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PETITIONER: P. MADHUSUDHAN REDDY (DEAD) BY LRS.

       Vs.

RESPONDENT: THE CONTROLLER OF ESTATE DUTY

DATE OF JUDGMENT:       20/07/1998

BENCH: SUJATA V. MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T Mrs. Sujata V. Manohar, J.      These appeals  arise out of the estate duty proceedings in respect  of the  estate of  the deceased  P.  Madhusudhan Reddy. During  his lifetime the deceased had taken out three life insurance  policies of  Rs. 50,000/- each. Two policies were from  the phoenix  Assurance Company,  Bombay  and  one policy was  taken from  the Standard Life Insurance Company, Calcutta. During  his lifetime  the  deceased  had  obtained loans on  the security  of his  tow life  insurance policies taken out  from Phoenix  Assurance Company, Bombay. It seems that the  total loan  amount was Rs. 78,400/- . the deceased had also,  from time to time, repaid a part of the loan. The amount due  in respect  of the loans so taken at the time of the death of the deceased was Rs. 71,260/-.      During his  lifetime on  or about  29th of August, 1954 the deceased  executed an  assignment in  respect of each of these three  life insurance  policies in favour of his grand children. the  deeds of  assignment have  been registered on 27.9.1954. A  notice of  the assignment  was  given  to  the insurance company  in  accordance  with  the  provisions  of Section 38  of the  Insurance Act,  1938 and the assignments were registered with the Insurance Companies.      The Deceased  made a  will dated 4.2.1959 in respect of all his  properties. In  his will, in the list of properties he mentioned, at item no. 30, as follows:-      " There  are three Policies of Life      Insurance, as detailed below of Rs.      50,000/- each,  which  are  already      assigned  in   favour  of   my  six      grandsons  and   a  grand  daughter      (i.e. the  sons and  daughter of my      two sons).  1.  The  Standard  Life      Insurance Co.,  Fifty thousand.  2.      The  Phoenix   Assurance  Co.,  two      policies of Fifty thousand each." In the  will, he also mentioned in the list of dues, payment of dues  to insurance  companies amounting  to Rs. 71,250/-. Under his  will he  provided that after his death the amount of his  three life  insurance policies,  that is to say, Rs.

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1,50,000/- plus  bonuses  that  will  be  received  thereon, should  be  distributed  equally  among  his  surviving  six grandsons and  grand daughter in whose favour he had already assigned irrevocably  and transferred  the policies. He also provided that  the dues  of the  insurance companies  (inter alia) should be paid out of the general estate.      In the estate duty proceedings the Assistant controller of Estate  Duty initially  treated the  three policies  as a separate estate  for the  purpose of calculation of the rate of estate  duty. In  appeal, before  the appellate  Tribunal held that  each of  the three  policies should be separately assessed  to  estate  duty.  However,  after  reopening  the assessments the  Assistant Controller of Estate Duty treated the three  policies as  a part  of the  main estate  of  the deceased and  levied estate duty accordingly. In the several proceedings  which  took  place  dealing  with  the  initial assessment as  well as  the reopening of the assessment, the Appellate tribunal  ultimately held  that the  two insurance policies taken  out from  Phoenix Insurance Company formed a part of  the general  estate of the deceased while the third policy  constituted   a  separate   estate.  The   Appellate Tribunal, however,  rectified its  order as  a  mistake  and ultimately held that all the three policies formed a part of the  general  estate  of  the  deceased  and  could  not  be separately assessed.      In respect  of these  various proceedings, depending on the view  then taken, three sets of questions were framed by the Tribunal  and  referred  to  the  High  court  in  three reference applications  which arose  from these proceedings. The three sets of questions are as follows:-      " Set No. 1.:      1. Whether  on the facts and in the      circumstances  of   the  case,  the      Appellate Tribunal was justified in      law in holding that there should be      separate assessments  in respect of      each of  the three insurance policy      amounts assigned by the deceased in      favour of  his  grand-children  (At      the instance of the Revenue).      2. Whether  the loan  amount of Rs.      78,400/-  taken  on  the  insurance      policies by  the deceased is liable      to be  deducted  as  a  debt  under      section 44  of the  Estate Duty Act      from the General estate as distinct      from the  separate  estate  of  the      three insurance policies; and      3. Whether  the estate duty payable      is  liable  to  be  deducted  while      computing the  net estate  exigible      to duty?      (At the instance of the accountable      person).      Set No. 2:      1. Whether  on the facts and in the      circumstances  of   the  case,  the      Tribunal  has   acted  within   its      jurisdiction   in    allowing   the      department’s  appeal  and  revering      its   earlier   order   passed   on      27.10.77.      2. Whether  on the facts and in the      circumstances  of   the  case,  the      Tribunal was  justified in  holding

