GANGADHARAN PILLAI P Vs. CONTROLLER OF ESTATE DUTY
LAWS(KER)-1967-12-18
HIGH COURT OF KERALA
Decided on December 06,1967

P. GANGADHARAN PILLAI Appellant
VERSUS
CONTROLLER OF ESTATE DUTY, ERNAKULAM. Respondents

JUDGEMENT

ISAAC, J. - (1.) THESE two reference arise out of an order passed by the Central Board of Revenue on April 16, 1960, in Estate Duty Appeal No. KL 28; and they relate to the assessment of estate duty under the Estate Duty Act, 1953 (hereinafter referred to as the Act) on the property passing on the death of one Sri Parameswaran Pillai of Quilon, who died on May 13, 1956. The applicant in these references is one of the accountable persons. He delivered to the Assistant Controller of Estate Duty, Ernakulam, a statement of account of all the properties in respect of which the estate duty is payable, showing a total value of Rs. 2,04,861. After scrutiny of the statement, and giving the accountable persons due opportunity of being heard in the matter, the Assistant Controller determined the principal value of the estate at Rs. 9,16,321, and the estate duty payable thereon at Rs. 1,33,560.
(2.) THE controversy before the Assistant Controller related only to the following matters : (i) THE deceased, Parameswaran Pillai, had purchased a land more than two years prior to his death in the name of his wife. He had also constructed a house in the said land, wherein he was living with his wife, and children till he died. It was contended that the above land and building belonged absolutely to the wife of the deceased as a gift, which was made more than two years prior to his death, and that the value of this property should be, therefore, be treated as part of the property passing on the death of the deceased. (ii) Sri Parameswaran Pillai was carrying on a business in cash went and tobacco. On December 29, 1954, which is within two years of his death, he executed a deed of settlement in respect of certain immovable properties, and the assets and liabilities of the above business together with its goodwill in favour of his sons. According to the applicant, the business was then running at a loss and the value of its assets was a negative figure. It was only after the donees had invested their own moneys, expended their skill and effort in running the business and ploughing back the accrued profits into the business, that the business flourished, and the balance-sheet of the subsequent year showed a positive value for the assets. It was, therefore, contended that these assets should not be valued, as they stood at the time of the death, but only as they stood on the date of the settlement. In other words, the additions brought to the business by the donees should be excluded from the valuation; and (iii) the business of the deceased had no goodwill, as it was being run at a loss; and there was no scope for assessing any value for its alleged goodwill. The Assistant Controller rejected all the above contentions. The applicant, therefore, field an appeal before the Central Board of Revenue, who was then the appellate authority, and pressed the same contentions before it. The Central Board upheld the order of the Assistant Controller, except with regard to the value of the goodwill of the business. It held that the value of the goodwill of the cashew business was nil, as against Rs. 1,25,955 fixed by the Assistant Controller. As regards the value of the goodwill of the tobacco business, the sum of Rs. 69,831 fixed by the Assistant Controller was reduced to Rs. 50,000. Being dissatisfied with the order of the Central Board, the applicant moved under section 64 of the Act by an application dated 6th June, 1960, to refer the following questions of law said to arise out of the said order for decision by this court : 1. Whether, on the facts and in the circumstances of the case, the Central Board of Direct Taxes was right in holding that the bona fide possession and enjoyment of the property gifted was not immediately assumed by the donee and thenceforward retained to the entire exclusion of the donor ? 2. Whether, on the facts and circumstances of the case, the Central Board of Direct Taxes was justified in including the profits of the business carried on exclusively by the donees with their own monies and the augmented value of the assets, the augmentation being due to the exercise of the skill and efforts of the donees, in the value of the assets said to pass on the death of Sri Parameswaran Pillai ? 3. Whether the Central Board of Direct Taxes was justified in taking into consideration also the profits of business conducted exclusively by the appellants in computing the value of the goodwill of the business which was gifted long ago before the death of Sri Parameswaran Pillai ? 4. Whether, on the facts and circumstances of the case, the method of computation adopted by the Central Board to Direct Taxes for computing the value of the goodwill is justified in law ? 