Supreme Court Allows Assessee in Estate Duty Appeal Concerning Inclusion of Gifts to Daughters Under Section 10 of Estate Duty Act, 1953. Unconditional Gifts Made by Sole Proprietor to Daughters, Later Utilised as Capital in Partnership with Donor, Were Not Includible in Estate as Donor's Enjoyment Was Not Referable to the Gift Under Section 10 of Estate Duty Act, 1953.

Case Note & Summary

The appeal arose from a certificate granted by the Madras High Court under Section 65 of the Estate Duty Act, 1953, concerning the applicability of Section 10 of that Act. The deceased, Murugesa Mudaliar, carried on a proprietary business under the name 'Newton & Company'. On 20 July 1962, he made two cash gifts of Rs.40,000 each to his two daughters, Rajeswari and Gnanambigai, by debiting his capital account and crediting their accounts in his personal business books. Both daughters wrote letters accepting the gifts and thanking him. A week later, on 27 July 1962, each daughter wrote a separate letter thanking him again and requesting that the gifted amounts be retained in the business and that they be admitted as partners. Accordingly, a partnership was formed effective 1 August 1962, with the donees and the donor as partners. The deceased passed away on 15 October 1964. The question before the court was whether the aggregate gifts of Rs.80,000 were includible in the principal value of the estate of the deceased under Section 10 of the Estate Duty Act. The Assistant Controller of Estate Duty held that the gifts were includible because the donees had not taken possession and enjoyed the amounts to the entire exclusion of the donor. The Appellate Controller confirmed that assessment. The Income Tax Appellate Tribunal, however, found that the gifts did not fall within the ambit of Section 10. The Tribunal held that the transfers were complete with the condition that the gifted amounts formed the capital account of the donees and continued to be available for the business; the donees assumed such possession and enjoyment as the subject matter was capable of, to the exclusion of the donor; and that the donor's control arose from the condition stipulated by the donees, not from a reservation by the donor. The Revenue sought a reference to the Madras High Court. The High Court distinguished the Supreme Court decision in Controller of Estate Duty v. R.V. Viswanathan [(1977) 1 SCC 90] and held that Section 10 was attracted, answering in favour of the Revenue. Later, the High Court granted a certificate of fitness to appeal to the Supreme Court in view of the later decision in Controller of Estate Duty v. Kamlavati [(1979) 4 SCC 265]. Before the Supreme Court, the appellant relied on Viswanathan and Kamlavati, contending that the facts were identical and that the High Court erred. The Revenue argued that the ratio of the earlier cases did not apply because in those cases the donor was already a partner, whereas here the donor was a sole proprietor who subsequently formed a partnership with the donees. The Supreme Court rejected the Revenue's distinction. It observed that in Viswanathan, the donor was a sole proprietor when he gifted a total sum to his four major and two minor sons. The Court noted that the rigour of Section 102 of the English Finance Act, corresponding to Section 10 of the Estate Duty Act, had been mellowed, with leniency shown to accountable persons. Quoting extensively from Kamlavati, the Court reiterated that where a property is gifted and its possession and enjoyment is allowed to a partnership firm in which the donor is a partner, the mere fact of the donor sharing enjoyment is not sufficient to attract Section 10 unless the enjoyment or benefit is clearly referable to the gift. If the donor's possession or benefit is consistent with rights other than the gift, it cannot be said that the donee has not retained possession and enjoyment to the entire exclusion of the donor. It makes no difference whether the donee is a partner from before or is taken as such at the formation of the firm by allowing the gifted property to be used for partnership purposes. Applying these principles, the Court found from the Tribunal's findings that the gift was unconditional, and a week later the donees requested partnership formation and retention of the amounts as their share capital. The letters written by the donees indicated that the donor's enjoyment was not referable to the gift. The facts were more or less identical to Viswanathan, and the ratio laid down therein, consistently applied, was applicable. The Supreme Court allowed the appeal, answered the question referred to the High Court in the affirmative in favour of the accountable persons and against the Revenue, and made no order as to costs.

Headnote

Issue of Consideration

Final Decision

Appeal allowed; question referred to the High Court answered in the affirmative in favour of the accountable persons and against the Revenue; no order as to costs.

Law Points