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    that the amount of Rs.1,39,284/- in      respect of  Standard Life Assurance      co. policy  was to  be included  in      the main  estate  of  the  deceased      under Section  34(3) of  the Estate      Duty Act.      3.  Whether   on  the   facts   and      circumstance  of   the  case,   the      Tribunal  was  correct  in  law  in      holding that  Section 34(3)  of the      Act     was     not     applicable.      Set No. 3:      1.  Whether on the facts and in the      circumstances  of   the  case,  the      Tribunal  was  correct  in  holding      that the Assistant Controller could      reopen the assessment under section      59(b) of the Estate Duty Act?      2.  If  the  answer  to  the  first      question   No.    1   is   in   the      affirmative,   whether    the   two      insurance   policies    could    be      assessed as  separate estates under      Section 34(3) of the Act?"      The High  Court by  its impugned judgement (reported in 156 ITR  45) has upheld the ultimate finding of the Tribunal that the three insurance policies have to be considered as a part of  the general  estate of the deceased and they cannot be  aggregated   individually  or  collectively  to  form  a separate estate  or estates  for the purposes of calculating the rate  of estate  duty. The  three sets of questions were accordingly answered  in favour  of the  revenue.  The  High Court also  upheld the exercise of power in the present case by the  Assistant Controller of Estate Duty in reopening the assessment and  it also  upheld the exercise of power by the Tribunal for rectifying the mistake.      The present  appeals are  filed from the above impugned judgment of the High Court. Before us, the question relating to the  exercise of  power by  the Assistant  Controller  of Estate Duty  for  reopening  the  assessments  as  also  the question relating  to the power of the Tribunal exercised in the present  case to  rectify the  mistake,  have  not  been pressed.      In the  first set of questions, question no. 3 has been correctly answered by the High Court against the assessee in view of  two decisions  of this Court, one in the case of p. Leelavathamma v. Controller of Estate Duty (188 ITR 803) and other in  the case  of Nawab  Mir Barkat Ali Khan Bahadur v. Controller of Estate of Duty (222 ITR 612).      The  remaining  questions  deal  with  two  issues;  1) whether after the assignment of the three insurance policies by the  deceased in favour of his grandchildren, it could be said  that  the  deceased  had  any  interest  in  the  life insurance policies  which passed on his death; and 2) if the three insurance  policies are  held to  pass on the death of the  deceased  whether  (i)  each  of  the  three  insurance policies should  be separately  assessed to  estate duty  or (ii) the  three insurance  policies taken together should be separately assessed  to estate  duty of  (iii)  whether  the three insurance policies have to be aggregated with the main estate of the deceased for the purposes of estate duty.      Under Section  2(15) of  the  Estate  Duty  Act,  1953, "property" includes  any interest  in  property  movable  or immovable, and  also  includes,  inter  alia,  any  property converted from  one species  into another by any method. The

