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PETITIONER: MAHENDRA    RAMBHAI PATEL

       Vs.

RESPONDENT: CONTROLLER OF ESTATE DUTY, GUJARAT

DATE OF JUDGMENT: 28/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  578            1967 SCR  (1) 991  CITATOR INFO :  F          1973 SC2150  (18)

ACT: Estate  Duty  Act, 1953 (34 of 1953), ss. 2(15), 5  and  23- Property settled by deed of trust-Beneficiaries entitled  to maintenance  but not to hold the property  before  attaining age of 25 years--One of the beneficiaries dying before  that age-His  interest  whether  ’property’  under  2(15)-Whether passes under s 5.-Applicability of s. 23.

HEADNOTE: Under  a deed of trust 160 shares of a company were  settled equally   upon  the  appellant  and  his  younger   brother. According  to the deed the trustees were to hold the  shares of each beneficiary till he attained the age of  twenty-five years.   Before  that the income from the shares was  to  be applied   for   the   benefit   and   advancement   of   the beneficiaries.  If either of them died before attaining  the age  of  twenty-five  years his shares were  to  devolve  on persons  named  in  cls.  6  and  7  of  the  deed  but  the accumulated income was to devolve on his heirs.  Clause 5 of the  deed laid down that the beneficiaries could not  before attaining the age of twenty-five years mortgage or  encumber the  shares  or  sell the  same.   The  appellant’s  younger brother  died  in  1954  while he  was  still  a  minor  and unmarried.   The  Assistant Controller of Estate  Duty  held that the, deceased’s interest passed to the appellant  under s.   5  of  the  Estate  Duty  Act,  1952  and  levied   tax accordingly.   The  Central Board of Revenue  and  the  High Court  upheld the finding.  The: appellant contended  before this  Court that before attaining age of  twenty-five  years neither  beneficiary had any interest in the property  being entitled  under the deed only to maintenance.  Reliance  was also placed on s. 23 of the Act. HELD  :  Though the shares were not to be delivered  to  the deceased until he attained the age of twenty-five years, the shares  belonged to him since the execution of the  deed  of trust,  and he was also beneficially entitled to the  income of  the shares.  His interest in the shares and  the  income was  not  an estate in remainder or reversion, nor  was  his interest  a future interest.  He was presently  entitled  to

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the  whole  income  of his one-half share in  the  said  160 shares, and -after provision of maintenance, if any  surplus remained, he was the beneficial owner of the accumulation of such surplus income But for cl. 5 he could disposed it of as he  willed,  and if he died it was heritable by  his  heirs. [996 G-H] In  the circumstances, the interest of the deceased  in  the shares  and in the accumulated income was ’property’  within the  meaning  of  s. 2(15) of the Act.   On  his  death  the property  passed to the appellant who was liable  to  estate duty. [995 D-E] Since the interest of the deceased did not fail or determine before it became     an interest in possession s. 23 of  the Act had no application to the case. [995 H]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1067  of 1965. Appeal from the judgment and order dated October 28, 1963 of the Gujarat High Court in Estate Duty Reference No. 1  of 1963. 992 A.   K.  Sen,  G.  L. Sanghi and B.  R.  Agarwala,  for  the appellant. S.   T.  Desai,  A. N. Kirpal and R. N.  Sachthey,  for  the respondent. The Judgment of the Court was delivered by 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  Cotton  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. 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. 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

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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  that view was challenged  before  the  High Court, but without success.                             993 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  con-               sideration  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 clause 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 completing the age of               twenty-five   years  leaving  male  issue   or               issues, the trustees shall stand possessed  of               the  said shares in trust for such male  issue               or issues (if more: than one in equal  shares)               till each of them completes the age of   twenty-one               years.               7.    In event of said beneficiaries or any of               them shall die before     completing  the  age               of twenty-five years without leaving any  male               issue, the trustees shall stand possessed.  of               the  said shares in trust for the  other  then               living sons of the said Rambhai Somabhai Patel               in  equal  shares after making  the  following               provisions:"               994

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             [Clauses  (a)  & (b) make  provision  for  the               benefit of the widow of the beneficiary  dying               before  the age of twenty-five years  and  the               female  children  of the  beneficiary  in  the               event of his death before attaining the age of               25 years].               "8. The trustees shall not charge, mortgage or               otherwise  incumber  the said  shares  in  any               manner whatsoever." Under  the terms of the deed of trust, each beneficiary  was entitled  to 80 shares of the Central Trading Company.   The trustees were to hold 80 shares for each beneficiary till he attained the age of twentyfive years, and the trustees  were to  apply  either the whole or part of the  profits  arising from  the shares, as the trustees deemed "fit  and  proper", for  the maintenance and advancement of  the  beneficiaries, and to invest the surplus in securities or concerns as  they deemed proper.  In the event of death of either  beneficiary before he attained the age of twenty-five the shares settled on  him,  but not the accumulated surplus  income,  were  to devolve  on the persons mentioned in cls. 6 & 7.  Till  each beneficiary   attained   the  age  of   twenty-five   years, management of the shares was to remain with the trustees and provision for maintenance and advancement for the benefit of the  beneficiary  was to be made by the trustees.   But  the income which remained unused after providing for maintenance and  advancement was not directed in the event of  death  of the  beneficiary before he attained the age  of  twenty-five years  to go to the persons named in cls. 6 & 7 and  was  to devolve  upon the heirs of the beneficiary according to  the personal  law of succession and inheritance.   This  clearly indicates   that   the  entire  income  accruing   to   each beneficiary  in  respect of his 80 shares belonged  to  him. Clause  5  also  indicated  that but  for  that  clause  the beneficiaries would have been entitled to exercise the right to mortgage or create any encumbrance or sell the shares and the accumulations thereof By cl. 4 it was expressly provided that  on the attainment of the .age of twenty-five years  by each  beneficiary the trustees shall transfer 80 shares  and the  accumulations thereof or any other investment  in  lieu thereof as provided in cls. 2 & 3 of the deed. On the clauses set out earlier, we are unable to accept  the contention that each beneficiary, until he attained the  age of  twenty-five  years,  was  entitled  merely  to   receive maintenance  and  provision  for  advancement,  and  had  no interest in the corpus of the shares.  We are of the opinion that  under the deed of trust the right to 80 shares and  to the income thereof arose from the date on which the -deed of trust  became  operative and it was not  deferred  till  the beneficiary attained the age of twenty-five years. We  may now consider whether estate duty in respect  of  the shares  and  the accumulated income thereof  became  payable when 995 Manubhai died on June 7, 1954.  Section 5 of the Act, sub-s. (1), provides               "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, .               which  passes               on  the  death of such person, a  duty  called               "estate duty" at the rates fixed in accordance               with section 35."

