Case: Mahendra Rambhai Patel Vs. Controller Of Estate Duty, Gujarat

1. 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 Cottons 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 Revenue.2. The Central Board of Revenue referred the following question to the High Court of Gujarat under S. 64 of the Estate Duty Act 34 ofon 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 lawHigh Court recorded an affirmative answer to that question. Against that order with certificate granted by the High Court, this appeal has been preferred.3. 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 deceaseds heirs would be entitled to the savings from the income upto the date of death. The correctness of the view was challenged before the High Court, but without success.

Court's reasoning:
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 and 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 and 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 incumbrance 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 and 3 of the deed.4. 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 enfield 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-fivethe 80 shares under the deed of trust were settled property is not disputed; and Manubhai had an interest in those 80 share. 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 presentinterest 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 he attains the age specified. But where, as in the present case, the 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.8. 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 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.