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Explanations to  Section 2(15)  are  not  relevant  for  our purposes. Section 2(16) defines "property passing on death". It includes  property passing either immediately on death or after an  interval; and  he phrase "on death" includes "at a period  ascertainable  only  by  reference  to  the  death". Learned counsel  for the appellants contended before us that in view of the assignments of the life insurance policies by the deceased  during his  lifetime to  his grandchildren, it cannot be  said that  the deceased  had any  interest in the life insurance policies which could pass on his death. Hence under Section  34 of  the Estate  Duty Act,  1953, the  life insurance policies  cannot be treated as property passing on the death of the deceased.      He drew  our attention  to Section  38 of the insurance Act,  1938.  Section  38(1)  provides  that  a  transfer  or assignment of a policy of life insurance can be made only by an endorsement  upon the  policy or by a separate instrument in the  manner provided  there. In  sub-section  (2)  it  is provided that  the transfer and assignment shall be complete and effectual  upon the  executions of  such endorsement  or instrument in the manner provided but shall not be operative as  against  an  insurer  and  shall  not  confer  upon  the transferee or  assignee or  his  legal  representatives  any right to sue for the amount of such policy until a notice in writing of  the transfer  or assignment  and either the said endorsement or instrument itself or a certified copy thereof have been  delivered to  the insurer. Under sub-section (5), subject to  the terms  and conditions of the assignment, the insurer shall,  from the  date of  the receipt of the notice referred to in sub-section (2) , recognise the transferee or assignee named  in the notice as the only person entitled to benefit under  the policy,  such person  shall be subject to all liabilities  and equities  to which  the  transferor  or assignor  was  subject  on  the  date  of  the  transfer  or assignment.  Since   the  deceased  had  duly  assigned  the policies in accordance with the provisions of Section 38 and by complying  with all its requirements, the assignee alone, it is  contended, had  an interest  in these policies at the time of  the death  of the  deceased. Hence  no interest was left in  the deceased  in respect  of these  policies  which passed on his death.      In considering  this contention,  one must bear in mind Section   14(1) of the Estate Duty Act, 1953. It provides as follows:      " 14(1):  Money  received  under  a      policy of insurance effected by any      person  on   his  life,  where  the      policy is wholly kept up by him for      the benefit  of  a  donee,  whether      nominee or  assignee, or  a part of      such money  in  proportion  to  the      premiums paid,  by him,  where  the      policy is  partially kept up by him      for such  benefit, shall  be deemed      to  pass   on  the   death  of  the      assured.      Explanation.   -    A   policy   of      insurance on the life of a deceased      person effected  by  virtue  or  in      consequence of a settlement made by      the deceased  shall be  treated  as      having   been   effected   by   the      deceased." The remaining  part of  Section 14  is not  relevant for the present purpose.  By virtue  of Section  14(1) money under a

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life insurance  policy which is kept up by the donee for the benefit of  his nominee or assignee is deemed to pass on the death of  assured. This is a clear deeming provision whereby even after  the assignment  of his policy by the assured, if the assured  keeps up  the policy  for the  benefit  of  his assignee, the insurance policy will constitute a part of the estate of the deceased.      From the  statements of Case which are before us in the three references,  as also  the facts  found, the  assignees have not contended that after the assignment of the policies in their  favour, the assignees paid the premium or any part of the  premium on the policies so assigned or the assignees kept the  policies alive.  The policies  were entirely under the control  of the  deceased. The  deceased had taken loans and  repaid  loans  or  parts  thereof  on  these  insurance policies. From  the tenor of the will it is apparent that it was the deceased who had retained possession of the policies and had  kept them  up during  his life  time even after the assignment. The  provisions of  Section 14  are,  therefore, directly attracted in the present case.      The contention  of the appellants that the deceased did not have  any interest  in the insurance policies passing on his death  must, therefore  be  rejected  in  the  light  of Section 14.  Learned counsel  for the  appellants  drew  our attention to  a decision  of the  Madras High  Court  in  D. Mohanavelu Mudaliar and Anr. V. Indian Insurance and Banking Corporation Ltd.,  Salem and  Anr. (AIR  1957 Mad. 115). The Madras High  Court, however,  was  not  concerned  with  the question whether on assignment of a life insurance policy by the insurer  during his  life  time,  the  insurer  had  any interest left  in the life insurance policy which could pass on his  death under  the provisions  of the Estate Duty Act, 1953. The  Court was concerned with the effect of assignment and whether  a creditor  of the  insurer  could  attach  the policy which  was already  assigned. The provision so of the Estate Duty Act are not considered in the judgment.      The appellants also drew our attention to two decisions of this  Court dealing  with accident  policies.  One  is  a decision  in  the  case  of  M.  CT.  Muthiah  and  Anr.  V. Controller of  Estate Duty,  Madras (161  ITR 768)  and  the other is  the decision  in the  case of Bharat Kumar Manilal Dalal v.  Controller of  Estate Duty, Gujarat (164 ITR 231). In the  former case,  the deceased , prior to flying by air, took  out   a  personal  accident  policy  under  which  the insurance company  agreed  that  if,  any  time  during  the currency of  the policy,  the  deceased  should  sustain  an accident resulting  in any  injury of  injuries  leading  to death, the  insurance company would pay to the assured or to his legal representatives in the case of his death, such sum as was  specified. The  deceased effected  a  nomination  in favour of  M. The  deceased died  following the crash of the airline in  which he  was  travelling.  On  his  death,  the insurance company  paid the  nominee M  a sum of Rs. 2 lakhs which was  the benefit  stipulated to  be paid. The question was whether the sum of Rs. 2 lakhs should be included in the estate of  the deceased  as property passing on the death of the deceased for the purposes of state duty. This court held that the  insurance amount became property only on the death of the deceased in an accident during the subsistence of the policy. During  the life  time of  the deceased interest was vested totally  and irrevocably in the hands of the nominee. The death  did not  cause  the  property  to  change  hands. Therefore, the  sum of Rs. 2 lakhs was not includible in the principal value  of the  estate  of  the  deceased  for  the purpose of estate duty. This Court also observed that though