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The  expression  "property"  is  defined  in  s.  2(15)   as inclusive   of  "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" Explanations 1 & 2  are not relevant  Section 2(16) defines "property passing on the death" as inclusive of "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" Interest  of Manubhai in the shares and in  the  accumulated income was ’property’ within the meaning of s. 2(15).   That property  did,  as  we have already  pointed  out,  vest  in ownership  in Manubhai immediately on the execution  of  the deed of trust.  On Manubhai dying unmarried, the property as to  the  shares  under  cl. 7 of the  deed  and  as  to  the accumulated  income  under the law of  inheritance  devolved upon  his brother Mahendra.  On Manubhai’s death  there  was under the deed of trust a change in the person who was bene- ficially interested in the shares. Counsel  for the appellant relied upon s. 23 of  the  Estate Duty Act, which insofar as it is material, provides :               "In  the  case of settled property  where  the               interest  of any person under  the  settlement               fails  or  determines by reason of  his  death               before  it becomes an interest in  possession,               and  one or more subsequent limitations  under               the   settlement  continue  to  subsist,   the               property  shall not be deemed to pass on  his,               death  by  reason  only  of  the  failure   or               determination of that interest." That  the  80 shares under the deed of  trust  were  settled property  is not disputed; and Manubhai had an  interest  in those 80 shares.  But the interest of Manubhai in the shares did  not,  for reasons already set out,  fail  or  determine before  it  became  an interest in  possession.  Section  23 therefore has no application to the present case. 996 Counsel for the appellant relied upon an Irish case reported in  The Attorney-General v. Power and Another(1).   In  that case,  under a settlement, one H took a vested legal  estate as  tenant in common in fee, with a limitation over  on  his dying  under  the age of twenty-one.  The legal  estate  was subject to the proviso that during minority of  the trustees were to enter into receipt of the rents, providing there out for his maintenance etc. and to accumulate the surplus  upon trust, if He should attain Ms age, for him, and if He should die under-age, for the persons who should ultimately  become indefeasibly   entitled.    He  died  under-age,   and   the defendants became indefeasibly entitled as tenants-in-common in  fee  of all the lands in the settlement,  including  H’s share.  It was held that estate duty was not payable as on a property  passing  on H’s death that H’s  interest  had  not become  a beneficial interest in possession in the  land  at his  death,  and that accordingly, s. 5, sub-s. (3)  of  the Finance  Act, 1894, was inapplicable.  Section 5(3)  of  the Finance Act, 1894, which was later amplified by s. 48 of the Finance Act, 1938, was substantially in the same terms as s. 23 of the Estate Duty Act.  But Power and Another’s  case(1) was  decided on,the footing that the settlor’s interest  was not  vested  in H in possession during  his  minority.   The Court held that mere possibility of receiving maintenance at the discretion of the trustees was not per se an interest in

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possession  for the purpose of s. 5(3) of the  Finance  Act, 1894.  An interest in property liable to be divested on  the death before the beneficiary attains a certain age,  coupled with’ a direction to accumulate the income in the  meantime, so  far as it is not required for maintenance so as to  make the  accumulated  income an accretion to the capital  is  in substance  a  contingent interest, and the property  may  be exempt from estate duty, if the beneficiary dies before  the attains  the age specified.  But where, as in  the,  present case,  he income of the property absolutely belongs  to  the beneficiary and such part of the interest as is not  applied for  the  benefit  of  the  beneficiary,  is  liable  to  be accumulated  for his benefit, and in the event of his  death before he attains the age specified in the deed of trust, it is to devolve upon his heirs, creates in the beneficiary  an interest in possession and not an interest in expectancy. The  High Court was in our judgment, right in  holding  that though the shares were not to be delivered over to  Manubhai until  he attained the age of twenty-five years, the  shares belonged  to him since the execution of the deed  of  trust, and he was also beneficially entitled to the income from the shares,  that his interest in the shares and the income  was not  an  estate  in  remainder or  reversion,  nor  was  his interest  a  future  interest, and  that  he  was  presently entitled  to the whole income of his one-half share  in  the said  160  shares  and after provision  of  maintenance  and advancement, if any surplus (1)  [1906] 2 1. R. 272 997 remained, it was to be accumulated and he was the beneficial owner of the accumulation of such surplus income and but for cl. 5 he could dispose it of as he willed, and if he died it was heritable by his heirs.The appeal therefore fails and is dismissed with costs. G.C.                                     Appeal dismissed. 998