Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the probable estate duty payable on the death of the life tenant has to be taken into account and the value of the property will be diminished by that for charge of wealth-tax in the hands of the remaindermen?

High Court Of Andhra Pradesh

Commissioner Of Wealth Tax vs. SB. Naseema Begum & Ors.

Sections WT 5(1)(xxvi), WT 7

S.V. Maruthi & T.N.C. Rangarajan, JJ.

Ref. Case Nos. 53, 56, 65, 69, 77, 78, 106, 107, 116, 133 & 134 of 1989 & 229 of 1990

5th March, 1998

Counsel Appeared

S.R. Ashok, for the Revenue : Y.Ratnakar, for the Assessee in RC Nos. 53, 69, 77 & 78 : B.H. Murli Krishna, for the Assessee in RC Nos. 65, 106, 107, 116 & 229 : None, for the assessee in RC Nos. 56, 133 & 134.

JUDGMENT

T.N.C. RANGARAJAN, J. :

In these cases, certain common questions have been referred by the Tribunal. In R.C. Nos. 106 of 1989, 107 of 1989, 116 of 1989, 133 of 1989, 134 of 1989 and 229 of 1990; the following three questions have been referred :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the probable estate duty payable on the death of the life tenant has to be taken into account and the value of the property will be diminished by that for charge of wealth-tax in the hands of the remaindermen?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the rate of interest adopted by the assessee’s actuary is correct? Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the rate of interest as given in the WT Rules for valuation of life interest is applicable to the present case where the corpus is jewellery which is appreciable asset?”

2. In R.C. Nos. 53 of 1989, 56 of 1989, 65 of 1989, 69 of 1989, 77 of 1989 and 78 of 1989 the following questions have been raised : “1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the probable estate duty payable on the death of the life tenant has to be taken into account and the value of the property will be diminished by that for charge of wealth-tax in the hands of the remaindermen? Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the rate of interest as given in the WT Rules for valuation of life interest is applicable to the present case where the corpus is jewellery which is an appreciable asset? Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the rate of interest adopted by the assessee’s actuary is correct?” The admitted facts are that the assessees are all beneficiaries of a trust called H.E.H. the Nizam’s Jewellery Trust. The assessees returned the value of their interest in the trust properties on the basis of the valuer’s report. The WTO accepted the returns. In some cases, the CWT considered such assessments to be erroneous and prejudicial to the Revenue. In other cases, the WTO, himself reopened the assessments. The view of the Department was that the valuation made by the assessees’ valuer was incorrect for three reasons, namely, (i) that the estate duty payable on the death of the life tenant was wrongly deducted; (ii) that no adjustment has been made for appreciation in the value of the property; and (iii) that the interest rate was wrongly taken at 6-1/2 per cent, for the purpose of actual valuation.

The Tribunal rejected these three grounds on finding that the accepted method of valuing the remaindermen’s interest included a deduction of the estate duty, that the value had been taken on the basis of the Department, valuer’s report and so did not call for appreciation and that the interest rate adopted was given in the table annexed to the WT Rules itself. At the instance of the Revenue, the questions set out above have been referred. With reference to the first question whether the estate duty liability could be deducted in ascertaining the value of the remaindermen’s interest, learned standing counsel for the Revenue submitted that once a formula is adopted for ascertaining the value, there is no need to import any further criteria and relied on the decision of the Supreme Court in the case of Bharat Hari Singhania vs. CWT (1994) 118 CTR (SC) 125 : (1994) 207 ITR 1 (SC). Learned counsel for the assessees, however, submitted that since the valuation of the remaindermen’s interest arises on the fiction of the life tenant dying on the valuation date, it has to be taken to the logical conclusion for the purpose of deducting the estate duty leviable on that event. He also pointed out that the Tribunal has referred to the principles of valuation given in the books by Dymond & Green on Death Duties. In order to understand the issue raised, we have to keep in mind the provisions of s. 21 of the WT Act which brings to charge the asset held by a trustee. According to that section wealth-tax has to be levied on the trustee in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf or for whose benefit the assets are held. In the present case, the beneficiaries are remaindermen, who are entitled to the benefit only on the death of the life tenants. These remaindermen had earlier taken the stand that since the property does not devolve on the remaindermen till the life-time of the life tenant, they will not be liable to any tax at all. But the Supreme Court in CWT vs. Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust 1977 CTR (SC) 306 : (1977) 108 ITR 555 (SC) held that :

The consequences of the provisions in s. 21(1) that the trustee is assessable ‘in the like manner and to the same extent’ as the beneficiary are three-fold. In the first place, there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly.” It was further observed that the position is as if the preceding life-interest had come to an end on that date and if, on that hypothesis, it is possible to determine who precisely would be the beneficiaries and on what determinate shares, sub-s. (1) of s. 21 must apply and it would be a matter of no consequence that the number of beneficiaries may vary in the future either by reason of some beneficiaries ceasing to exist or some new beneficiaries coming into being.

