Rc/242/1996 Of Commr. Of Income Tax Hyd v. Late Nawab Shabbir Jah Bahadur Hyd

HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.242 OF 1996 ORDER:- (per Hon’ble Sri Justice Challa Kodanda Ram) At the instance of the Revenue, the Income Tax AppellateTribunal, Hyderabad Bench-‘B’ had referred the following question oflaw: “Whether, on the facts and in the circumstances of thecase, the ITAT was correct in holding that no propertypassed on to the accountable persons on the death of thedeceased u/s 7 of the E.D. Act in respect of HEH TheNizam’s Jewellery Trust?” 2) The matter arises under the Estate Duty Act (for short,“the Act”). HEH Nawab Mir Sir Osman Ali Khan Bahadur, the thenNizam of Hyderabad and Berar, settled certain precious gems, jewels,ornaments and articles of jewellery and antique pieces specified in theFirst Schedule and securities worth Rs.10 lakhs specified in theSecond Schedule on trust vide Trust Deed dated 29.3.1951, for thebenefit of his children. The trust is named as HEH the Nizam’sJewellery Trust. By various trust deeds, the modalities of distributionof the income and other assets were delineated. Sofaras the presentcase is concerned, it is relevant to record that the funds in these casesare relatable to remaining sons’ funds and remaining daughters’ funds. As per the trust deed, the deceased late Sb.Ramzani Begum and Nb.Shabbir Jah Bahadur are the beneficiaries of the trust. The shares ofthe beneficiaries are specified in the trust deed. As per which, both areentitled to the incomes of the respective funds which are to be earnedby the trustees from the investment of the funds realised on sale ofjewellery of the trust. Clause-13 of the Deed provided for the eventuality of sale of jewellery. However, the jewellery could not besold by the trustees as stipulated and consequently there were nofunds from which income could be earned and received by thetrustees. The accountable persons declared the value of the interestof the two deceased at nil as in the wealth-tax returns of the twodeceased for the period prior to their death. The Assistant Controller ofEstate Duty basing on the valuation report of the valuation officervalued the interest of the two deceased at Rs.42,90,200/- in the case ofSb. Ramzani Begum and Rs.55,09,300/- in the case of Nb. Shabbir JahBahadur. The valuations were arrived at by dividing the corpusnotionally as per Clause 4 of the deed. This was challenged by theaccountable persons before the Appellate Controlling Officer of EstateDuty who held that Section 5(1) of the Act, has no application as nobeneficial interest of the deceased passed or changed hands on theirrespective deaths. He also held that the two deceased had only a lifeinterest limited to income from the principal fund of the trust and suchinterest could have only notionally passed on their death under Section7(1) of the Act and on account of the death such interest nevermaterialised during their life time as there was no sale of jewellery interms of Clause 13 of the Trust Deed. The Appellate Controller EstateDuty had also held that even on the basis of their enforceable right ofinterest in the settled property, there was no passing of that right as thesame could arise only after the sale of some or all of the items ofjewellery by the trustees and not from the date of handing over of thejewellery to the trustees, but it was to take effect from the time of theirsale together with investment of the proceeds in income-yieldingassets. He further held that it was not enough that some interestceased on death, but there must be some property with respect towhich the interest ceased and some benefit must accrue to someperson, viz., the children of the deceased. The Assistant Controller ofEstate Duty challenged the order of the Controller of Estate Duty before the Income Tax Appellate Tribunal, Hyderabad Bench. The Tribunalwhile dealing with the case had recorded as under: the Income Tax Appellate Tribunal, Hyderabad Bench. The Tribunalwhile dealing with the case had recorded as under: “8. As per caluses 9 and 10 of the deed, the two deceased weregiven a right to enjoy the income for their life. In other words, suchright to enjoy the income was to cease on their respective deaths. Assessability of such an interest is provided in Section 7(1) of theAct which reads as under: “7. Interests ceasing on death. (1)Subject to the provisions of this section, property inwhich the deceased or any other person had aninterest ceasing on the death of the deceased shall bedeemed to pass on the deceased' s death to theextent to which a benefit accrues or arises by thecesser of such interest, including, in particular, acoparcenary interest in the joint family property of aHindu family governed by the Mitakshara,Marumakkattayam or Aliyasantana law.” On a bare reading of Section 7, it is evident that the deceased must have an interest