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PETITIONER: CONTROLLER OF ESTATE DUTY, GUJARAT

       Vs.

RESPONDENT: HUSSAINBHAI MOHMEDBHAI BADRI

DATE OF JUDGMENT30/04/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1973 AIR 2150            1974 SCR  (1) 122  1974 SCC  (3) 142

ACT: Estate  Duty  Act-Sections 5(1), 2(15), (16)  Settlement  by trust-Settlor,  his wife and eldest son appointed  trustees- settlor  entitled to net income of trust  properties-On  his death,  and  of said income to be  appropriated  by  wife-On wife’s  death  1/3 share of trust to be  given  eldest  son- Whether whole of trust to be included in assessment or  only a  portion  thereof-"Property passing  on  death"-Scope  of- Change in the beneficial interest and not title, is the real test.

HEADNOTE: The  settlor in the instant case settled upon trust  certain immovable  properties and lease-hold lands by  an  indenture dated 15-7-1938.  Under that deed the settlor, his wife  and their  eldest son (the respondent) were appointed  trustees. Under the terms of the trust deed. the settlor was  entitled to  the  net  income  of the  trust  properties  during  his lifetime.   After his death, the income of those  properties was  to  be divided into three equal shares;  1/3rd  of  the income  was  to  be  appropriated by  the  wife  during  her lifetime.  Out of the remaining 2/3rd, I /3rd was to be paid to  the  respondent  and  the remaining I  /3rd  was  to  be entrusted  to  the  respondent for being  utilised  for  the maintenance  of  the  two  wives and  the  children  of  the settlor’s  youngest son. who had died before the trust  deed was executed.  On the death of settlor’s wife, the  trustees were to divide the trust properties into two equal shares of which one share would go to the respondent. The  settlor’s  wife died on 6-10-1955.  The  value  of  the estate   left  by  her  was  determined  by  the   Assistant Controller  at Rs. 4,15,0001- on the basis that  the  estate consisted  of two items. (a) her individual  properties  and (b)  1/3rd  of  the  trust  properties.  He  overruled   the objection  of the respondent, the accountable person to  the inclusion  of  the  value of the 1/3rd share  in  the  trust properties  in  the computation of the value of  the  estate that  "passed"  on the death of the wife.   On  appeal,  the Appellate Controller considered the entire trust property as the property that "passed" on the death of deceased and con- sequently  enhanced  the  valuation made  by  the  Assistant Controller.   The  Tribunal  set  aside  the  order  of  the

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Appellate  Controller  and restored that  of  the  Assistant Controller  holding  that  only 1/3rd of  the  trust  estate "passed"  on the death of the deceased.  At the instance  of the  appellant, the Tribunal referred to the High Court  for its  opinion  the question as to whether the  whole  of  the trust estate was to be included in the assessment or only  a portion  thereof  and if so what portion.   The  High  Court answered that question in favour of the respondent  assessee holding  that  under  s. 5 of the Act  only  the  beneficial interest of the deceased in the trust estate "passed" on her death and the passing of the legal title to the estate  from the  trustees to the beneficiaries after the. death  of  the deceased was not a material circumstance. On  appeal  by  certificate to  this  Court,  the  appellant contended  that  :  (i) the title to  the  trust  properties vested in the trustees till the death of the deceased;  (ii) that  title  "passed" to the beneficiaries  immediately  the deceased died; (iii) the title that "passed on the death  of the  deceased was the title in respect of the  entire  trust property and therefore it must be held that the entire trust property  "passed"  on the death of the  deceased  and  (iv) hence,  the  value of the entire trust  property  should  be taken  into  consideration  in computing the  value  of  the estate  that  massed  on the death  of  the  deceased.   The respondent contended that : (i)    the  deceased  had   only 1/3rd interest in the trust property and that alone  passed" on her death : and (ii) the deceased’s position as  trustee, which came to an end on her death be considered as  property passing on her death. Dismissing the appeal,  123 HELD  : (i) Ever since the death of the settlor,  beneficial interest in 2/3rd of the income of the trust property Vested in  persons  other  than the  deceased.   The  deceased  was entitled to only 1/3rd share in the income of the trust pro- perty.   In  substance,  only 1/3rd interest  in  the  trust property  passed  on her death.  It is true that  after  the death  of the deceased, the respondent as well as the  other heirs  of the settlor who had only a beneficial interest  in the income of trust property became the legal owners of  the trust  property.   This change in the nature of  the  rights possessed by some of the beneficiaries under the trust  deed does not enlarge either the extent or value of the  property that passed" on the death of the deceased. [127C] (ii) The expression "property passing on death (as found  in Ss.  5(1)  and,  2(16)  of  the  Act)  is  not  a  technical expression.   In other words, it is not a term of law.   The word  "passed" means "changes hands".  To ascertain  whether property  has passed, a comparison must be made between  the persons  beneficially  interested at the moment  before  the death and the persons so interested after the death. [126E] What is relevant in determining the scope of the  expression "property  passing  on  the death of the  deceased"  is  the change  in  the  beneficial  interest  and  not  title.   In determining  whether a particular property "passed"  on  the death  of  a deceased what has to be seen  is  whether  that deceased  had any beneficial interest in that  property  and whether  that  interest "passed" to someone  on  his  death. [129D-E] Scott  and Coults and Co. v. inland  Revenue  Commissioners, [1937] A.C. 174’ Green’s Death Duties: referred to. Re.   Thomas  Townsend,  Deceased [1901]  2       K.B.  331, applied. Mahendra  Rambhai  Patel  v.  Controller  of  Estate   Duty, Gujarat, 63 I.T.R. 645, relied on.

