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Petitioner: CONTROLLER OF ESTATE DUTY, ASSAM, TRIPURA AND MANIPUR VS Respondent: BIRENDRA KUMAR SENHonorable Justice MEHROTRA
[Assam and Nagaland (India)]
Before G. Mehrotra, C. J. and S. K. Dutta, J
CONTROLLER OF ESTATE DUTY, ASSAM, TRIPURA AND MANIPUR
Versus
BIRENDRA KUMAR SEN
Estate Duty Reference No. 1 of 1963, decided on 22nd January 1964.
Estate duty-Gift-Exclusion of donor-Gift of half share of proprietary interest in business of donor-Subsequent partnership between donor and donee-Donor whether entirely excluded-Estate Duty Act, 1953, S. 10.
The deceased, who was the sole proprietor of a pharmacy business, made an absolute gift to his eldest son, who had been actively associated with that business and had been devoting his labour and skill in its development, of half of his right, title and interest in the pharmacy business, including its stock-in-trade, furniture and goodwill, etc. On the same date a partnership deed was executed whereby the pharmacy business was carried on in partnership, the deceased and his son dividing the profit and loss of the partnership equally. The deed gave a right to each partner to take part in the conduct of the partnership business. On the death of the deceased, more than two years after the date of the gift, the question arose whether section 10 of the Estate Duty Act, 1953, applied on the ground that the deceased was not entirely excluded from the possession and enjoyment of the subject-matter of the gift. The Appellate Tribunal found that the subject-matter of the gift was a half share in the partnership business, subject to all the limitations of partnership property, and held that the donor was entirely excluded from the possession and enjoyment of the subject-matter of the gift. On a reference:
Held, on the facts, that the Tribunal was justified in holding that the donor was entirely excluded from the possession and enjoyment of the subject-matter of the gift, viz., a half share of the partnership business, and accordingly the provisions of section 10 of the Estate Duty Act were not attracted.
H. R. Munro v. Commissioner of Stamp Duties (1934) A C 61 (P C) applied.
Cliford John Chick v. Commissioner of Stamp Duties of New South Wales (1959) 37 I T R (E D) 89 distinguished.
[Cases referred to.]
P. Choudhuri for the Controller.
S. K. Ghose and J. B. Bhattacharjee for the Accountable Person.
JUDGMENT
MEHROTRA, C. J.-The following question of law has been referred to this Court by the Income-tax Appellate Tribunal, Calcutta Bench A, Calcutta, under section 64(1) of the Estate Duty Act, 1953 (hereinafter called "the Act") for opinion:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the donor was entirely excluded from the possession and enjoyment of the subject-matter of gift, i.e., the half share of the partnership business known as Upper Assam Pharmacy and accordingly the provisions of section 10 of the Estate Duty Act were not attracted to the property so gifted?"
The case has been stated to this Court on an application made by the Controller of Estate Duty, Assam, Tripura and Manipur.
The relevant facts are that the deceased, Shri Jnanendra Mohan Sen was the sole proprietor of a pharmacy business at Dibrugarh known as Upper Assam Pharmacy. On the 21st January 1957, he made an absolute gift to his eldest son, Shri Birendra Kumar Sen, of "proprietary interest in the said business in the shape of a half partner, i.e., eight annas in the rupee." On the same date he entered into a partnership agreement with the donee in respect of the said business, under a registered deed of partnership dated January 21, 1957, sharing profits and loss in the said business equally. The entire business was valued at Rs. 60,000 and each of the partners was credited with Rs. 30,000 in the partnership books. On the 15th August 1960, Shri Jnanendra Mohan Sen died, i.e., more than two years after the date of the gift. The question arose about the estate duty assessable on the chargeable estate of the deceased, Shri Jnanendra Mohan Sen. The Assistant Controller of Estate Duty held that section 10 of the Estate Duty Act applied to the facts of the case and thus the property which was the subject-matter of the gift was liable to estate duty. He thus included the son's share in the partnership in the dutiable estate of the deceased. On appeal the Appellate Controller held that the property gifted was a half share in the business and the mere fact of carrying on of the business in partnership does not amount to the retention of the possession and enjoyment of the property by the donor. The Appellate Controller thus excluded the aforesaid inclusion from the principal value of the estate. An appeal was preferred by the Department before the Appellate Tribunal. The Tribunal upheld the decision of the Appellate Controller and rejected the contention of the Department. An application was then made by the Department for reference to this Court.
The contention of the counsel for the Department is that on the plain language of section 10 of the Act the capital investment of the son in the partnership which he got as a gift from the father formed part of the dutiable estate. Section 2(16) of the Act defines "property passing on the death" as follows:
"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 the death'."
