Controller of Estate Duty Vs. A. Nissar Ahmed. (Accountable Person of Late Mohammed Ismail Sahib) - Court Judgment

Ratnam, J.

1. On the death of one Haji Mohammed Ismail Sahib on April, 4, 1971, an account was filed by the accountable person declaring the principal value of the estate at Rs. 4,63,165. In completing the assessment under the provisions of the Estate Duty Act, 1953 (hereinafter referred to as 'the Act'), the Assistant Controller of Estate Duty brought to duty Rs. 3,92,700 as dutiable estate under section 17 of the Act. It was found that the deceased had transferred by way of sale a property at Tiruvottiyer High Road, Madras, in January, 1961, to Taj Flour Mills (P.) Ltd. (hereinafter referred to as 'Taj Flour Mills' for short) for Rs. 50,000. Taking note of the shares held by the deceased as well as his relatives in Taj Flour Mills, the Assistant Controller of Estate Duty considered that company to be a 'controlled company' within the meaning of section 17 of the Act. While considering the benefits derived by the deceased from the controlled company for the purpose of computing the value of the estate, it was found that the benefits derived by the deceased and the assessed profit and loss of the company were as under:

------------------------------------------------------------------------Benefits derived Assessed profit or loss------------------------------------------------------------------------ Year Salary Rent Rs. Rs. Rs. 31-3-1969 24,000 2,040 Loss 86,698 31-3-1970 24,000 2,040 Income 36,157 31-3-1971 24,000 2,040 Loss 60,835 ------------------------------------------------------------------------

2. Since the remuneration was found to be reasonable, that was not taken into consideration, though the rent of Rs. 2,040 was regarded as a benefit under rule 5 of the Estate Duty (Controlled Companies) Rules, 1953. The average adjusted income for the three years ending with the death of Haji Mohammed Ismail Sahib was a negative figure, i.e., Rs. 1,11,376. The Assistant Controller of Estate Duty was of the view that 100% of the net assets of the company shall be deemed to have passed on the death of the deceased. In that view, he subjected to duty Rs. 3,92,700. On appeal by the accountable person to the Appellate Controller of Estate Duty, it was held that the very term 'slice' used for ascertaining the amounts to be included, would refer to a fraction of the total value of the assets of the company and in a case where the aggregate amount of the net income of the company for three years was a loss, there cannot be any slice and in the absence of profits, the question of working out any proportion cannot also arise and, therefore, the addition of Rs. 3,92,700 as forming part of the dutiable estate was deleted. On further appeal by the Revenue before the Tribunal, it was contended on behalf of the Revenue, relying on proviso (a) to section 17(2), that even in a case where there were no profits for the compay, the entire value of the assets of the company should be deemed to pass. But the Tribunal repelled this contention, holding that in a case where the net income of the company is 'nil', the slice rule cannot be worked out and that the operation of proviso (a) to section 17(2) of the Act would be limited to cases where there is an income in one year and loss in another year and the net result was an income and that cannot be applied to a case where the net result of the income computation of the company is a loss. It was also pointed out that section 17 is a deeming provision and should receive a strict interpretation and in that view, the Tribunal dismissed the appeal.

3. Under section 64(1) of the Act, at the instance of the Revenue, the following question has been referred for the opinion of this court:

'Whether, on the facts and in the circumstances of the case and having regard to proviso (a) to section 17(2) of the Estate Duty Act, 1953, the Appellate Tribunal was right in excluding the value of the assets of the controlled company, viz., Rs. 3,92,700, in the principal value of the estate of the deceased?'