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it was  not necessary  to decide  the point  , had it become necessary to  decide, it would have held that the sum of Rs. 2 lakhs  was a  separate estate from the other estate of the deceased. The  same view has been taken by this Court in the subsequent case  of Bharat Kumar Manilal Dalal (supra). Both these cases  deal with  policies of accident insurance where the amount  became payable  only on the death of the insurer in an  accident. In  such a situation, there was no question of any  amount ever coming to the deceased, the amount under the policy  being payable  only to  a nominee  on  insurer’s death in an accident.      These cases  cannot apply  to the  present  case  which deals with  assignments of  life insurance policies. In view of the  express provisions  of Section 14, the deceased must be considered  to have an interest in these policies passing on his death for the purposes of estate duty.      In the  case of  Controller of  Estate Duty v. Bomansha Framji Cama  and Ors.  (170 ITR  600), the Bombay High Court held that  the provisions of Section 14(1) were attracted in a case where the deceased had settled on trust five policies of insurance  on his  life, when  the premiums  on the  said policies after  their assignment  under the settlement, were paid by  the deceased.  The policies  became fully  paid  up during the  life time  of the  deceased On  his  death,  the moneys received  by his  assignees were  held to be property passing on  the death  of the  deceased by virtue of Section 14(1). The  Court said  that the  words] "kept up" mean that the policy has been and is kept valid by payment of premiums by the  donee and  is not allowed to lapse. In the case of a paid up policy, no further payment of premium is required to prevent it  from lapsing.  The past payments of premium kept the policy  valid and  such a  policy must  be considered as having been  kept up  by the  assured  for  the  purpose  of Section 14.      Therefore, the  contention of  the learned  counsel for the appellants  that the  policies do  not form  part of the estate of the deceased must be rejected.      Under Section  34 of the Estate Duty Act, 1953, for the purpose of determining the rate of estate duty to be paid on any property  passing on  the  death  of  the  deceased  the properties specified  in subsection  (1) and  (2)  shall  be aggregated as  provided therein.  Sub-section (3) of Section 34, however, provides as follows:      " 34(3):  Notwithstanding  anything      contained  in  sub-section  (1)  or      sub-section   (2)    any   property      passing in which the deceased never      had an  interest, not being a right      or debt  or benefit that is treated      as  property   by  virtue   of  the      Explanations  to   clause  (15)  of      section 2,  shall not be aggregated      with any  property, but shall be an      estate by  itself, and  the  estate      duty shall be levied at the rate or      rates applicable  in respect of the      principal value thereof."      It is,  therefore, contended by learned counsel for the appellants  that   even  if   the  life  insurance  policies constitute a part of the estate of the deceased, they should be separately  assessed under  section 34(3). Now, only such property passing  on the  death of the deceased in which the deceased "never  had an interest" will constitute a separate estate under  Section 34(3)  for the  purpose of determining the rate  of estate  duty. What  is meant  by the phrase "in

