Case: Controller Of Estate Duty, Kerala Vs. M/S. R.V. Vishwanathan &amp; Ors

This appeal on certificate is by the Controller of estate Duty against the judgment of the Kerala High Court where by the High Court answered the following question referred to it under section 64(1) of the Estate Duty Act (hereinafter referred to as the Act) in favour of the accountable persons and against the revenue :"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 2, 70, 000 is not includible in the estate of the deceased under section 10 of the Estate Duty Act ?"The matter relates to the estate of R. V.Veeramani Iyer, who died on November 18, 1960. The accountable persons are the six sons of the deceased. The deceased was the proprietor of two business concerns, one dealing in yarn and carrying on money-lending business under the name and style of P. R. N.Ramanatha & Co., and the other dealing in piece-goods under the name and style of R. V.Veeramani Iyer. With a view to convert the business of the aforesaid two concerns into partnership business with his four major sons, the deceased transferred sum of Rs. 45, 000 from his personal account to the credit of each of his adult sons on September 12, 1955. On September 17, 1955, a partnership deed was executed by the deceased and his four adult sons constituting a partnership firm under the name and style of P. R. N. Ramanatha Iyer & Co. The sums of Rs. 45, 000 transferred by the deceased to each of his four sons were treated as their share capital in the partnership business. A day later, on September 18, 1955, two minor sons of the deceased were also admitted to the benefits of the said partnership. Agreement dated September 18, 1955, was executed in this connection and in that agreement the deceased acted as gradient of his minor sons, the deceased also transferred on September 18, 1955, a sum of Rs. 45, 000 from his personal account in firm to each of his two minor sons who were admitted to the benefits of partnership. One of the minor sons attained majority on December 21, 1957, and he was taken as a regular partner by agreement dated March 29, 1958. The other son continued to be a minor till the date of death of the deceased. The share of the deceased and each of his six sons, including the minor son, was one-seventh in the profits in the partnership till the date of the death of the deceased.In the estate duty proceedings that followed the death of the deceased, the accountable persons included the value of a one-seventh share in the partnership business in the estate of the deceased which along with the movable was declared at Rs. 1, 05, 236. The assessment was completed on January 18, 1962. The Assistant Controller of Estate Duty by applying the provisions of section 10 of the Act included the following items in the estate of the deceased :(1) The capital of Rs. 2, 70, 000;(2) Subsequent accretion in the form of profits till the date of death of the deceased; and(3) 6/7th share of goodwill, the quantum of goodwill being computed at Rs. 1 lakhThe principle value of the estate was determined at Rs. 8, 43, 214The accountable persons preferred an appeal before the Appellate controller of Estate Duty. It was contended in their behalf that the value of the share of the sons in the business should not be included in the estate of the deceased under section 10 and that the valuation of such shares as determined by the Assistant Controller was excessive. The Appellate Controller held that so far as the gift of the shares in the business was concerned it could not be included in the estate of the deceased under section 10 of the Act. Regarding the gift of Rs. 2, 70, 000 by the deceased in favour of his sons, the Appellate Controller held that the same could be included in the estate of the deceased under section 10. Accordingly, the Appellate Controller sustained the inclusion of Rs. 2, 70, 000 and deleted the balance of Rs. 3, 40, 054 which amount also included six-sevenths share of the goodwill. The value of the goodwill was reduced by the Appellate Controller from Rs. 1 lakhs to Rs. 75, 000Against the decision of the Appellate Controller the accountable persons filed appeal to the Appellate Tribunal and claimed that the inclusion of Rs. 2, 70, 000 in the estate of the deceased was wrong in law. It was urged that although the deceased purported to transfer a sum of Rs. 45, 000 in favour of each of his sons, it did not represent a transfer of cash and the transfer really represented a transfer of a share in the business. The Tribunal elaborately went into the clauses in the partnership deed and came to the conclusion that what the deceased gifted to his sons was only a share in the business and not gifted of cash. The Tribunal, therefore, held that the sum of Rs. 2, 70, 000 could not be included in the estate of the deceased and ordered the deletion of that sum.On an application made by the Controller of Estate Duty, the question reproduced above was referred to the High Court. The High Court held that the subject-matter of the transfers in favour of each of the sons of the deceased were the assets to the extent of Rs. 45, 000 "subject to the rights of those assets being available for the continued use of the business". The contention advanced on behalf of the revenue that there had been complete transfer of the assets to the extent of Rs. 45, 000 to each of the sons and that thereafter the sons allowed the subject-matter of the gift to be made use of by the donor, was rejected. It was further observed as under :"The Tribunal has taken the view that the subject-matter of the gift was property which was subject to the rights of the business to have that property being utilised for the purpose of business and they have expressed themselves by saying that the transfer was shorn of the rights of the partnership. The decision, we think, is correct. We, therefore, answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department."

Court's reasoning:
In the right of the finding that the deceased transferred six-sevenths share in the business in favour of the sons and retained only one- seventh share, no question can possibly arise for the inclusion of the said six-sevenths share or of the amount of Rs. 2, 70, 000 in the estate of the deceased. The transfer of Rs. 2, 70, 000 by the deceased in the favour of his sons was not in cash but was by means of book entries. The transfer of that amount was a part of the scheme as stated above, to transfer six-sevenths share in the business in favour of the sons. There was no absolute transfer of Rs. 2, 70, 000 in favour of the sons but the transfer was made subject to the condition that the sons would use it as capital, not for any benefit of the deceased donor but for each of them becoming entitled to one-seventh share in the business. No benefit of any kinds was enjoyed by way of possession or otherwise by the deceased under the gift of the subject-matter of the gift. Whatever benefit was enjoyed by the deceased subsequent to the date of the gift was on account of the fact that he held one-seventh share in the business, which share heartened throughout and never parted with. No extra benefit was also conferred under the deed of partnership upon the deceased although some extra benefit was conferred upon two of the major sons in the form of remuneration because of their active and full participation in the business. Keeping in view the position of law discussed earlier, it is plain that the facts of the case would not fall within the ambit of section 10 of the ActThe Tribunal has expressly recorded a finding that what the deceased gifted to his sons was only a share in the business. The Tribunal also expressed its full agreement with the following observations made by the Assistant Controller :"From the facts of the case it is clear that the gift in favour of the sons represented amounts transferred by book entries to the account of each of the sons who were admitted to the partnership and that it does not actually represent cash sums of Rs. 45, 000 as such. By virtue of these transfer entries the sons of the deceased got a share in the business. Thus, the gift cannot be construed as a gift of cash but it only represented a gift of a share in the business. By virtue of this gift, the sons had necessarily to become partners. Ther of the gift is the investment in the business and such investment was compulsory or, in other words, gift was for the specific purpose of admission into the business as partners and for no other purpose."The above finding of the Tribunal has been arrived at upon the material facts and relevant circumstances of the case and in answering the question referred to by the Tribunal, we must proceed upon the basis of the correctness of the above findings. although Mr. Mehta has tried to assail that finding, nothing cogent has been brought to our notice as might indicate any infirmity in that finding. The circumstances of the case indeed point to the conclusion that the said finding is