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(iii)     The  deceased’s wife had only 1/3rd share  in  the income  of the trust ’property.  That  interest  undoubtedly passed on her death., In the remaining 2/3rd income, she had no  interest  and the same did not pass on her  death.   Her title  to  the property as a trustee was purely  a  personal right.. It had no value in terms of money.  It conferred  no right  on her.  It only imposed some, duties.  Such a  right cannot be considered as "property". [129E]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1096  of 1970. Appeal  by  certificate from the judgment  and  order  dated October3 and 4,.1968 of the Gujarat High Court at  Ahmedabad in Estate Duty Tax Reference No. 1 of 1968. N.   D.  Karkhanis,  P.  L. Juneja, S. P. Nayar  and  R.  N. Sachthey, for the appellant. S. T. Desai, H. S. Parihar, for the respondent. The Judgment of the Court was delivered by HEGDE, J.-The appeal by certificate arises from the decision of’ the High Court of Gujarat in a Reference under S.  64(1) of  the Estate Duty Act (to be hereinafter referred  to  as. the  Act).   Therein  the Tribunal referred  partly  at  the instance  of the Department and, partly at the  instance  of the accountable person three questions of law said to  arise from  its  order, for the decision of the High  Court..  The accountable person at whose instance, the last question  was referred informed the High Court that he does not desire  to have  any  answer to that question.  consequently  the  High Court did not answer that question.  The High Court answered the  first question in favour of the accountable person,  In view of that answer, it thought it 124 unnecessary  to  answer  the  second  question.   The   only question calling for decision is question No. 1, which reads               "Whether on the facts and in the circumstances               of the case, the whole of the Trust estate was               to  be  included in the assessment or  only  a               portion thereof and if so what portion Herein we are concerned with the estate of Bai Safiabai (the widow  of Eusufalli Badri) who died on 6-10-1955.  The  High Court  opined that only 1/3rd of the trust estate  of  which the deceased was one of the trustees ’passed’ on her  death. The  correctness  of that conclusion is  challenged  by  the Department.   According to the Department, the entire  Trust estate ’passed’ on the death of the deceased. The  material  facts  of the case may  now  be  stated,  One Eusufalli  Ebrahimji  settled upon trust  certain  immovable properties  and leasehold lands by an indenture  date  15-7- 1938.  Under that deed three trustees were appointed.   They were  Eusufalli  (the settlor), his wife Bai  Safiabai  (the deceased) and their eldest son Mohamedbhai, the  accountable person.  Under the terms of the trust deed, the settlor  was entitled  to the net income of the trust  properties  during his  life  lime.   After  his death,  the  income  of  those properties was to be divided into three equal shares;  1/3rd of the income was to be appropriated by Bai Safiabai  during her life time.  Out of the remaining 2/3rd, 1/3rd was to  be paid  to  Mohomedbhai  and the remaining  1/3rd  was  to  be entrusted   to  Mohomedbhai  for  being  utilised  for   The maintenance  of  the  two  wives and  the  children  of  the settlor’s  youngest  son Salebhai, who had died  before  the trust deed was executed. The settlor prescribed in the trust

