Case: P. Venkatarama Reddy Vs. Controller of Estate Duty

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 two 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. 71, 250 During his lifetime on or about August 29, 1954, the deceased executed an assignment in respect of each of these three life insurance policies in favour of his grandchildren. The deeds of assignment have been registered on September 27, 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 companies2. The deceased made a will dated February 4, 1959, in respect of all his properties. In his will, in the list of properties he mentioned, at item No. 30, as followsThere 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 granddaughter (i.e., the sons and daughter of my two sons). 1. The Standard Life Insurance Co., fifty thousand. 2. The Phoenix Assurance Co., two policies of fifty thousand each.3. In the will, he also mentioned in the list of dues, payment of dues to insurance companies amounting to Rs. 71, 250. Under 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 granddaughter 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 estateIn the 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, the 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  4. In 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. The three sets of questions are as follows  Set No. 11. 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 grandchildren (at the instance of the Revenue)?2. 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 E.D. Act from the general estate as distinct from the separate estate of the three insurance policies; and3. 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)?1. Whether, on the facts and in the circumstances of the case, the Tribunal has acted within its jurisdiction in allowing the Departments appeal and reversing its earlier order passed on October 27, 1977?2. 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?3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that section 34(3) of the Act was not applicable?1. 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?2. If 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 the Act?5. The High Court by its impugned judgment (reported in P. Indrasena Reddy v. CED (AP)) 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 mistakeThe 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

Reasoning: 6. In the first set of questions, question No. 3 has been correctly answered by the High Court against the assessee in view of the two decisions of this court, one in the case of P. Leelavathamma v. CED and the other in the case of Nawab Mir Barkat Ali Khan Bahadur v. CED8. Under 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. It includes property passing either immediately on death or after any interval; and the phrase on death includes at a period ascertainable only by reference to the death. Learned 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 deceasedHe 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 therein. In sub-section (2) it is provided that the transfer and assignment shall be complete and effectual upon the execution 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 representative, 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, and such person shall be subject to all liabilities and equities to which the transferor or assignor was subject at 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 deathBy virtue of section 14(1) money under a life insurance policy which is kept up by the assured 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 deceased11. From 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 lifetime even after the assignment. The provisions of section 14 are, therefore, directly attracted in the present case12. The 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.Both these cases deal with policies of accident insurance where the amount became payable only on the death of the insured 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 the insureds death in an accidentThese 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 purposes of estate duty13. In the case of CED v. Bomansha Framji Cama, 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 lifetime 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.Therefore, the contention of learned counsel for the appellants that the policies do not form part of the estate of the deceased must be rejectedNow, 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.The decision, therefore in DAvigdor-Goldsmid v. IRC, is not directly relevant to the issue in the present caseApplying the test as laid down in Re Hodsons Settlement (CA), 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 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 deceased22. In the premises, we hold that the amounts under the three life insurance policies form 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.