Section 5 of the Act provides as follows:
"5. (1) 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 States specified in the First Schedule to this Act, which passes on the death of such person, a duty called `Estate Duty' at the rates fixed in accordance with section 35.
(2) The Central Government may, by notification in the official Gazette, add the names of any other States to the First Schedule in respect whereof resolutions have been passed by the Legislatures of those States adopting this Act under clause (1) of Article 252 of the Constitution in respect of estate duty on agricultural lands situate in those States, and on the issue of any such notification the States so added shall be deemed to be States specified in the First Schedule within the meaning of subsection (1)."
Section 9 of the Act reads as follows:
"9. (1) Property taken under a disposition made by the deceased purporting to operate as an immediate gift inter vivos whether by way of transfer, delivery, declaration of trust, settlement upon persons in succession, or otherwise, which shall not have been bona fide made two years or more before the death of the deceased shall be deemed to pass on the death:
Provided that in the case of gifts made for public or charitable purposes the period shall be six months.
(2) The provisions of subsection (1) shall not apply to gifts made in consideration of marriage or which are proved to the satisfaction of the Controller to have been part of the normal expenditure of the deceased, but not exceeding rupees five thousand in the aggregate."
Section 10 runs as follows:
"Property taken under any gift, whenever made, shall be deemed to pass on the donor's death to the extent that bona fide possession and enjoyment of it was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor or of any benefit to him by contract or otherwise :
Provided that the property shall not be deemed to pass by reason only that it was not, as from the date of the gift, exclusively retained as aforesaid, if, by means of the surrender of the reserved benefit or otherwise, it is subsequently enjoyed to the entire exclusion of the donor or of any benefit to him for at least two years before the death."
As the present gift admittedly has been made more than two years before the death of Shri Jnanendra Mohan Sen, section 9 of the Act will not be attracted. The only question referred to us is whether in the circumstances of the case section 10 is attracted. Section 10 in effect lays down that the gifts which have not been perfected will not be regarded as divesting the donor of his right in the property for the purposes of assessing the estate duty. It only lays down that even though the donor has purported to part with the ownership of the property, it will be deemed to pass on the donor's death to the donee for the purposes of the payment of the estate duty. Before, however, this section can be excluded; three things are essential; firstly, that the donee has resumed immediate possession and enjoyment of the gifted property; secondly, that having assumed such possession, the donee has retained possession and enjoyment to the entire exclusion of the donor; and, thirdly, that the donee has retained possession and enjoyment of the property to the exclusion of any benefit conferred on the donor under the gift. In the present case it is not contended by the Department that the donee did not assume bona fide possession or enjoyment of the gifted property immediately after the gift. It is further urged by the Department that no benefit was conferred under the gift on the donor and thus the question of excluding the donor from benefit does not arise in the present case. The only contention of the Department is that from the circumstances of the present case and the materials on the record it is evidently clear that the donee has not retained bona fide possession and enjoyment of the gifted property to the entire exclusion of the donor. The question which the Court has to ask in considering the applicability of section 10 is whether it can be said in the circumstances of the present case that the donee, namely, Shri Birendra Kumar Sen, retained to the entire exclusion of his father, Jnanendra Mohan Sen, the half share which he got under the gift in the business, when on the same date the gift was executed, he entered into a partnership with his father to carry on a similar business and as a capital for the new business, he subscribed his half share in the old business which was gifted to him.
The Tribunal found as a fact that the subject-matter of the gift in this case was the half share in the partnership business and thus the finding is to be accepted by this Court and the question referred is to be answered on the finding of fact arrived at by the Tribunal.