4. Learned counsel for the Revenue contended relying upon section 17 and proviso (a) to section 17(2) of the Act that in a case like this, where the aggregate amount of the net income of the company in the three years ending with the death of the deceased, is a loss, or, a negative figure, even then, the property should be deemed to pass, though not with reference to the slice rule under section 17(2) of the Act, but with reference to the whole of it. Learned counsel also emphasised that section 17(2) of the Act should be construed in such a manner as to make the charge to estate duty effective. On the other hand, learned counsel for the accountable person submitted that section 17 of the Act is a special provision dealing with the ascertainment of the share in the assets of the controlled company deemed to pass for the purpose of estate duty to be included in the property passing on the death of a person and it should be so applied that its operation is confined only upon the fulfillment of the conditions required under section 17(1) and (2) of the Act and if, in any case, the slice of the assets of the company deemed to be included in the property passing on the death of the deceased cannot be worked out by applying that rule, it cannot be included at all. Referring to proviso (a) to section 17(2) of the Act, counsel submitted that it contemplated and provided for only a case for the computation of the net aggregate income of a company which should be positive figure, though in one or more of the accounting years, the company might have sustained a loss. Our attention was also drawn to some passages in Green's Death Duties, fifth edition, at page 198, and Dymond's Death Duties, fourteenth edition, at page 473.

5. There is no dispute that the deceased had transferred property to the company, Taj Flour Mills, and had held shares therein and further that even the accountable person had conceded in his letter dated October 19, 1972, that the company is a controlled company. That certain benefits had been received by the deceased is also not in controversy. Before section 17(1) of the Act could be applied, the following requirements should be fulfilled. (1) there must be a transfer of assets by the deceased to a controlled company; (2) the property so transferred should not be an interest limited to case on death; (3) the property should not have been transferred in a fiduciary capacity; and (4) benefits must accrue from the company to the deceased in the three years ending with his death. All the aforesaid requirements are fulfilled in this case.

6. The principal question in this case is regarding the applicability of the slice rule, where the aggregate amount of the net income of the company for the three years ending with the death of the deceased, is a negative figure or net loss. While section 17(1) of the Act declares that the assets of the company shall be deemed, for purposes of estate duty, to be included in the property passing on the death of a person to the extent determined in accordance with section 17(2) of the Act such extent of assets so deemed to be included in the property passing on death is quantified as provided under section 17(2) of the Act. Though section 17(1) of the Act is declaratory of the deemed passing of the assets of the company for purposes of estate duty to be included in the property passing on the death of a person, it also indicates the extent to which such assest of the company shall be deemed to be so included for purposes of estate duty, as that worked out as per section 17(2) of the act. Section 17(2) of the Act enacts that a slice or proportion of the assets of the company worked out as provided therein shall be deemed to be included for purposes of estate duty to be included in the property deemed to pass on death. The proportion to be worked out is determined by the formula-

Benefits accruing to the deceased-------------------------------------------- x Assets of the companyNet income of the company for three years

7. Provision (a) to section 17(2) is designed only to compute the aggregate net income of the company in the three years ending with the death of the deceased in a case where the company had sustained loss in one or more of the said accounting years. All that is contemplated by the proviso is that, in the process of ascertaining the aggregate net income of the company, if, in any year, the company had sustained a loss, that loss shall be deducted in ascertaining the aggregate net income. The proviso only indicated how the aggregate net income of the company should be computed and ascertained if the company has sustained loss in one or more of the three accounting years. Even so, the application of the slice rule under section 17(2) of the Act is possible, only if the proportion could be arrived at as a fraction, so that that fractional part of the assets of the company can be deemed, for purposes of estate duty, to be included in the property passing on the death of the deceased. If, for some reason, the proportion cannot be worked out or is unworkable, it follows that the slice rule cannot be applied. In the instant case, if the slice is worked out, i.e.,

Rs. 6,120------------------------------------ x Rs. 3,92,700 =Rs. 1,11,376= - 0549 x 3,92,700= - 21,559-23 (or) R.-21,559.