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which deceased  never had  an  interest"?  The  language  of Section 34(3) is similar to the language of Section 4 of the English Finance Act of 1894 as amended by the Finance Act of 1990. Section 4 of the Finance Act, 1894 is as follows:      "  For   determining  the  rate  of      estate  duty  to  be  paid  on  any      property passing  on the  death  of      the  deceased,  all  properties  so      passing in  respect of which estate      duty   is    leviable   shall    be      aggregated  so   as  to   form  one      estate,  and   the  duty  shall  be      levied at the proper graduated rate      on the principal value thereof:      Provided  that   any  property   so      passing in which the deceased never      had  an  interest  ................      shall not  be aggregated  with  any      other property,  but  shall  be  an      estate by  itself  and  the  estate      duty shall  be levied at the proper      graduate  rate   on  the  principal      value thereof ............ "      In the  case of  Attorney General  v. Pearson  and Ors. (1924 (2)  K. B.  375 )  the English court considered a case where the  settlor had  assigned to  trustees  a  policy  of assurance on  his wife, reserving interest for himself until marriage, and  thereafter to  hold the  moneys payable under the policy  in trust  to pay  the income thereof to his wife during her  life time  and after  the decease of the settlor and his  wife, in  trust for the children of the marriage as therein mentioned  and if there is no child of the marriage, for  the   settlor  absolutely.   The  court,   inter  alia, considered whether  the money  under the  policy  should  be aggregated with  the other  estate  of  the  deceased  under Section 4  determining the  rate of  estate duty.  The court asked, (page  388) "Had the deceased even an interest within the meaning  of the  Act in  the moneys which were to become payable under the policy"? The court answered, one could not hold that  the  deceased  never  had  an  interest  in  this property. "On  the  contrary  he  had  an  interest  in  the policies before  he settled  them. Moreover after he settled them he  had an  interest in  the benefit which was going to accrue or  arise from  them on his death, though it may have been a  remote  interest  which  he  never  could  enjoy  in possession. He  had an  interest during all his married life contingently upon the failure of the trusts in favour of his wife and  children. If his wife and children had predeceased him the  legal position would have altered, but his interest would then  have  become  a  very  proximate  and  extremely valuable interest,  and he would have died worth the capital value of  the insurance  money". Of  course, on the facts of that case  since the  settlor had  reserved  to  himself  an interest in  the eventuality  of the failure of the trust in favour of  his wife  and children, it was easy for the court to come  to the conclusion that the deceased had an interest in the insurance money during his life time.      In Re  Hodson’s Settlement, Brookes v. Attorney General (1939 (1)  AER 196  ) the settlor had vested a trust fund in trustees upon  trust that  they should,  if the  income were sufficient, pay  yearly sum  of $1,200  to one  $ during her life time. He also made certain other settlements under none of which  there was  any chance  of anything accruing to the settlor. The  court, in examining the application of Section 4 of  the Finance  Act of  1894 to decide whether the amount