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deed that after the death ,of Safiabai               "The  trustees divide the trust properties  in               such  a manner that one equal share i.e.  half               share  shall be  given  to  my  eldest  son,               Mohomedbhai,  and if he has died  before  that               then,  that  share  shall  be  given  to   his               children  and wife and that division shall  be               made according to dictates of my religion  and               the  other  half share shall be given  to  the               wife  and children of Salebhai in such  manner               that the two anna share shall be given to each               of  his  two wives and  the  remaining  twelve               annas   shall  be  distributed   amongst   his               (Salebhai’s)   children   according   to   the               dictates  of  my religion and after  doing  so               this trust shall come to an end."               (The  remaining clauses in the trust deed  are               not relevant). Safiabai,  as  mentioned earlier, died  on  6-10-1955.   The value  of  the  estate left by her  was  determined  by  the Assistant  Controller at Rs. 4,15,000/-.  According  to  the Assistant  Controller  the  estate  left  by  the   deceased consisted of two times (a) of her individual properties  and (b) 1/3rd of the trust properties. 125 The  accountable  person objected to the  inclusion  of  the value  of  the 1/3rd share in the trust  properties  in  the computation of the value of the estate that ’passed’ on  the death of Safiabai.  But that objection was overruled by  the Assistant Controller. Aggrieved  by that decision, the accountable person went  up in  appeal to the Appellate Controller.  But, later  on  the accountable  person  sought  to withdraw  the  appeal.   The Appellate  Controller refused to him permission to  withdraw the  appeal.  Further, he gave him notice requiring  him  to show  cause why the entire value of the trust estate  should not  be  included  in the computation of the  value  of  the estate that ’passed’ on the death of Safiabai.  The account- able person contended that the trust property did not belong to the deceased and as such the same cannot be said to  have ’passed’  on  her death.  That contention was  rejected  and ’the  entire trust property was considered as  the  property that  ’passed’ on the death of the  deceased.   Consequently the valuation made by the Assistant Controller was  enhanced by Rs. 5,73,000/-.  Against   the  order  of  the  Appellate  Controller,   the accountable  person  went  up in appeal  to.  the  Appellate Tribunal.  The Tribunal set aside the order of the Appellate Controller  and restored that of the  Assistant  Controller. It held that only 1/3rd of the trust estate ’Passed’ on  the death  of the deceased.  Thereafter at the instance  of  the Department,  the question set out earlier was  submitted  to the High Court seeking its opinion thereon.  The High Court, as  mentioned earlier, answered that question. in favour  of the assessee.  The High Court opined that under s. 5 of  the Act  only  the beneficial interest of the  deceased  in  the trust estate ’passed’ on her death. It rejected the contention of the Department that the entire trust estate passed on her death.  It further held that  the circumstance that the legal title to the estate passed  from the  trustees  to the beneficiaries after the death  of  the deceased was not a material circumstance.  Before us it  was contended on behalf of the Department that the title to  the trust  properties vested in the trustees till the  death  of the deceased.  That title ’Passe& to the beneficiaries imme-

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diately  the deceased died.  The title that passed’  on  the death of the deceased was the title in respect of the entire trust  property and therefore we must hold that  the  entire trust  property  ’passed’  on the  death  of  the  deceased. Hence,  the  value of the entire trust  property  should  be taken  into  consideration  in computing the  value  of  the estate  that  passed on the death of the deceased.   On  the other  hand  it was contended on behalf of  the  accountable person  that  the deceased had only 1/3rd  interest  in  the trust  property  and  that  alone  ’passed’  on  her  death. According  to  him, the deceased’s position  as  a  trustee, which  came to an end on her death cannot be  considered  as property passing on her death. To  decide  the  controversy  between  the  parties,  it  is necessary  to, find the scope of s. 5(1) of the  Act.   That section reads :               "In  the case of every person dying after  the               commencement of this Act. there shall, save as               herein after expressly               126               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, which passes on the death  of  such               person,  a  duty called "estate duty"  at  the               rates fixed in accordance with Section 35."               (The  remaining portion of the section is  not               relevant). At  this  stage we may refer to ss. 2(15) and 2(16)  of  the Act.  Section 2(15) says :               "   "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 on species into another by  any               method".               (The  explanations  to this  section  are  not               relevant).               Section 2(16) defines the expression "property               pass           on the death".  That  provision               runs thus:               "  ’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 "that a period  ascertainable               only by reference to the death" : This  definition is only an inclusive definition.   It  does not  bring  out  the meaning  of  the  expression  "property passing on the death". The  expression  "property  passing  on  death"  is  not   a technical  expression.  In other words, it is not a term  of law,  The  word  "   passes"  means  "changes  hands".    To ascertain whether property has passed, a comparison must  be made between the persons beneficially interested the  moment before  the death and the persons so interested  the  moment after  the  death-see the observations of  Lord  Russell  of Killowen  in  Scott  and Coutts and Co.  v.  Inland  Revenue Commissioner(1).   It is observed in Green’s "Death  Duties"

