Controller of Estate Duty Vs. Kasturi Lal JaIn and Mohini Devi Muju - Court Judgment

Ali, C.J.

1. These two references, namely, Reference No. 2 of 1972 and Reference No. 5 of 1972, raise common questions of fact and law and, therefore, we propose to decide them by one common order.

2. Reference No. 2 of 1972 relates to the estate of Babu Lal Jain who was a partner in the firm of Messrs. Kasturi Lal Jain & Sons, Srinagar, dealing in brassware. The deceased, Babu Lal Jain, unfortunately died in an air crash and his heirs were paid compensation of Rs. 42,000 by the Indian Airlines Corporation. This amount, however, was not included in the estate of the deceased and a note of this fact was made in the return. Similarly, in Reference No. 5 of 1972, the deceased Shri Nand Lal Muju, resident of Karapora Khushki, Rainawari, Srinagar, died in a plane crash. The heirs of the deceased, namely, his wife, Mst. Mohini Devi, received a sum of Rs. 42,000 as compensation from the Airlines Corporation which was not included in the estate of the deceased under the provisions of the Estate Duty Act (hereinafter to be referred to as ' the Act'). In both the cases the Assistant Controller of Estate Duty held that the compensation paid to the heirs of the deceased should have been included in the estate of the deceased and was a property which passed to the heirs of the deceased and, therefore, they be assessed to duty under the provisions of the Act. The assessees then went up in appeal to the Zonal Appellate Controller whoallowed the appeal and held that the amount of Rs. 42,000 ought not to have been included in the estate of the deceased and he accordingly deleted the amount in both the cases. The department then went up in appeal to the Income-tax Appellate Tribunal, Chandigarh Bench, who after hearing counsel for the parties affirmed the decision of the Zonal Appellate Controller and held that the amount of compensation of Rs. 42,000 in each case was not the property of the deceased which passed to his heirs and was, therefore, not liable to estate duty. In taking this view, the Tribunal observed that there was no authority directly in point but relied on several authorities referred to in various text books. The Tribunal was also of the view that since the compensation was paid not to the estate of the deceased but to his dependants, it could not be considered in any sense as the property of the deceased. The Tribunal accordingly dismissed the appeals and held that the sum of Rs. 42,000 in each of the two references should not be included in the value of the estate of the deceased in the two cases. The revenue being aggrieved by the decision of the Tribunal made an application to it for making reference to this court for deciding the questions of law involved and, accordingly, the Tribunal has made the two references in which the same point is involved. The point referred to us by the Tribunal is as follows:

3. In Reference No. 2 of 1972.--Controller of Estate Duty v. Kasturi Lal Jain:

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the compensation of Rs. 42,000 was not liable to estate duty '

4. In Reference No. 5 of 1972.--Controller of Estate Duly v. Mohini Devi Muju :

' Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,000 received by the dependants was liable to estate duty ?'

5. In order to answer the point of law referred to us in the two references, it may be necessary first to scrutinize the material provisions of the Act. To begin with it is necessary to analyze the ingredients of Section 5 of the Act which is the charging section and which runs thus :

' In the case of every person dying after the commencement of this Act, there shall, save as hereinafter expressly provided, be levied and paid upon the principal value ascertained as hereinafter provided of all property, settled or not settled, including agricultural land situate in the territories which, immediately before the 1st November, 1956, were comprised in the States specified in the First Schedule to this Act and in the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry which passes on the death of such person, a duty called ' estate duty' at the rates fixed in accordance with Section 35'.

6. The decision in both the references turns upon the true interpretation and ambit of the words ' which passes on the death of such person '. In other words, we have to determine what is the exact meaning of the expression ' passes on the death of such person '. In order to amplify the meaning of these words it may be necessary to refer to the definition of property itself as given in Section 2(15) and (16) of the Act which runs thus :

'(15) 'property' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method ;..,..

(16) ' property passing on the death' includes property passing either immediately on the death or after any interval, either certainly or contingently, and either originally or by way of substitutive limitation, and ' on the death ' includes ' at a period ascertainable only by reference to thedeath'.'

7. By way of illustration Section 6 clearly provides that a propertywhich the deceased was at the time of his death competent to dispose of shall be deemed to pass on his death. Although this section is not exhaustive, yet it is clearly illustrative and will give us an idea of the nature of the property which passes on the death of a person to his heirs and which is exigible to estate duty. It seems to us that the Act undoubtedly covers the cases of properties which devolve on the heirs of the deceased by any mode, namely, by inheritance, gift, will, trust, settlement or the like.

