M.Ct. Muthiah and another, Controller of Estate Duty, Madras Vs. Controller of Estate Duty, Madras, M. Ct. Muthiah and another

Citation - AIR 1986 SC 1863

Honourable Judges - R.S. PATHAK AND SABYASACHI MUKHARJI

Issue - Estate Duty Act (34 of 1953), Section 6, Section 2(16)

Date of Judgement - Jul 17 1986

Case Number : Civil Appeals Nos. 2086 of 1974 with 67 (NT) of 1975

Judgement:

SABYASACHI MUKHARJI, J.:- These two appeals are from the judgment and order of the Madras High Court dated 20th September, 1973 by certificates of fitness granted by the High Court. under S. 65 of the Estate Duty Act, 1953, hereinafter called the Act.
2. Civil Appeal No. 2086 of 1974 is by accountable persons and Civil Appeal No. 67 of 1975 is by the revenue. The judgment under appeal is reported in 94 ITR .
3. The accountable persons are the sons of one fate M. Chindambaram Chettiar hereinafter called the deceased. The deceased was the karta of a Hindu undivided family. He gave his first son Muthiah, in adoption to his divided paternal uncle Pethachi Chettiar, and adoption ceremony was held on 7th June, 1931. Subsequently his second son, also called Pethachi, was born in 1933. with whom the deceased was joint throughout his life.
4. On 21st February, 1954, prior to proceeding to Malaya by air, the deceased took out a personal accident insurance policy with the United India Fire and General Insurance Company Ltd. (hereinafter called the Insurance Company). Under the terms of the said policy which was to be in force for one month, the Insurance Company had agreed that if at any time during the currency of the said policy, the deceased should sustain any accident resulting in any injury or injury leading to his death, then, the Insurance Company undertook to pay to the assured or to the legal representative of the assured in case of the assured's death, such sum as might be appropriate in the Table of Benefits appended to the Policy. The Table of Benefits mentioned that in case of death or total disablement the benefit payable was Rs. 2 lakhs, in case of partial disablement, Rs. 1 lakh, in case of temporary disablement, a weekly payment of Rs. 1200/- or Rs. 300/- according to the nature of the disablement. The policy, inter alia, provided that "the policy is unassignable and the company shall not be affected by notice of any trust or purported to be imposed upon assignment of or of any charge or lien imposed or purported or any dealing with the policy and the receipt of the insured or the executors or administrators of the insured for any moneys payable thereunder shall in all cases be an effectual discharge to the company". A sum of Rs. 250/- was paid or credited as paid by the deceased as and towards the premium and other charges for the aforesaid personal accident insurance policy. It also appeared that in the proposal Form dated 20th February, 1954 filed by the deceased with the Insurance Company, the deceased had effected a nomination in favour of his son M. Ct. Muthiah. On the 13th March, 1954, the deceased died following the crash of the airliner in which he had travelled. On his death the Insurance Company paid the nominee, the appellant No. 1 herein a sum of Rs. 2 lakhs which was the benefit stipulated to be paid, in such an event, under the terms of the policy. At the time of his death the deceased had other properties and interests. One was his interest as an undivided coparcener in his joint family which consisted (after the adoption away of his first son A, Muthiah) of the deceased and his second son Pethachi.
5. In the assessment under the Estate Duty Act, 1953, (hereinafter called the 'Act'), the Deputy Controller of Estate Duty was of the view that the personal accident insurance money of Rs. 2 lakhs paid by the Insurance Company should be charged to estate duty and further that it had to be aggregated with the rest of the properties passing on the deceased's death. He held further that the insurance money of Rs. 2 lakhs was property which the deceased was competent to dispose of by will. Before the Deputy Controller, it was urged that the amount of Rs. 2 lakhs could not, in any case, be aggregated with the rest of the properties, but must be brought to charge independently as a separate,state in itself, the contention being that the deceased had no interest at all in the said insurance money. The Deputy Controller rejected this contention as untenable, holding that the deceased did have an interest in the insurance money. As in respect of the deceased's interest in the coparcenary property, which had to be included in the dutiable estate, the Deputy Controller took the view that such interest extended to 1/2 share of the joint properties on the basis that the deceased and his second son Pithachi were alone entitled as coparceners to the said properties. He rejected the contention that M. Ct. Muthiah who bad been adopted away from this family in 1931 was nevertheless entitled, as on the date of the deceased's death, to an equal interest in the deceased's family properties, so that the quantum of the deceased's coparcenary interest was not one-half but only - one-third of the total value of the family properties. It was urged before the Deputy Controller that the adoption of M. Ct. Muthiah in 1931 was on the basis that notwithstanding his adoption into another family, M. Ct. Muthiah must continue to retain his interest in the properties belonging to the family of his birth. A "Muri" in Tasil in curdgeon-leaf purported to have been executed on 7th June,1931 was produced before the Deputy Controller in support oil the above plea. The Deputy Controller did not accept the genuineness of the said document. But even otherwise, the Deputy Controller proceeded to hold that the "Muri" had no legal effect on the continued rights of adopted son in the family of his birth subsequent to his adoption. He accordingly included, in the dutiable estate, one-half of the joint family properties as being the measure of the deceased's coparcenary interest.