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under the  settlement could  be aggregated  with  the  other estate of  the deceased-settlor, formulated a test to decide when it  could be  said that  the property was such that the deceased never  had an  interest in  it. The  Court observed (page 210)  that in  different circumstances different tests may well  be applicable.  however, there  was one test which was properly  applicable to the facts of the case before it. "That test  is to  ask in  whose favour  there  would  be  a resulting  trust  of  the  accumulations  in  case  all  the beneficiaries under the disposition under which the property passes were  do disclaim  the benefits  conferred on them by the disposition."  If the answer is that the resulting trust would be  in favour  of the  deceased or  in favour  of  his representatives as  such representatives, the court would be bound to  hold that  the property  is property  of which  it would be untrue to say the deceased never had an interest in it.      The test  so laid down in this case has been repeatedly applied by  the English  courts. In  the case of Tennant and Ors. V.  Lord Advocate  (1939  (1)  AER  672)  the  deceased effected a  policy of insurance on his own life. Later on he assigned the  policy to  trustees whom  he  directed,  inter alia, (i)  to pay  to his testamentary trustees the proceeds of the policy in satisfaction of all death duties payable by reason of  his death,  and (ii)  to pay  any residue  to his children. On his death the whole proceeds of the policy were paid to  the testamentary  trustees  for  payment  of  death duties. The  House of  Lords said  that for  the purpose  of determining the  rate of estate duty, the sum realised under the policy had to be aggregated with the other estate of the deceased. Lord  Russel for Killowen in his judgment observed (page 675): "I feel no doubt that the deceased had, from the commencement of the policy’s existence, an interest, and for many years  the sole  interest, in  the proceeds thereof. He could, before  the assignation, have assigned or charged the entirety of those proceeds, ad even after the assignation he had a contingent interest therein by way of resulting trust, of which  he could have disposed inter vivos or by will. The word ’interest’ is a word capable of wide meaning, and I see no valid  reasoning for  limiting its  scope in Section 4 as was suggested  in the  course of  the argument.  The case is really covered  by the  decision of  Rowlatt, J.,  in A-G v. person.......... "      In Westminster  Bank Ltd. V. Attorney General (1939 (1) Chancery   610), the court of Appeal in England considered a case where a settlor assigned to bank as trustee life policy and investments  on trust  to accumulate  the income  of the investment for  21 years or during his life whichever should be shorter  and thereafter  to hold  the settled property on trust to pay the income to other persons specified there. In considering the  application of  Section 4 to the amounts so settled by  the  deceased  -settlor,  the  Court  of  Appeal followed the  test  laid  down  in  Re  Hodson’s  Settlement (supra) and  the decision  of House  of Lords in Tennant and ors. (supra) observing that it was not possible to predicate regarding policy  moneys paid  in respect of a policy at one time belonging  to the deceased, that the deceased never had any interest in that policy.      Our attention  was drawn to a decision for the House of Lords in D’A Vigdor-Goldsmid v. Inland Revenue Commissioners (1953 A.C.  347). In  that case,  the settlor,  inter  alia, appointed a  policy taken  on his  life  and  other  settled property being  free hold   premises  to his son absolutely. From the  date of  that appointment  the premiums previously paid by  the settlor  were paid by his son. To the extent of

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the income from the free hold, premiums thereafter were paid by the  son from  such income. The premiums so paid were, by the  Finance  Act,  1939,  Section  30,  attributed  to  the settlor. The  settlor died  and his  son received  under the policy $48,765.  The Court,  for  the  purposes  of  Section 2(1)(d) of  the Finance  Act, 1894,  came to  the conclusion that the  money received by the son under the policy did not from part  of the  estate of  the  deceased.  The  question, therefore, of  the aggregation  of this  amount  with  other properties of  the deceased  did not arise for consideration before the  House of  Lords  in  that  case.  In  fact,  the decisions in  Attorney General  v. Pearson and Ors., Tennant and Ors.  and Westminster Bank Ltd. (supra) were referred to and it was observed that the issue in those cases was one of aggregation and,  therefore, none  of these three cases were directly in  point. The  decision, therefore, in D’A Vigdor- Goldsmid (supra)  is not  directly relevant  to the issue in the present case.      Applying  the   test  as   laid  down  in  Re  Hodson’s Settlement  (supra)  to  the  present  case,  prior  to  the assignment, the deceased clearly had an interest in the life insurance policies.  Even  after  the  assignment,  had  the assignees disclaimed  their interest  in the  policies,  the benefit under  the  policies  would  have  resulted  to  the deceased or  his representatives.  Therefore, it  cannot  be said that  the deceased  never had  an interest  in the life insurance policies  for the purposes of Section 34(3) of the Estate Duty  Act, 1953.  the amount  under  the  three  life insurance policies  is, therefore,  liable to  be aggregated with the general estate of the deceased.      In view  of the above, the other question as to whether the debts under the three policies should be paid out of the general estate of the deceased or out of the insurance money does not now survive.      In the  premises, we  hold that  the amount  under  the three life  insurance police  is forms a part of the general estate of  the deceased and that the amounts under the three life insurance  policies have  to  be  aggregated  with  the general  estate   of  the   deceased  for   the  purpose  of determining the  rate  of  estate  duty.  The  appeals  are, therefore, dismissed.  In the  circumstances, however, there will be no order as to costs.