8. The question, however, still remains as to what is the connotation of the words ' passes on the death of such person '. The word ' pass ' has been defined in various ways in the Webster's International Dictionary and connotes ' to move on '; ' to go from one quality, state, condition or form to another ' ; ' to undergo transfer or conveyance so as to become vested in another; to go from one person to another.' The dictionary meaning of the word ' pass ', therefore, clearly implies a movement from one hand to another. In other words the word ' pass ' conveys a state of affairs where a thing is in the power or possession of one person and then it moves into the power and possession of another person either by a voluntary or involuntary act. Thus, before a property can pass to the heirs, it must be established that the deceased had control, possession or interest in the said property. The words (supra) in Section 5 have been borrowed from the U.K. Finance Act of 1894, and, therefore, the English decisions as to the connotation or definition of these words would be extremely useful. In Halsbury's Laws of England (3rd edition, volume 15), at page 10, the following observations have been made :

' ' Passing' is not defined but may be taken to mean changing hands. The expression ' passing' on the death denotes some actual change in the title or possession of the property which takes place at the death. The mere turning of a contingent interest into a vested interest, or a defeasible interest into an indefeasible interest, is not per se a passing of property. The assets of a deceased person pass on his death to his legal personal representative.'

9. The Act in India is based on the pattern of the U. K. Finance Act of 1894 and, therefore, a large number of English decisions given on the various provisions of the U. K. Finance Act would have to be adopted for the purpose of construing the provisions of the Act which follows the same pattern.

10. In Attorney-General v. Milne, [1914] A.C. 765. 779 ; 2 E.D.C. 8, 21 (H.L.) Lord Parker of Waddington attempted to define the expression ' property passing on the death ' and observed as follows:

' The expression ' property passing on the death ' includes, according to the definition contained in the 22nd section of the Act, property passing either immediately on the death or after any interval either contingently or certainly, and either originally or by way of substitutive limitation, and the expression ' on the death includes ' at a period ascertainable only by reference to death '. The expression ' passing on the death ' is not further defined, but is evidently used to denote some actual change in the title or possession of the property as a whole which takes place at the death. For the purpose of this section it is absolutely immaterial to whom or by virtue of what disposition the property passes.'

11. Similarly, in Nevill v. Commissioners of Inland Revenue, [1924] A.C. 385, 399; 2 E.D.C. 219,232 (H.L.) while construing sections of the U.K. Finance Act of 1894 and the proviso thereto, Lord Viscount Cave, with whom the majority of Lords agreed, observed as follows:

' But by the proviso any ' property so passing in which the deceased never had an interest' is exempted from aggregation; and as the deceased, although he undoubtedly had an interest in the inalienable property itself, never had or could have had an interest in his successor's estate, the inference appears to be irresistible that the property escapes from aggregation under the provisions of Section 4, and is to be treated as an estate by itself.'

13. These decisions were followed in Scott v. Commissioners of Inland Revenue, [1937] A.C. 174; 2 E.D.C. 579 (H.L.).Thus, it would appear that before a property can pass to the heirs ofa deceased, there must be changing -of hands which implies that thedeceased must have some control or possession over the property which passes to his heirs on his death.

14. In Nevill v. Commissioners of Inland Revenue, so far as one of the items of the property was concerned, the deceased had no power of disposition at all over that property and it was held by their Lordships that the property was not exigible to estate duty.

15. The Indian authorities also appear to have adopted the same view. In Mahendra Rambhai Paid v. Controller of Estate Duty, [1965] 55 I.T.R. (E.D.) 1,15 (Guj.) a Division Bench of the Gujarat High Court pointed out that the English decisions on the interpretation of the provisions of the U.K. Finance Act, 1894, were very useful for interpreting similar provisions of the Indian Act. In this connection their Lordships observed as follows:

' Now the expression ' passes on the death' might have created some difficulty of interpretation, but two generations of judicial decisions have imparted to that expression as occurring in Section 1 of the U.K. Finance Act, 1894, which imposed for the first time in England the duty called ' estate duty ', exact shades of meaning that could not have been originally discerned and our Act being modelled on the English statute, it would be a fair presumption to make that when the legislature enacted our Act, the legislature used the expression ' passes on the death' in the sense in which it had been judicially interpreted in England. We might, therefore, usefully refer to English decisions on the interpretation of section 1 of the U. K. Finance Act, 1894, in order to comprehend the true import of passing of property referred to in Section 5 of our Act.........A few years later. Viscount Haldane L.C. said in Nevillv. Inland Revenue Commissioners '' passes ' may be taken as meaning ' changes hands '. This observation emphasizes by a very apt and precise use of language that what is material to consider in passing of property is whether there is any change in the beneficial possession or enjoyment of property'.'

16. It was aptly pointed out by their Lordships that the crucial point for determination is not the mere change of source or title but the change of beneficial possession or enjoyment. This was also stressed by Lord Evershed M.R. in In re Parkes' Settlement: Midland Bank Executor and Trustee Co. Ltd. v. Inland Revenue Commissioners, [1956] 1 All E.R. 833, 838 ; [1956] 1 W.L.R. 397 ; 3 E.D.C. 721, 729 (C.A.).:

' I agree with counsel for the trustees that prima facie there must, in order to give rise to a valid claim for duty, whether under Section 1 or Section 2 of the Finance Act, 1894, be a change not merely of source or title, but of possession or enjoyment.'