6. The accountable persons appealed against the above assessment to the Appellate authority which at that time was, as the law then was, the Central Board of Revenue.
7. The Central Board held that the insurance money of Rs. 2 lakhs was chargeable to estate duty under section 6 of the Act. The Board took the view that under the terms of the policy, the deceased had the right to nominate a person to take the moneys on the deceased's death and also the capacity to dispose of the amount by testamentary disposition.
8. On the question as to whether the amount of Rs. 2 lakhs must, in any event, be charged as a separate estate in itself, segregated from the rest of the properties, the Central Board rejected the accountable persons' contention that the deceased never had any interest in the said insurance money. On the terms of the accident policy, the Board was of the view that the deceased did have the power of disposition over the insurance money both by the exercise of the power of nomination under the policy and also independently by the exercise of any testamentary power.
9. On the point. relating to the exact quantum of the deceased's interest in coparcenary property, the Board accepted the genuineness of the "Muri". Before the Board, an Agreement in writing dated 19th August, 1956 between A. Muthiah and Pathachi, the two sons of the deceased, was produced to further support the claim that Muthiah retained his coparcenary interest in the family of his birth despite his adoption into another family.
10. The Board however hell that (under) the Hindu lam' adoption makes the adopted son lose his property interests in the family of his birth and that the "dwamushayana" form of adoption pleaded by the accountable persons had become obsolete in Madras. The Board rejected the claim that there was a custom prevailing in the Muttuktta Chettiar community, to which the deceased belonged, under which the adopted son never loses his property rights in the fairly of his birth. On these findings, the, Board upheld the assessment of one-half of the value of the whole of the joint family property as the measure of the deceased's dutiable interest.
11. After the decision of the Board, the following questions of law were referred to the High Court:
1. Whether the deceased was competent to dispose of the moneys payable under the accident policy and whether the sum of Rs. 2,00,000/- is includible in the principal value of the estate?
2. If the sum of Rs. 2 lakhs was liable to be assessed to duty whether the said amount could be aggregated with the other properties or should be assessed as an estate by itself?
3. Whether the share of the deceased Chindambaram Chettiar in the property of the joint family at the time of his death was one half or one third of the property?"
The High Court by the judgment under appeal answered the first question in favour of the revenue and against the accountable person and the second and third questions were answered against the revenue and in favour of the accountable person.
12. Being aggrieved by the answer against the first question, the accountable person has preferred the appeal being appeal No. 2086 of 1974 and on the certificate granted by the High Court and on the subsequent two questions, the revenue obtained the certificate of fitness to appeal to this Court which is appeal No. 67(NT) of 1975.
13. The High Court in the judgment under appeal held that under S. 5 of the Act, all properties which passed on the death of the person were liable to estate duty. Under S. 6 of the Act, property which the deceased was at the time of his death competent to dispose of should be deemed to pass on his death and under S. 3(1)(a), a person was deemed competent to dispose of property if he has such an estate or interest therein or such general power as would, if he were sui juris, enable him to dispose it of. General power included every power or authority enabling the holder thereof to appoint or dispose of property as he thought fit, whether exercisable by instrument inter vivos or by will or both. A personal accident policy was not a contract of indemnity. The amount payable on death of the insured was fixed in the policy itself. It was in the contemplation of the parties even at the time of the contract that in the case of death the amount would be payable either to the nominee or the legal representative and not to the assured. It was thus in the nature of a provision made by the deceased for such person. The deceased had no interest in the money as such because that came into existence the moment after his death and was payable to the nominee or legal representative. But he had a right in the payment on his death to his legal representatives. In other words, he had interest over the payment of money and not in the money itself. He had a right to take away that right of the legal representatives to receive the money and to vest it in some other person by will. He could nominate a person to whom the amount should be paid. Nomination in such a case was in the nature of a disposition by will and as such till he breathed his last he could cancel such nomination and nominate another. The nominee, unlike an assignee of life policies, got title to the money on death, for the property itself came into existence