in a property, that interest must cease on his/herdeath and that a corresponding benefit must accrue or arise by thecessor of such interest. Though a right is given or a benefit isgranted to the two deceased as per clauses 9 and 10 of the TrustDeed to enjoy the income of their respective funds, such occasionhad never arisen. The property of the funds remained in the shape ofjewellery on their respective deaths and, therefore, there was noquestion of any investment of the sale proceeds thereof nor anyaccrual of income from investment of such funds. It remained aninchoate right with the two deceased. The two deceased beneficiarieswere entitled to income only if there was income and not otherwise. The jewellery was to be sold within 3 years of the death of thesurvivor of the settler or Prince Azam Jah but could not be soldbecause of some restrictions imposed by the Government and,therefore, the two deceased beneficiaries had no remedy to enforcetheir right. It became a dormant right with the two deceased whichcould never frutify during their life time or even at the time of theirrespective deaths. Such interest, before it became a vested interest,of course, ceased on their respective deaths but no benefit had accrued or arisen by such cessor to their respective successorbeneficiaries mentioned in the trust deed. In these circumstances,therefore, there cannot be any deemed passing of property underSection 7 of the Act as it requires that a corresponding benefit shouldoccur or arise because of the cessor of interest of the deceased. Inour opinion, therefore, the Appellate Controller of Estate Duty wasjustified in holding that there was no passing of property either underSection 5 of under Section 7 of the Act. 9. The issue may be examined from a different angle as well,that is, on the aspect of valuation of the benefit which is deemed topass on cessor of interest. Section 40 of the Act provided for thevaluation of the benefit from interest ceasing on death. It read: “The value of the benefit accruing or arising from thecessor of an interest ceasing on the death of thedeceased shall- a)if the interest extended to the whole income of theproperty, be the principal value of that property, andproperty, be the principal value of that property, and b)if the interest extended to less than the whole income ofthe property, be the principal value of an addition to theproperty equal to the income to which the interestextended.”the property, be the principal value of an addition to theproperty equal to the income to which the interestextended.” This section pre-supposes that there must be some income of theproperty in which the deceased had an interest. On their death, therewas no income in the respective parts of the principal fund to whichthe two deceased belonged and, therefore, ‘passing of property’ failedon this account as well. The interest of the deceased in the incomeof the fund cannot be evaluated in the absence of any income arisingto the fund.” b)if the interest extended to less than the whole income ofthe property, be the principal value of an addition to theproperty equal to the income to which the interestextended.”the property, be the principal value of an addition to theproperty equal to the income to which the interestextended.” This section pre-supposes that there must be some income of theproperty in which the deceased had an interest. On their death, therewas no income in the respective parts of the principal fund to whichthe two deceased belonged and, therefore, ‘passing of property’ failedon this account as well. The interest of the deceased in the incomeof the fund cannot be evaluated in the absence of any income arisingto the fund.” 3) In the light of what has been recorded by the Tribunalholding that there was no passing of property either under Section 5 orSection 7 of the Act, the question now referred is declined to beanswered as the question raised is a pure question of fact and there isno challenge to the said fact or of finding recorded by the Tribunal. It iswell settled by the judgment of the Supreme Court reported in D.Meenakshi Mills Limited vs. CIT[[1]];’that the facts as recorded by theTribunal are required to be accepted by the High Court in exercise ofthe jurisdiction under Section 256(1) of the Act in the absence ofchallenge of the said finding of the Tribunal as perverse. Inasmuch asthere is no challenge in this R.C of the finding that there was nopassing of property either under Section 5 or Section 7 of the Act, thereference fails. 4) Accordingly, the Referred Case is dismissed. No order asto costs. Miscellaneous Petitions, if any, pending in this Referred Caseshall stand disposed of. ______________________ G. CHANDRAIAH,J ____________________________ CHALLA KODANDA RAM, J Gk. HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.242 OF 1996 Date:05.11.2013. Gk [1](1957) 31 ITR 28 SC