17. Similarly, a Division Bench of the Madhya Pradesh High Court stressed that before the property passes to the heirs there must be a changing of hands. Their Lordships observed as follows:

' Coming to the question whether muafi is property which passed on the death of Narayan Rao within the meaning of Section 5 of the. Act, we are of opinion that, as the muafi lapsed on the death of Narayan Rao, it did not pass on his death. The word ' passes ' as it occurs in Section 5(1) of the Act means ' changes hands ' ' Nevill v. Inland Revenue Commissioners. When the muafi held by Narayan Rao lapsed and thus came to an end, how can it be said that it passed or changed hands On the finding that the muafi was not heritable and was for Narayan Rao's life lapsing on his death, it must be held that it was not property passing on his death.' (See Controller of Estate Duty v. Usha Devi Patankar, [1970] 76 I.T.R. 347, 352 (M.P.)).

18. A similar view appears to have been taken by a Full Bench of the Madras High Court in Alladi Kuppuswami v. Controller of Estate Duty, [1970] 76 I.T.R. 300, 505 (Mad.) [F.B.] which was dealing with the case of a widow's interest. Their Lordships observed:

' It will be inappropriate to describe the merger as passing of property on the death of the widow. ' Passes' in Section 5 implies movement of the estate from one dying to another, and means changing hands. When by the death of the widow her interest under Section 3(2) lapsed or it merged in the coparcenary automatically, not involving any mode, of devolution known to the law, and her interest up to her death, unless worked out by a partition, was but a fluctuating one as in the case of her husband when alive, and is in no way different in its behaviour or character from the interest of a coparcener, it cannot possibly be said that on her death her interest passed within the meaning of Section 5.'

19. In Shamsun Nehar Mansur v. Controller of Estate Duty, [1969] 71 I.T.R. 301, 303 (Cal.) their Lordships held that unless the deceased had the power to dispose of the property it would not pass to his heirs on his death. In this connection their Lordships observed as follows:

' Looking at this deed of conveyance, the only material document for this purpose, one should have thought that the simple answer to the question asked would be in the negative because such a property could not be regarded as property passing or deemed to pass on the death of Abdul Mansur on a plain reference to Section 6 of the Estate Duty Act which provides, ' property which the deceased was at the time of his death competent to dispose of shall be deemed to pass on his death'. Obviously the property under this deed of sale by Henry Earnest Cecil Grant to Mrs. Shamsun Nehar could not pass on the death of Abdul Mansur because he could not dispose of this property.........'

20. To the same effect are the decisions of the Patna High Court in Makanth Umesh Narain Puri v. Controller of Estate Duty, [1970] 75 I.T.R. 310 (Pat.) and of the Andhra Pradesh High Court in Yelukuru Satyanarayana v. Assistant Controller of Estate Duty, [1961] 43 I.T.R. (E.D.) 51 (A.P.).

21. The nearest case that we have been able to find appears to be Murat Singh v. Controller of Estate Duty, [1960] 401.T.R. (E.D.) 1, 3, 4, 5, 6 (Punj.). In this case the facts or rather the principles deducible are more or less the same as in the present case. What happened was that a displaced person from West Pakistan named Harchand Singh had applied for compensation under the Displaced Persons (Claims) Act, 1950. The claim of Harchand Singh was being investigated into by the concerned authority and had been registered and verified, but before the coming into force of the Displaced Persons (Compensation and Rehabilitation) Act under which Harchand Singh would have been entitled to receipt of compensation, he died. It was held by their Lordships that even though the claim was verified under the previous Act, since it was not received by the deceased, it was not exigible to estate duty. In this connection their Lordships made the following observations :

' There can thus be no manner of doubt that any legal rights that came into being in the matter of receiving compensation by displaced persons who had left their properties in Pakistan were created by the Act of 1954 and not by the earlier Act of 1950 which only dealt with the registration and verification of claims.........

It could, therefore, be said that the verification of the claim itself gave rise to an interest or right to a property which in due course would have crystallized into compensation. ....

It is not possible to see from the above and the preamble contained in the Act of 1950 and the substantive provisions thereof that the verification of the claim itself would clothe the claimant with any interest or right to any property in the form of compensation. By no stretch of reasoning could the verified claim be considered to be ' property ' within the meaning of Section 2(15) of the Estate Duty Act. In Amar Singh v. Custodian of Evacuee Property, Punjab, [1957] S.C.R.;801; A.I.R. 1957 S.C- 599 their Lordships had occasion to consider whether the incidents of a quasi-permanent allotment showed that the sum total thereof constituted even qualified ownership of the land allotted. ....