8. the slice is a negative figure and that cannot be deemed to pass and there cannot be a charge of duty. We are also fortified in this view of ours by the opinions of eminent authors on death duties. In Green's Death Duties, fifth edition, at page 198, it has been stated as follows:

'The taxable proportion of the company's assets is ascertained by comparing the aggregate amount of the deceased's benefits in the last five accounting years with the aggregate net income of the company for those years, a loss in any of those years being deducted in ascertaining the latter figure. Where the company came into existence in the last but three, or last but two, or last but one, or the last accounting year, the computation is made for the last four or three or two such years or the last such year. (The provision as to the four years, etc., may seem superfluous, because the inclusion of a period before the company was in existence could not affect the figures, but it is linked with the definitions of 'relevant accounting years 'and' average rate' , which will appear later.)

In the case of deaths on or after April 5, 1960, benefits accruing to the deceased by reason only of the 'surrender of title' provisions are reduced for the purpose of section 46 computation if the surrender was made more than two years before the death.

If the company sustained an aggregate loss, there is no charge of duty. '

9. In Dymond's Death Duties, fourteenth edition, at page 473, the following passage occurs:

'The'income' of a company for any accounting year (see pp. 475- 476) is to be computed from each source in accordance with the provisions of the Income-tax Acts relating to the computation of income from such a source, subject to the modification that the computation is to be made by reference to the actual income for that year, and not by reference to the income for any other period (Finance Act, 1940, section 49). Where the Income-Tax Acts provide machinery for the computation of income from a particular source, but in the case of the particular company the income from that source would not be liable to income-tax, it is thought that such income should nevertheless be taken into account in computing the 'income' for the purpose of section 49. This applies, for example, to the foreign income of foreign companies. Since the deceased's 'benefits' may include such income, it logically ought to be included in the 'net income' also, so as to give equal treatment to both the numerator and denominator of the fraction which determines the proportion of the assets chargeable with duty: to exclude it would result in an artificial reduction in the denominator of the fraction, and an increase in the proportion of the assets liable to duty, except where such income was the only income of the company, when the denominator would be reduced to nil, so that section 46 could not be applied at all. Income received by a company under a settlement, which is treated as treated as the income of the settlor 'and not of any other person' under the Income Tax Act, 1952, sections 404-406 (formerly Finance Act, 1938, section 38), appears to be in a similar possession.'

10. The provisions of section 17(1) and (2) of the Act correspond to section 46(1) and (2) of the Finance Act, 1940, as amended by Part I. Para 4 of the Eleventh Schedule to the Finance Act, 1946, of the United Kingdom. We are, therefore, of the view that, on the facts and in the circumstances of the case, there is no scope whatever for applying and giving effect to the slice rule. We are unable to accept the contention of learned counsel for the Revenue that the entirety of the assets of the controlled company should be deemed to pass. When, even according to section 17(2) of the Act, only a fraction of the assets woked out in accordance with section 17(2) of the Act can be deemed to pass, it is difficult to accept how, when even a fractional share cannot be worked out and deemed to pass, the entirety of the assets should be deemed to pass. To uphold the contention of the Revenue would be to indulge in a legislative exercise resulting in the rewriting and re-enactment of the relevant provisions of the Act to the effect that even when a fractional share of the assets under section 17(2) of the Act cannot be ascertained and treated as deemed to have passed, the whole of the assets of the company should be regarded as deemed to have passed.A deeming provision like that found in section 17(1) and (2) of the Act cannot lend itself to the interpretation suggested by learned counsel for the Revenue. We, therefore, hold that the Tribunal was quite right in the view it took that the slice rule cannot be worked out, and, accordingly, nothing passed and that proviso (a) to section 17(2) of the Act is limited in its operation to the ascertainment of the aggregate net income of the company in the three years ending with the death of the deceased in cases where there is income in one or more years and loss in another or others, and the result is a net income and not a loss, as in this case. We, therefore, answer the question referred to us in the affirmative and against the Revenue. The assessee will be entitled to the costs of this reference. Counsel's fee Rs. 500.