by reason of the death and was payable to the nominee by virtue of the power of disposition by will which the deceased had over the sum: The High Court further held that the- money paid on death was property and that was clear. This property, according to the High Court, came into existence at the time of death. The High Court further held that though the property was not in existence before his death, since it came in at the time of his death, the deceased was competent to dispose of the same by will. It was this power, according to the High Court, of disposal that attracted the provisions and made it property which was deemed to pass on his death under S. 6 of the Act. The beneficial interest in the policy which accrued or arose on death was the sum paid out under the policy and this beneficial interest having been purchased by the deceased, the provisions of section 15 of the Act were also attracted. Further, the estate had been depleted to the extent of the premium paid and the beneficial interest purchased and the deceased not having received a full equivalent for what he has paid and having regard to the nature of the policy, the intention from the beginning was to make a provision. The principal value of the estate that was deemed to pass under S. 6 and which accrued or arose under S. 15 was that sum which was paid out under the policy. As there was no devolution of interest from the deceased to another person and from the very inception the amount was payable only to the nominee or legal representative, section 5 of the Act was not applicable.
14. It was further held by the High Court that in the case of a personal accident policy, the property was not the policy but the ultimate money that was paid and that should be deemed to pass on death of the deceased because of his competency to dispose of the same by will and the holder of the policy had a right to have the amount paid to his legal representative or nominee. The right was with respect to the disposition of the money payable under the policy and not a right in the money itself. But in the case of a life insurance policy, both the policy and the money payable thereon was property which could. be settled during the lifetime of the insured. As the deceased never had any interest during his lifetime in the money paid on death under the personal accident policy, though he was competent to dispose of the same by will, the sum paid under the policy was not aggregatable with the other estate of the deceased and was to be treated as an estate by itself under S. 34(3) of the Act. The High Court held that though as the deceased was competent to dispose of the moneys payable under the policy, the sum of Rs. 2 lakhs was includible in the principal value of the estate but the same was not liable to be aggregated with the other properties and had to be assessed as an estate by itself.
15. Regarding adoption, the High Court was of the view that the type of adoption set out by the accountable person was recognised by the custom of the Nattukottai Chettiar community, the terms of the muri formed part of the adoption and the adoption could not be considered dehors the agreement and hence the deceased had only one-third share in the joint family properties at the time of his death:
16. In order to appreciate the question involved in Civil Appeal No. 2086 of 1974, it is necessary to bear in mind the scheme of the Act. Section 5 deals with levy of estate duty. It states that there shall be levied and paid upon the principal value ascertained in the manner provided of all properties which passes on the death of such person. Therefore, three factors are important; (1) there must be passing, (2) of such property and (3) such passing on must be on the death of a person..Section 2(15) of the Act defines 'property' 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. There are two Explanations which are not necessary to be set out in detail.
17. Section 2(16) deals with 'property passing on the death' and includes any 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'.
18. Section 3(1)(a), (b) & (c), inter alia, provides for certain situations in which a person is deemed competent to dispose of property. Section 5 as we have noted before deals with the levy of estate duty. Section 6 deals with property within disposing capacity and provides that property which the deceased was at the time of his death competent to dispose of shall be deemed to pass on his death.
19. Section 14 deals with policies kept up for a donee. It is not necessary to set out the actual terms of the said provision. Section 15 deals with annuity or other interest purchased or provided by the deceased and provides that any annuity or other interest, purchased or provided by the deceased, either by himself alone or in concert or by arrangement, with any other person shall be deemed to pass on his death to the extent of the beneficial interest accruing or arising, by survivorship or otherwise, on his death.
20. Section 34 of the Act provides for aggregation and stipulates that for purposes of determining the rate of the estate duty to be paid on any property passing on the death of the deceased, what kinds of property should be aggregated. Except sub-section (3) of S. 34, nothing is material for our present purpose. Sub-section (3) of S. 34 reads as follows:
"(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 Explanation to clause (15) of S. 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.''