The deed of gift which forms part of the statement of the case sets out that the donee, Birendra Kumar Sen, who is a Bachelor of Science, has been actively associated with the said pharmacy business and has been faithfully devoting his labour and skill in the development of the said business, which has materially contributed towards its present position which is fairly valued at Rs. 60,000 more or less as on the 31st day of December 1956, and the donor by reason of his advanced age cannot take proper and effective interest in the said business for about the last ten years and it was thought expedient in the interest of the said business that the donee who had been working on a monthly salary basis, should get further inducement by conferring on him proprietary interest in the said business in the shape of a half partner, i.e., eight annas in the rupee, and in pursuance of the said intention and for natural love and affection, the donor out of his full will and pleasure arid in full possession of his sense doth hereby give, grant, transfer and confirm unto the said donee for ever, half of his right, title and interest in the said pharmacy business including its stock-in-trade, furniture and goodwill and benefits of all licences as also tenancy right of the premises which according to calculation set forth above is valued at Rs. 30,000. On the same date, that is, on the 21st January 1957, the partnership deed, which forms part of the statement of the case, sets out the terms and conditions of the partnership. Though the deed was executed on the 21st January 1957, still by virtue of clause 2 of the partnership deed, the partnership was to be deemed to have commenced from 1st day of January 1957, and the said deed of gift also was executed and registered simultaneously. In the partnership deed it is set out that the first party, that is, the donor, has by a separate deed of gift absolutely parted with his half right, title and interest in the pharmacy business known as "The Upper Assam Pharmacy" of Dibrugarh, so long carried on as his sole personal property in favour of the second party. Clause I of the deed states that the business of the partnership shall be that of stocking medicines, drugs and toilet requisites of all varieties and other articles allied with the business for sale and to serve prescription of all authorised medical practitioners when tendered and that the business will continue to be known and styled as "The Upper Assam Pharmacy" and the place of business will be Dibrugarh town as before, and it may be extended in such other name or names or place or places as may be decided by the partners. Clause 4 of the partnership deed sets out that the capital of the partnership shall for the time being be the present stock-in-trade, furniture, goodwill and cash balance in hand and cash balance with bankers as on December 31, 1956, as per books of accounts and assessed for the present for a round sum of Rs. 60,000 divided equally between both the partners. Besides this capital, the partners may contribute further sums of money as loan to the firm. The capital and loan so taken from the partners shall bear uniform rate of interest at three per cent per annum. Clause 5 of the partnership deed sets out that the first party shall remain liable for all taxes and liabilities due and payable by and from the business till December 31, 1956, and shall have the right to recover and appropriate all out-standings from the customers due up to that date as may be exhibited by the books. Clause 6 states that the profit and loss of the partnership shall be divided equally and borne by the partners likewise. Clause 7 states that all accounts of the partnership business shall be taken on 3lst December each year. Clause 8 then states that every partner shall have a right to take part in the conduct of the partnership business. The other clauses of the partnership deed are not relevant for the inquiry before us.
The contention of the Department is that the partnership deed gives a right to every partner to take part in the conduct of the partnership business and thus the donor was not entirely excluded from the possession of the share in the business gifted by him to his son. Every partner has the right as a partner to possess and deal with every item of the partnership capital and thus the, donor could posses and enjoy as a partner the share gifted to his son as his share of the capital of the partnership. The argument of the donee is two-fold. Firstly, he contends that as the gift was not of the entire property in specie but a half share in the business, the donor retained for himself half share in the business and the enjoyment or possession of the donor even without partnership could have continued as the owner of the half share and thus after the partnership the possession and enjoyment of the donor does not change its character. It continued if at all, as before, as a co-owner and so far as the share which was gifted by the father was concerned, the donee was in possession and enjoyment to the exclusion of the father. The possession and enjoyment of the father as a co-owner cannot be held to be incompatible with his exclusion from the share which he had gifted to his son, merely because the son has brought in that share as a capital of the partnership. Secondly, it is urged that having regard to the nature of the two transactions it appears that the son, the donee, was managing the business and had taken a major part in building up the business. The father thus wanted to take him in as a partner in the business and not to retain him only on salary basis. With that end in view the partnership deed, though executed on the 21st January 1957, was given effect to from the 1st January 1957, and further the capital of the partnership was stated to be the stock-in-trade, furniture, goodwill and cash balance in hand and cash balance with bankers as on December 31, 1956, and not on the 21st January 1957. The accounts of the partnership were to be also taken on 31st December every year and thus when the father executed the gift deed, he gifted his half share in the business subject to his own right in the half business as a partner and if he continued to exercise that right as a partner, it was by virtue of that fact that his right as a partner in the half share gifted was retained by him and was not gifted at all. In other words the gift was of the half share in the business shorn of the right which belonged to the partnership. It was not a gift of an absolute right to the son in half share of the business but was a gift of half share of business subject to the donor's own right as a partner over it.
Before examining the respective arguments of the counsel advanced in the case, it will be convenient at this stage to refer to the authorities cited by the parties. It should be pointed out that the contention of the Department is that the case is covered by the principles enunciated and laid down by their Lordships of the Privy Council in the case of Clifford John Chick v. Commissioner of Stamp Duties of New South Wales ((1959) 37 I T R 89 (E D)), while the case of the donee is that this case is not applicable and the principles which apply to the facts of the case are those laid down by their Lordships of the Privy Council in the case of H. R. Munro v. Commissioner of Stamp Duties ((1934) A C 61 (P C)). The Tribunal has accepted the contention of the donee that the principles of Munro's case are attracted to the present case and not of the Chick's case. It is, therefore, essential to examine in detail these two authorities.
