STATEMENT OF CASE

One Shri B.S Varadaraja Setty died on 6th May, 1965 leaving behind him a large estate. The accountable person had claimed before the Asst. Controller the liabilities amounting to Rs. 2,59,757 the details of which were not available in full at that time. There was income-tax liability of Rs. 90,000 full details of which were not furnished. In fact a sum of Rs. 22,627 was due for payment for the assessment year 1964–1965 as per the Income-tax Officer's order dated 15th March, 1969. That was allowed. Further, there was a claim of Rs. 2,500 as liability to pay estate duty. The Assistant Controller held that there was no provision in the Estate Duty Act for allowing estate duty liability which arose after the death of the deceased. Accordingly the Assistant Controller disallowed the claim.

Being dis-satisfied with the order of the Assistant Controller, the accountable person went in appeal before the Appellate Controller of Estate Duty. It was argued before him that the estate duty payable on the estate of the deceased should be allowed as a deduction from the gross duty payable. The learned counsel referred to (Kesoram Industries and Cotton Mills Ltd. v. C.W.T (Central) Calcutta(1).

The Appellate Controller held that the above cited case arose inter alia on an interpretation of Section 2(M) of the Wealth-tax Act. The Appellate Controller held that the case had no application as it was under wealth-tax. The charge under that Act was on the net wealth of the individual and H.U.F on the corresponding date commencing from the assessment year 1957–1958. It was a tax due by the individual or H.U.F It was in that context that the Supreme Court interpreted the words ‘debt owed’. The Appellate Controller further went on to say that the debt payable on the principal value of estate under the Estate Duty Act cannot be considered to be a debt incurred by the deceased. Section 44 provided the deduction under the Act and unless strict requirements were satisfied, there could be no deductions. Taking note of Section 5, the duty was not payable by the deceased himself but by his successor. Estate Duty is a liability attaching to the estate of a deceased individual which had to be discharged by the accountable person. Holding that view, the Appellate Controller dismissed the appeal.

Against the order of the Appellate Controller the accountable person went in appeal before the Tribunal. It was contended before the Tribunal that the property passed with the charge and as such the debt payable was deductible from the principal value of the estate. Reliance was also placed on 53 I.T.R 64 (E.D) (Mrs. Blanche Nathalia Pinto v. State of Mysore). It was urged by the accountable person's counsel that immediately on the death of a person, estate duty became eligible in respect of the property which passed on his death. When it came to the hands of the executor it was an estate which was already burdened with liability to pay the estate duty.

The Tribunal had on an earlier occasion to deal with an identical question which arose before it in E.D.A No. 143/67-78. There the Tribunal held that the estate duty payable by the accountable person never fell for deduction from the principal value of the estate.

The authorised representative referred to Section 74 of the Act which laid down that the estate duty payable in respect of property movable or immovable passing on the death of the deceased shall be a first charge on the immovable property so passing.

The Tribunal held that estate duty fell upon the property passing on the death apart from its destination. The levy and payment of estate duty occurred not at the point of succession to property but on the passing of property by the death of a person. However, when valuing the market value of the estate a willing purchaser would have to take into consideration the estate duty payable on it. So the estate duty payable being a charge on the property deflated the market value and to that extent the necessary allowance became factually accorded. The Tribunal held that the case referred to i.e, 53 I.T.R 64 (E.D) by the learned counsel was not relevant as the decision had proceeded on a phraseology of the relevant sections of the Mysore Court Fees and Suits Valuation Act and the procedure laid down therein. In the case before the Tribunal it had to see whether estate duty payable by accountable person fell for deduction in his hands under Section 44 of the Act. As there was no existing debt at the time when the deceased died, no deduction for the estate duty payable on his estate would be allowable. There was no liability before the death of the deceased. It was further held by the Tribunal that no doubt in the hands of the executor the estate came already burdened with liability to pay the estate duty. It was in the course of the passing of the estate that the existance, or the liability emerged and not prior to it.

T.R.C No. 7 of 1972.

JUDGMENT

Govinda Bhat, C.J:— The Appellate Tribunal, Bangalore Bench, under Section 64(1) of the Estate Duty Act, 1953 (hereinafter called the Act) has stated a case and referred the following question for the opinion of this Court:—

“Whether on the facts and in the circumstances of the case the estate duty payable by the accountable person is deductible in computing the net principal value of the estate of the deceased?”

(2) On Varadaraja Setty died on 6th May, 1965. The Accountable person filed return before the Assistant Controller of Estate Duty in which he claimed that a sum of Rs. 2,59,757 should be deducted from the principal value of the estate. The said sum of Rs. 2,59,757 included a sum of Rs. 2,500 being the estimate of the estate duty payable by the Accountable person. The Assistant Controller disallowed the claim for deduction of the amount of estate duty. The Appellate Controller of Estate Duty as also the Appellate Tribunal have affirmed that part of the order of the Assistant Controller on the ground that estate duty payable by the Accountable person is not a debt or encumbrance coming within the scope of Section 44 of the Act.

(3) The short question that arises for decision is whether in determining the value of an estate for the purpose of estate duty allowance or deduction shall be made for estate duty under Section 44 of the Act.