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at p. 34:               "If. after much a comparison, it appears  that               the  beneficial enjoyment of the  property  (a               definable part thereof) was, in substance  and               in  events,  unaffected  by  the  death,   the               property  (or that part thereof) did not  pass               on  the death merely because, as a  matter  of               terminology,  one  set  of  limitations   then               ceased  to  have  effect  and  another  became               operatives.               It is further observed therein               to the extent that there is no change or bene-               ficial  enjoyment de facto, property does  not               pass merely because the exact nature or extent               of the beneficial inte- (1)  [1937] A. C. 174. 127               rests  after the death was  not  ascertainable               until  that  event occurred;  or  because  the               beneficiary was entitled to income only before               the death and to capital thereafter."               Proceeding further, the learned author says               Moreover Estate duty is not payable under s. 1               (corresponding to our s. 5) by reason only  of               a  change of title, where the same person  was               entitled  as  of right to  the  possession  or               income  of the property both before and  after               the death, without interruption.  This is  so,               even  if  before  the  death  he  had  only  a               defensible  right to the income and after  the               death  he  has an indefeasible  right  to  the               capital." From the facts mentioned earlier, it is seen that ever since the  death of the settlor, beneficial interest in  2/3rd  of the  income  of the trust property vested on  persons  other than  the  deceased.  The deceased was entitled only  to  on 1/3rd  share  in  the  income of  the  trust  property.   In substance, only 1/3rd interest in the trust property  passed on  her  death.   It is true, that after the  death  of  the deceased, the accountable person as well as the other  heirs of  the  settlor who had only a beneficial interest  in  the income of the trust property became the legal owners of  the trust  property.   This change in the nature of  the  rights possessed by some of the beneficiaries under the trust  deed does not enlarge either the extent or value of the  property that ’passed’ on the death of the deceased. The meaning of the expression "property passing on the death of the deceased" found in the corresponding English Act  was considered  by  the  Kings  Bench  in  Re  Thomas  Townsend, Deceased(1).   In that case a testator who died  before  the commencement  of  the  Finance  Act,  1894,  by  his   will, bequeathed his real and personal estate to trustees for sale and  investment,  and for payment out of the  annual  income thereof  of  an  annuity to his wife, and,  subject  to  the annuity, to his eight children equally,-and after the  death of  his wife to divide the trust fund among the children  in equal  shares; but if the fund exceeded a certain  specified sum,  then to divide eight-ninths of such excess  among  the children,  and to pay the remaining ninth to  certain  other persons.   The  wife died after the Finance Act,  1894,  had come  into operation.  The Court held that the  estate  duty was only payable on the one-ninth share of the excess of the trust  fund over the specified sum and on the benefit  which accrued to the children by the cessor of the annuity,  since that was the only property passing on the death of the wife.