The learned counsel for the respondent has based his arguments largely on the definition of the expression ' property passing on the death', vide Section 2(16). It is submitted that on the death of the deceased even the property which was in Pakistan passed on his death and if the claimswhich had been registered and verified with regard to the same eventuallyafter an interval of time gave rise to a claim for compensation under theDisplaced Persons (Compensation & Rehabilitation) Act, 1954, and paymentof such compensation, that would be covered by Section 2(16). Such anargument cannot be entertained nor can it have any force because at thetime of the death of the deceased what could pass was only the verifiedclaim which has been held not to fall within the definition of the word' property'. It is also common ground that no duty could be levied on theagricultural land and immovable properties of the deceased in Pakistan byvirtue of the provisions contained in sections 3 and 21 of the Estate DutyAct as also the rules framed thereunder.'

22. In the present cases also we find that so far as the compensation of Rs. 42,000 is concerned, the deceased in both the references had neither any interest in the said property nor were they in possession of the properties either actually or constructively. Furthermore, we find that the compensation of Rs. 42,000 in each case which is the property in dispute did not and could not have come into existence during the lifetime of the deceased, but accrued for the first time only after their death and that too since the death took place in a particular mode. In these circumstances there is no movement of property from one hand to another or a change from one person to another. The deceased had not even a contingent interest because the compensation had to be paid not to the deceased but to their heirs on their death. Thus, it is clear that if at all the property passed, it passed directly from the Airlines Corporation to the heirs of the deceased and the erstwhile estate of the deceased was not at all involved. To put the matter more succinctly the position would be that the deceased was not in possession of the property, had no interest in it and, therefore, the heirs could not get the property merely by virtue of the death of the deceased, for they got the property only because the death took place in a particular manner, namely, in a plane crash. Thus, in our opinion, it cannot be said by any stretch of imagination that the compensation received by the dependants of the deceased would be property in the hands of the deceased or even of the deceased which would pass to their heirs. The learned Tribunal rightly pointed out that under the provisions of the Carriage by Air Act of 1934 the compensation enured for the benefit of the members of the passenger's family. It is, therefore, clear that the compensation was meant to be a sort of a windfall to the dependants of the deceased and had nothing to do with the estate of the deceased. In other words, the main test which has to be applied in such cases is whether or not the property would have passed to the heirs of the deceased if they had not died in the air crash but by any other mode.

23. Mr. Bhan, standing counsel for the department, drew our attention to Section 2(16) of the Act (supra) and particularly to the words ' either certainly or contingently '. These words, in our opinion, do not appear to be of any assistance to the revenue. So far as the word 'certainly' is concerned, this would have no application because the property did not belong to the deceased either actually or constructively. Reliance was, however, placed on the word 'contingent' but that too in our opinion applies only to any contingent interest that the deceased possessed during their lifetime. This would obviously not include any compensation which may be awarded to their heirs in the event of their death taking place in a particular manner which they never foresaw and for which they made no contribution. For instance, in the case of insurance the deceased earns the amount by making contribution to it and, therefore, it does form part of his estate and, therefore, passes to his heirs, but this cannot be said of any compensation awarded by the Airlines Corporation to the heirs of passengers who die in an air crash. Moreover, as pointed out in Adamson v. Attorney-General, [1933] A.C. 257; 2 E.D.C. 419 (H.L.) and Attorney-General v. Lloyds Bank Ltd., [1935] A.C. 382 ; 2 E.D.C. 515 (H.L.) mere turning of a contingent interest into a vested interest or a defeasible interest into an indefeasible interest is not per se a passing of the property.

24. It seems to us, therefore, on a review of the authorities (supra), that before a property can pass to the heirs of a deceased, it must fulfil the following conditions:

(1) That the property was in the power, possession and control (actual, constructive or beneficial) of the deceased.

(2) That the deceased must have an interest, whether in praesenti or contingent, in the said property.

(3) That the property must be in existence during the lifetime of the deceased or at the time of his death.

(4) That the deceased must have a power of disposition over the property.

25. Analysing these conditions we are satisfied that none of them applies to the facts and circumstances of the present cases.

26. For these reasons we find ourselves in complete agreement with the view taken by the Tribunal which correctly decided that the amount of Rs. 42,000 in both the references was not chargeable to estate duty. We, therefore, answer the point referred to us in Reference No. 2 of 1972 (Controller of Estate Duty v. Kasturi Lal Jain) in the affirmative, and in Reference No. 5 of 1972 (Controller of Estate Duty v. Mohini Devi Muju) in the negative, and hold that the Tribunal was fully justified in coming to the conclusion that the compensation of Rs. 42,000 in both the references was not liable to estate duty.

27. The references are disposed of accordingly.

S. Wasiuddin, J.

28. I agree.