(4) Section 5(1) of the Act is the charging section which charges to duty all property which passes on the death of a person, the duty being determined on the principal value of the property so passing ascertained in the manner provided by the Act. Section 36(1) of the Act provides that the principal value of any property shall be estimated to be the price which, in the opinion of the Controller, it would fetch, if sold in open market at the time of his death. Sections 44 to 50 which come under part VI provide for deductions in determining the value of an estate for the purpose of estate duty. Section 44 which is the material Section reads thus:

“In determing the value of an estate for the purpose of estate duty, allowance shall be made for funeral expenses (not exceeding rupees one thousand) and for debts and encumbrances; but an allowance shall not be made.

(a) for debts incurred by the deceased, or encumbrances created by a disposition made by the deceased unless, subject to the provisions of section 27, such debts or encumbrances were incurred or created bona fide for full consideration in money or money's worth wholly for the deceased's own use and benefit and take effect out of his interest, or

(b) for any debt in respect whereof there is right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained or

(c) more than once for the same debt or encumbrance charged upon different portions of the estate, or

(d) for debts incurred by or on behalf of the deceased by way of dower, to the extent to which such debts are in excess of rupees five thousand, and any debt or encumbrance for which an allowance is made shall be deducted from the value of the property liable thereto.

Explanation.—For the purpose of this section, ‘funeral expenses’ include all expenses which may have to be incurred in connection with the sradha or barsi ceremonies of the deceased for a period of one year from his death.

(5) Section 74(1) of the Act provides that the estate duty payable in respect of property passing on the death of the deceased shall be a first charge on property liable therto. The said sub-section reads:

74. (1) Subject to the provisions of Section 19, the estate duty payable in respect of property, movable or immovable, passing on the death of the deceased, shall be a first charge on the immovable property so passing (including agricultural land) in whomsoever it may vest on his death after the debts and encumbrances allowable under Part VI of this Act; and any private transfer or delivery of such property shall be void against any claim in respect of such estate duty.

(6) The Act is modelled after its counterpart in the United Kingdom and not infrequently do we refer to the English Law and practice on most of the issues arising under the Act. Section 3(1) of the Act corresponds to Section 1 of the U.K Finance Act, 1894 (57 and 58 Vict. Ch. 30). Section 44 of the Act corresponds to Section 7(1) of the U.K Finance Act, 1894. The languages of Section 44 of the Act and of Section 7(1) of the U.K Finance Act, 1894 are identical. Although estate duty has been in force in the United Kingdom since 1894 it was never contended under the said Act that estate duty is liable to be deducted in determining the principal value of the estate of a deceased person. It was conceded by Sri K. Srinivasan, learned counsel for the Accountable Person that according to the practice prevailing in the United Kingdom, estate duty payable on the estate is not one of the items for which deduction is given as a debt or encumbrance under Section 7(1) of the Finance Act, 1894. The contention of the learned counsel was that estate duty is a captial levy similar to wealth-tax and that the difference between wealth-tax and estate duty consists in the fact that while wealth-tax is an annual-tax levied on the net wealth of a person on the valuation date, estate duty is a tax levied on the net wealth of a deceased at the time of his death; further that in the case of wealth-tax the Supreme Court in H.H Setu Parvati Bayi v. Commissioner of Wealth-Tax S.C(2) has held that wealth-tax liability of an assessee on the valuation date is a debt owed within the meaning of Section 2(m) of the Wealth-tax Act, 1957 and therefore, should be deducted from the estimated value of the assets as on the valuation date and the ratio of that decision has to be applied while determining the principal value of the estate of the deceased. He argued that Section 74(1) of the Act creates a statutory charge on the property passing on death that the liability to estate duty gets crystallised on the death and therefore, it is an encumbrance on the estate of the deceased for which allowance has to be made under Section 44 of the Act.

(7) Sri Rajasekhara Murthy, learned counsel for the Department submitted that the ratio in Setu Parvati Bayi's case cannot be applied to cases arising under the Estate Duty Act since the provisions of the two Acts are not in pari materia. He further submitted that the debts and encumbrances for which allowance has to be made under Section 44 of the Act are debts of the deceased existing before the death and similarly encumbrances of the estate are those existing at the time of death.

(8) The Accountable person claims deduction of the estate duty payable on the property passing on the death of the deceased under Section 44 of the Act. That is the only section which provides for deductions. The principal value of property passing on death has to be ascertained in the manner provided by the Act. If estate duty payable on the estate of a deceased does not fall under Section 44 of the Act, the Accountable Person is not entitled to claim deduction for the same. That estate duty payable on the estate of a deceased does not come under Section 44 of the Act is clear from sub-section (1) of Section 74 of the Act. The said sub-section has been set out in the earlier part of this Judgment. It provides that after the debts and encumbrances allowable under Part VI of the Act the estate duty shall be a first charge on the immovable property passing on the death of the deceased. The intention of the parliament that estate duty is neither a debt nor an encumbrance allowable under Part VI of the Act is clear from sub-section (1) of Section 74 of the Act. The debts and encumbrances allowable under Part VI of the Act take priority over the estate duty payable. If estate duty is either a debt or encumbrance allowable under Section 44 which occurs under Part VI of the Act, Section 74(1) could not have stated that the debts and encumbrances allowable under Part VI shall rank above estate duty for which charge is created. Therefore it is clear that estate duty payable on the estate of a deceased person is neither a debt nor an encumbrance liable to be deducted under Section 44 of the Act.

(9) In that view, the contention urged by the learned counsel for the Accountable Person has to be rejected and the question referred has to be answered in the negative against the Accountable Person. We answer the question accordingly.

The Accountable Person will pay the costs of the Department. (Advocate's Fee, Rs. 250).