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Dealing  with  the  question of  law  arising  for  decision Kennedy J. observed               "There  is  no question that, looking  to  the               substance  of  the  disposition  which  is  in               question, as to 9600 pond the children took an               interest on the death of testator which was [1901] 2 K.B. 331. 128 qua  that sum a definite ascertained profit which vested  in them,  and  as to which each of the eight children  got  his eighth  share of course the whole estate was subject to  the annuity, but the only uncertainty in case of the residue was as  regards the amount of anything beyond 9600 L. It is  not until the death of the widow that the residue over 9600 pond passes  to  the children and the grand-children in  the  way ,provided  for by the will.  Therefore, if it does not  pass until  then,  it cannot be ascertained until  then,  for  it cannot  be  known until then that there will,  be  any  such residue.   Otherwise  the  matter seems  quite  clear.   The property as regards the 9600 pond was property which  passed on  the death of the testator, and not on the death  of  the testator’s widow, and therefore is not liable. to this claim to the extent of the eight-nineths." A similar view was expressed-by Phillimore J. He observed "It seems to me obvious that, as regards the legacies and as regards eight-nineths of the residue, or, as the legacies go to  the same people, we may say as regards eight-nineths  of the  property, it passed at once to the children subject  to the  burden of the annuity; and if Mr. Thomas  Townsend  had died in the year of grace 1900 or 1901, and these had  been, not  children,  but nephews or great-nephews liable  to  pay legacy  duty,  I do not think the Inland  Revenue  officials would  willingly have accepted the suggestion  that’  legacy duty  would not become payable until after the death of  his widow." The rule laid down in Townsend’s case is equally  applicable to  the facts of the present case.  In our opinion  what  is relevant   in  determining  the  scope  of  the   expression "property  passing  on  the death of the  deceased"  is  the change  in  the  beneficial interest and  not  title.   This conclusion  of  ours receives support-from the  decision  of this Court in Mahendra Rambhai Patel v. Controller of Estate Duty, Gujarat(1).  Therein by a deed of trust dated June 28, 1941  one  Ramibhai settled 160 fully paid up  shares  in  a company  in trust for the benefit of his son&  Manubhai  and Mahendra  is  equal  shares.  The  trustees  were  to  stand possessed  of  the shares until each  of  the  beneficiaries completed the age of 25 years and apply in their discretion the  whole or part of the profits arising therefrom for  the maintenance  and  advancement of the  beneficiaries  and  to invest  the surplus.  If and when each of the  beneficiaries completed the age of 25 years the trustees were to  transfer out  of  the 160 shares his portion of the shares  and  the accumulation or any other investment in lieu thereof to  him absolutely.   If any of the beneficiaries should die  before completing  the age of 25 years, the shares settled  on  him (but not the accumulated surplus income) were to devolve  on certain persons.  The beneficiaries had no right to mortgage or  create  any encumbrance or sell it until  each  of  them completed the age of 25 (1)  63 I.T.R. 645; 129 years.   Manubhai  died  on  June  7,  1954,  a  minor   and unmarried;  and the principal value of his interest  in  the settled property was brought to estate duty in the hands  of

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his brother.  The accountable person challenged the validity of  the levy.  He contended that no property passed  on  the death of his brother Manubhai.  This contention was rejected both  by  the High Court, and this Court.  This  Court  held that though the shares were not to be delivered to  Manubhai until  he attained the age of 25 years, the shares  belonged to him since the execution of the trust deed and he was also beneficially  entitled to the income from those shares.   In the course of his Judgment Shah J. (as he then was) speaking for the Court observed at p. 649 :               "The interest of Manubhai in the shares and in               the  accumulated income was "property’  within               the  meaning of section 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  clause  7  of the deed and  as  lo  the               accumulated   income   under   the   law    of               inheritance devolved on his brother  Mahender.               On Manubhai’s death, there was under the  deed               of  trust  a  change in the  person  who  was,               beneficially interested in the shares. This decision clearly lays down that in determining  whether a  particular property ’passed’ on the death of  a  deceased what  has  to  be  seen is whether  that  deceased  had  any beneficial  interest  in  that  property  and  whether  that interest  ’passed’  to someone on his death.   The  deceased Safiabai  had  only 1/3rd share in the income of  the  trust property.   That interest undoubtedly passed on  her  death. In  the remaining 2/3rd Income, she had no interest and  the same  did not pass on her death.  Her title to the  property as  a trustee was purely I personal right.  It had no  value in  terms of money.  It conferred no eight on her.  It  only imposed  some duties.  Such a right cannot be Considered  as ’property’. For the reasons mentioned above, we entirely agree with  the conclusions reached by the High Court. In  the  result this appeal fails and it is  dismissed  with costs. B.W.                           Appeal dismissed. 10-L 944 Sup CI/73 130