- Goldsmid (supra) is not directly relevant to the issue in the
the test as laid down in Re Hodson's Settlement (supra) to the present case,
prior to the assignment, the deceased clearly had an interest in the life
insurance policies. Even after the assignment, had the assignees disclaimed
their interest in the policies, the benefit under the policies would have
resulted to the deceased or his representatives. Therefore, it cannot be said
that the deceased never had an interest in the life insurance policies for the
purposes of Section 34(3) of the Estate Duty Act, 1953. the amount under the
three life insurance policies is, therefore, liable to be aggregated with the
general estate of the deceased.
of the above, the other question as to whether the debts under the three
policies should be paid out of the general estate of the deceased or out of the
insurance money does not now survive.
premises, we hold that the amount under the three life insurance police is
forms a part of the general estate of the deceased and that the amounts under
the three life insurance policies have to be aggregated with the general estate
of the deceased for the purpose of determining the rate of estate duty. The appeals
are, therefore, dismissed. In the circumstances, however, there will be no
order as to costs.