The facts of Munro's case are that one A. G. F. Munro who died on November 4, 1929, had six children-four sons and two daughters-and was possessed of three holdings of an area of 33,501 acres. One of his sons attained majority in April 1909, and shortly thereafter the father with his six children entered into a verbal agreement by which it was agreed that the business of graziers should thenceforward be carried on by the father and his six children as partners under a partnership at will. The partnership business was carried on in three of the holdings. On May 1, 1913, by four deeds of transfer the father transferred by way of gift to each of his four sons all his right, title and interest in portions of his three holdings. On the same date by two other documents the father transferred certain other areas on trust in favour of his two daughters and their children. Thus the father was left with 8,020 acres out of the total of 33,501. On the 23rd June 1919, a formal partnership deed was entered into between the father and his children, which was substantially the same as the earlier partnership which was being carried on till then. The business was carried on till the death of the father in November 1929. On these facts on the death of the father the death duty was assessed on the estate of the deceased so as to include the lands comprised in the six transfers made by the deceased in the year 1913, by virtue of section 102(2)(d) of the Stamp Duties Act of the New South Wales. The relevant portion of section 102(2)(d) is as follows (1934) A C 61 (P C):
"102. For the purposes of the assessment and payment of death duty but subject as hereinafter provided the estate of a deceased person shall be deemed to include and consist of the following classes of property: . . . . . (2)(d). Any property comprised in any gift made by the deceased at any time, whether before or after the passing of this Act of which bona fide possession and enjoyment has not been assumed by the donee immediately upon the gift and thenceforth retained to the entire exclusion of the deceased or of any benefit to him of whatsoever kind or in any way whatsoever whether enforceable at law or in equity or not and whenever the deceased died."
On these facts their Lordships of the Privy Council held that the partnership formed in 1909 continued without interruption until 1919 and the transfers made in 1913 were intended to be subject to the partnership right. It was observed in this case as follows (19341 A C 61 (P C):
"It is unnecessary to determine the precise nature of the right of the partnership at the time of the transfers. It was either a tenancy during the term of the partnership or a licence coupled with an interest. In either view what was comprised in the gift was, in the case of each of the gifts to the children and the trustees, the property shorn of the right which belonged to the partnership, and upon this footing it is in their Lordships' opinion plain that the donee in each case assumed bona fide possession and enjoyment of the gift immediately upon the gift and thenceforward retained it to the exclusion of the donor. Further, the benefit which the donor had as a member of the partnership in the right to which the gift was subject was not in their Lordships' opinion a benefit referable in any way to the gift. It was referable to the agreement of 1909 and nothing else, and was not therefore such a benefit as is contemplated by section 102, subsection (2)(d)."
On this finding it was held that the subject-matter of the transfers could not be included in the estate of the deceased for the purposes of the death duty.
Munro's case was considered in Chick's case. The facts of Chick's case are that John Chick transferred by way of gift to his son a pastoral property. The gift was made with reservation or qualification or condition. The son was then living in a homestead erected on the property and continued to do so until John Chick's death. In 1935 John Chick, his son and another son entered into an agreement to carry on in partnership the business of graziers and stock dealers. Under the agreement Chick was to be manager of the business and his decision was to be final and conclusive in connection with all matters relating to its conduct. The business was to be conducted on the respective holdings of the partners which were to be used for the purposes of the partnership only. Any and all lands held by any of the partners at the date of the agreement or acquired afterwards were to be and remain the sole property of such partner and were not, on any consideration, to be taken into account as or deemed to be an asset of the partnership, and any partner holding any such land was to have and retain the sole and free right to deal with it as he might think fit. Each of the partners owned a property and these were thenceforth used for the depasturing of the partnership stock. John Chick died in April 1952 and in assessing the death duty payable in respect of his estate, the Commissioner of Stamp Duties included the value of the property given to John Chick's son by way of gift, by virtue of the New South Wales Stamp Duties Act, 1920-1956, section 102(2)(d). The Privy Council held that it was rightly included in the dutiable estate of the deceased. The Privy Council held that although the son assumed bona fide possession and enjoyment of the property immediately on the gift, to the entire exclusion of the deceased or of any benefit to him under section 102(2)(d), but as since 1935 onwards the partners and each of them were in possession and enjoyment of the property so long as the partnership subsisted, the son had not retained the bona fide possession and enjoyment of the property to the entire exclusion of the deceased or any benefit to him within section 102(2)(d). While dealing with Munro's case, it was observed as follows by Viscount Simonds (1959) 37I T R (E D) 89, 97:
"In the first place, it is not disputed that the property was given outright by the deceased to the appellant Clifford John Chick. As was said by Dixon, C. J., in Commissioner of Stamp Duties (New South Wales) v. Owens: `If ever there was a gift of an estate in fee simple, carrying the fullest right known to the law of exclusive possession and enjoyment, surely this was such a gift.' It follows that the decision of this Board in Munro v. Commissioner of Stamp Duties, on which the appellants relied, has no application to the present case. It must often be a matter of fine distinction what is the subject matter of a gift. If, as in Munro's case, the gift is of a property shorn of certain of the rights which appertain to complete ownership, the donor…
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