7. In view of this exposition of the law, the interest of the remaindermen has to be valued on the valuation date as if the life tenant had died on that date. If that were so, the logical conclusion is that, on that date, there will be an estate duty liability which will be a charge on the estate. Under s. 7 of the WT Act, the value of the asset has to be estimated as the market value which a willing buyer will pay as the price which it would fetch if sold in the open market and a willing buyer would naturally consider what he will get on the event of the life tenant dying and the interest of the remaindermen being available to them. That would necessarily be the amount as diminished by the estate duty because under s. 74 of the ED Act, the estate duty is a first charge on the property.

8. Learned standing counsel for the Revenue submitted that such an inference should not be drawn in making a notional valuation because where a formula has already been adopted, there is no need to add to that. He also explained the formula for valuing the remaindermen’s interest with the assistance of the valuer. But that is only with reference to the interest of the remainderman and not with reference to the asset that would be available for transfer by the remainderman when the interest falls into his possession. Learned counsel for the standing counsel for the Revenue relied on the decision of the Supreme Court in Bharat Hari Singhania vs. CWT (supra), to contend that it is not necessary to extend the fiction of the death to a case of liability to estate duty where valuation is made only for the wealth-tax purpose. The Supreme Court has in CIT vs. S. Teja Singh (1959) 35 ITR

408 (SC) approved the observations of Lord Asquith by observing as follows: “‘If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs : it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs’.”

9. In the case relied on by the Revenue, the question was whether in ascertaining the value of a share under the break-up method in r. 1D of the WT Rules, the capital gains tax that may be payable in case shares are sold is liable to be deducted. The Supreme Court pointed out that even though a fiction could go to its logical extent in the case of valuation of a share by a break-up method, there was no sale of asset and there was therefore no question of capital gains tax being attracted or being paid. This case, does not, therefore, detract in any way from the application of the principle enunciated by the Supreme Court to the facts of the present case. Here, the valuation itself is only on the basis that the life tenant had died on the valuation date and we are trying to ascertain the market value with reference to what a willing buyer will pay for the asset which falls into the possession of the remaindermen. The asset can be sold by the remaindermen only after it falls into his possession and he cannot get it without paying the estate duty or having it charged on the property. The willing buyer will necessarily take that into account in giving his offer. This is the reason why even in the ED Act where the interest in expectancy is to be valued, r. 14(7) lays down the following conditions : “In arriving at the market value of interests in expectancy, the following conditions shall be taken into account, namely : (a) The age and state of health of the life tenant, the contingencies affecting the duration and extent of his interests and the possible cost of covering his interest by insurance. (b) The duty and costs of realisation and distribution payable when the interests fall into possession (c) The character of the assets and the possibilities of their appreciation or depreciation in value. (d) The rate of interest, and officially recognised tables of mortality.” [Emphasis, italicised in print, supplied] Clause (b) clearly refers to deduction of estate duty as one of the items. This being the accepted formula of the Department in the analogous statute we see no reason to entertain the objection of the Revenue that there is any extension of a fiction beyond the needs of the situation. Our answer to the first question in all the cases and the second question in the second batch of cases is, therefore, in the affirmative and against the Revenue.

With reference to the second and third questions in the first batch of cases, it is not in dispute that the valuer has taken only the rate of interest given in the table annexed to the WT Rules. Hence, our answer to these questions is also affirmative and against the Revenue. With reference to the third question in the second batch of cases, the assessee claimed deduction under s. 5(1)(xxvi) in respect of the ground that the bank deposits were held by the trustee and not by the beneficiary. The Tribunal, however, allowed the exemption accepting the fact that the beneficiary is also the owner of the asset as otherwise the beneficiary would not be liable to tax in respect of that asset. This view has been confirmed by this Court as held by the Supreme Court in Bharat Hari Singhania’s case (supra) In the circumstances, this question is also answered in the affirmative and against the Revenue. Reference answered accordingly.

[Citation : 258 ITR 503]

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