Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1966 Supreme(SC) 296

SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.
Mahendra Rambhai Patel, Appellant
Versus
Controller of Estate Duty, Gujarat State, Ahmedabad, Respondent.
Civil Appeal No. 1067 of 1965, dated 28-10-1966.
Advocates appeared
Mr. A. K. Sen, Senior Advocate (Mr. G. L. Sanghi, Advocate and Mr. B. R. Agarwala, Advocate of (M/s. Gagrut and Co., with him), for Appellant Mr. S. T. Desai, Senior Advocate, (M/s. A. N. Kirpal and R. N. Sachthey, Advocates, with him) for Respondent.

Advocates:
A.K.SEN GUPTA, A.N.KIRPAL, B.R.AGRAWAL, G.L.SANGHI, GAGRAT JANEDRA LAL, R.N.SACH, S.T.DESAI

An interest in property that is liable to be divested on the death of the beneficiary before attaining a certain age, coupled with a direction to accumulate the income in the meantime, may be exempt from estate duty if the beneficiary dies before attaining the specified age. However, where the income of the property absolutely belongs to the beneficiary and any surplus income is liable to be accumulated for his benefit, it creates an interest in possession, not an interest in expectancy.

Headnote:
ESTATE DUTY - PROPERTY PASSING ON DEATH - INTEREST IN SHARES - VESTING OF INTEREST - ACCUMULATED INCOME - WHETHER LIABLE TO ESTATE DUTY - ESTATE DUTY ACT, 1953, SS. 2(15), 2(16), 5, 23.
Fact of the Case:

Under a deed of trust, shares were settled for the advancement and maintenance of two sons, Manubhai and Mahendra. Manubhai died unmarried before attaining the age of 25 years. The Deputy Controller of Estate Duty included the value of Manubhai's interest in the settlement in the estate of Mahendra, holding that it was vested in possession in Manubhai and chargeable to estate duty. The High Court upheld the order. The assessee appealed.
Finding of the Court:

The Supreme Court held that Manubhai had an interest in the shares and the accumulated income from the date of the deed of trust, and that interest vested in ownership in him immediately on the execution of the deed. On Manubhai's death, the property devolved upon his brother Mahendra under the deed of trust and the law of inheritance. Therefore, there was a change in the person beneficially interested in the shares on Manubhai's death, and estate duty was payable.
Issues: Whether Manubhai had an interest in the shares and the accumulated income from the date of the deed of trust, or whether his interest was contingent upon his attaining the age of 25 years.
Ratio Decidendi: The court held that Manubhai's interest in the shares and the accumulated income vested in ownership in him immediately on the execution of the deed of trust. The court distinguished the case from Power's case, (1906) 2 Ir. Rep. 272, where the settlor's interest was not vested in possession during his minority. The court held that where the income of the property absolutely belongs to the beneficiary and any surplus income is liable to be accumulated for his benefit, it creates an interest in possession, not an interest in expectancy.
Final Decision: The appeal was dismissed with costs.

Judgment

SHAH, J. : 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 of 1953:

"Whether on 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 law ?"

The High 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 deceased s 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. Determination of the question in dispute depends upon the provisions of the deed of trust, which may in the first instance be set out.

"Now these presents witness that in consideration of the above premises and in consideration of natural love and affection the Settlor bears towards the said Beneficiaries. * * * the settlor himself shall transfer to the name of the trustees the said 160 fully paid up "shares to hold in trust for the benefit and advantage of the said beneficiaries in equal shares.

2. The trustees shall stand possessed of the said shares until each of the said beneficiaries shall complete the age of 25 years and until the said time, out of the profits arising therefrom to apply either the whole or part thereof as the said trustees may deem fit and proper in the maintenance and advancement of the said beneficiaries. The trustees are hereby authorized to invest such unused or accumulated funds from the profits in any security or concern as they may deem fit and proper.

3. The trustees are further authorised to sell the said shares and invest the same in any other security or concern as they may deem fit and proper.

4. If and when each of the said beneficiaries complete the age of 25 years the trustees shall transfer out of the said 160 shares his portion of the shares and the accumulation thereof or any other investment in lieu thereof as provided in clauses 2 and 3 hereof absolutely.

5. The said beneficiaries shall not have any right to mortgage or create any incumbrance of any description or sell the same until each of them complete the age of twenty five years.

6. In event the said beneficiaries or any of them shall die before compl

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