5. Whether, in any view of the matter, the Central Board of Direct Taxes should not have taken the profits from the two main items of business together in computing the profits for ascertaining the goodwill ? The Central Board of Direct Taxes, New Delhi, considered the application; and it held by its order dated December 16, 1965, that only the following three questions of law arose out of its order for decision by the High Court : "1. Whether, on the facts and in the circumstances of the case, the house property at Q. M. C. No. 200 in Thamarakulam Ward, Quilon, standing in the name of the wife of the deceased was correctly included in the estate of the deceased as property deemed to pass on his death under section 10 of the Act ? 2. Whether, on the facts and in the circumstances of the case, for the purpose of inclusion in the estate, the properties covered by the settlement dated December 29, 1954 (including the goodwill) should have been valued as on the date of death as has been done by the Board or as on the date of the settlement as was contended by the applicant ? 3. Whether, on the facts and in the circumstance of the case, for the purpose of including in the estate the property covered by the settlement dated December 29, 1954, the profits of the business subsequent to the date of the settlement which had been ploughed back into the business was properly taken into account by the Board ?" Accordingly, the above three questions were referred to this court by the Central Board by its letter dated February 7, 1966, under section 64(1) of the Act, as it stood prior to the Estate Duty (Amendment) Act, 1958, along with statement of the case. This reference is I. T. R. No. 19 of 1966. 4. The applicant did not agree to the statement of the case; and he also claimed that more questions of law arose out of the order of the Central Board for reference. Hence, he filed O. P. No. 2087 of 1966 in this court under section 64(3) of the Act to direct the Central Board to refer the following four questions of law arose out of the order of the Central Board to refer the following four questions of law also, for the opinion of this court : "(1) Whether, on the facts and circumstances of the case, the Central Board was justified in including the profits of the business carried on exclusively by the donees with their own monies and the augmented value of the assets, the augmentation being due to the exercise of the skill and efforts of the donees, in the value of the assets said to pass on the death of Sri Parameswaran Pillai. (2) Whether the Central Board was justified in taking into consideration also the profits of business conducted exclusively by the appellant in computing the value of the goodwill of the business which was gifted long ago before the death of Sri Parameswaran Pillai. (3) Whether, on the facts and circumstances of the case, the method of computation adopted by the Central Board of Direct Taxes for computing the value of the goodwill is justified in law. (4) Whether, in any view of the matter, the Central Board of Direct Taxes should not have taken the profits from the two main items of business together in computing the profits for ascertaining the goodwill."
(3.) THE above O. P. was allowed. Accordingly, the Central Board, by its letter dated October 23, 1967, referred these four questions also to this court, along with a statement of the case. This reference is I. T. R. No. 89 of 1967. We shall now proceed to give our decision on the questions referred in these two references. Question No. 1 in I. T. R. No. 19 of 1966 : It is not disputed that the property consisting of the land and the house therein, which is the subject-matter of this question, became the property of the wife of Sri Parameswaran Pillai more than two years before his death, pursuant to the gift made by him. It is also admitted that the deceased was living with his wife and children in the said property can be deemed to be property passing on the death of Sri Parameswaran Pillai, depends on the application of section 10 of the Act. This section reads as follows : "Gifts whenever made where donor not entirely excluded. -Property taken under any gift, whenever made, shall be deemed to pass on the donors 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." The Supreme Court had occasion to construe the above section in a recent decision in George Da Costa v. Controller of Estate Duty. The question in that case was whether a house gifted by a deceased person to his sons four years prior to this death can be deemed to be property passing on his death, if he continued to live with his sons in the said house after the gift. The court answered the question in the affirmative; and in doing so, it said : "The crux of the section lies in two parts : (1) the donee must bona fide have assumed possession and enjoyment of the property, which is the subject-matter of the gift, to the exclusion of the donor, immediately upon the gift, and (2) the donee must have retained such possession and enjoyment of the property to the entire exclusion of the donor or of any benefit to him, by contract or otherwise. As a matter of construction we are of opinion that both these conditions are cumulative. Unless each of these conditions is satisfied, the property would be liable to estate duty under section 10 of the Act." ;


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