21. Sree C. Ram Krishan, learned counsel for the accountable persons in the first appeal before us and who was the advocate who had appeared before the High Court made various submissions. He submitted that it was a condition precedent for the attraction of the duty that (a) the estate holder must have possessed or enjoyed a property or an interest in property; (b) the interest in a property might be either vested or contingent; (c) out that interest should be with regard to either an immovable property or a movable property or an interest in immovable or movable property which was capable of being ascertained during the lifetime or at the time of the death of the estate holder; (d) a contingent interest could fall within the purview of the Act only if the interest was of a tangible nature and was capable of being ascertained, that. is to say, the estate holder must always be having a possibility to enjoy or possess that interest either actually or constructively during his lifetime itself. He cited the example of a life insurance policy.
22. According to counsel, if the above tests were satisfied then there had to be a passing of that property or interest as contemplated by S. 2(16) of the Act. Even though a person might have a power to dispose of a property or interest in property, he could not or his estate could not be brought within the purview of the Act solely because of the above factors. Because over and above this, in order for an estate to be liable for estate duty the power of disposition must be with regard to a property capable of being ascertainable during his lifetime or at the time of his death. It was urged that a property or interest in property has necessarily to change hands in order to attract estate duty. There has also to be a change in the beneficial possession and enjoyment of the property or the interest in that property. In other words, it was submitted, the property or interest which was liable for estate duty under the Act has to pass through the estate of the deceased. According to the counsel, applying the above principles it could not be said that an accident insurance policy had the characteristics of a property or interest in property and therefore was not liable for estate duty because an accident insurance policy could not be construed as a movable property unlike a life insurance policy or an annuity because as laid down in S. 2(15) it was not only necessary for a person to have property or interest in property but that interest must be in regard to a movable property and his interest should also be capable of being ascertainable during his lifetime or at the time of his death in that movable property. An accident insurance policy, according to him, could not be construed as a property or an interest in property since a person who possessed it could not also be said to have a contingent interest because there was every possibility of the accident policy getting extinguished or rendered worthless during his lifetime; on the other hand in the case of a life insurance policy, there is always a tangible continuing interest, only that the value of that interest might be subjected to a change at the time of passing of the property. Further it was submitted that it was not necessary that during the lifetime of the deceased the property in question should have "attained" the full value e.g. 'Annuity'. An annuity could mature even after the death of the estate holder. But it must be noted that the estate holder in the case of an annuity deposit knew precisely the value of the contingent interest that would mature at a future date. Consequently even a contingent interest which did not get crystallised during the lifetime of the deceased but which interest would, with certainty, accrue after the demise of the estate holder will be caught by section 6 as a property passing from the deceased to the beneficiary. Thus though only a future interest that crystallised after the death of the estate holder it would be deemed as a property of the estate holder. Learned counsel submitted that an accident policy is not property, because it lacks the well known characteristic of property namely that it should be capable of being mortgaged or pledged as a security. It lacked the characteristics of a security. Consequently an accident policy was not a property, according to counsel.
23. Since the benefit in accident policy could only accrue after the death of the estate holder, it became property for the first time, after the demise of the estate holder. There was, according to the counsel for the accountable person, no element of property during the lifetime of the estate holder, Therefore, there could not be any framing of property in a case, like this. A possession of accident policy could not be construed as a property in the hands of the estate holder. It was further submitted that in the case of an accident insurance policy, there cannot be passing because there was no change in the beneficial possession or enjoyment of the property or interest in the policy. The interest in accident insurance policy did not pass through the estate of the deceased as in the case of a life insurance policy or annuity. But here the interest directly went to the beneficiary in the case of the death by accident of the estate holder. It was in the premises submitted that it cannot be accepted that the deceased had any power of disposition over the accident policy during his lifetime because the interest in an accident policy could not also be elevated to that of a contingent interest. since there is always the chance for the accident policy being rendered worthless during the lifetime of the deceased. There is also no chance for the deceased to bear the fruition of the policy during his lifetime because in the case of an accident