Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the accountable person was entitled to a deduction of liability of Rs. 2,64,725 arising on account of a joint agreement dt. 1st May, 1944, with Bharat Bank Ltd. in arriving at the dutiable value of the estate of the deceased ?

The following two questions have been referred to us under s. 64(1) of the ED Act, 1953, in respect of the estate of one Jaikishan Narang :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the accountable person was entitled to a deduction of liability of Rs. 2,64,725 arising on account of a joint agreement dt. 1st May, 1944, with Bharat Bank Ltd. in arriving at the dutiable value of the estate of the deceased ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the interest in the joint family property of the lineal descendants of the deceased was not includible for the purpose of determining the rate of estate duty to be paid on the property passing on the death of the deceased ?”

2. The deceased and one Bhagwandas Mehra entered into an agreement with Bharat Bank Ltd. on 1st May, 1944, as a result of which they agreed to act as guarantee brokers for the bank in respect of transactions introduced by them. The liability of the deceased and Bhagwandas Mehra under this agreement to the bank was joint and several. Under this agreement, Bharat Bank Ltd. in 1946 advanced to M/s Ashok Woollen Mills, Amritsar, certain amount which was guaranteed by the deceased and Bhagwandas Mehra. The liability of the deceased and Bhagwandas Mehra under this agreement to the bank was joint and several.

3. The bank filed a suit against M/s Ashok Woollen Mills, Amritsar, and its partners for recovery of the amount so advanced by the bank together with interest. On 31st Aug., 1963, the bank obtained a decree for the sum of Rs. 2,19,062 against the principal debtor together with interest thereon at 6 per cent per annum. One of the partners of Ashok Woollen Mills died in the meanwhile. The bank took proceedings against the remaining partners and the legal heirs of the deceased partner for recovery of the decretal debt. The bank, however, could not recover any amount.

The bank, thereupon, issued a notice on 30th May, 1965, calling upon the guarantors to make good the liability under the said guarantee agreement of 1st May, 1944. A second notice was issued by the bank on the guarantors on 19th Oct., 1967. The total claim of the bank by this time was Rs. 5,29,450.

The deceased died on 30th Dec., 1967. On the date of his death, the claim of the bank in respect of the above transaction was Rs. 5,29,450.

2. The accountable person claimed deduction of the entire amount of Rs. 5,29,450 from the estate of the deceased. In the alternative, the accountable person claimed deduction of at least 1/2 of the said amount, in view of the fact that the deceased as well as Bhagwandas Mehra were jointly and severally liable to the bank in respect of the said amount. The Asstt. CED negatived this claim. The Tribunal, however, allowed the accountable person to deduct half of this amount from the estate of the deceased. The accountable person had also contended before the Tribunal that the value of the shares of the lineal descendants was not includible for the purpose of determining the rate of estate duty payable on the property passing on the death of the deceased. The Tribunal negatived this contention. In view, however, of the Tribunal’s order permitting the accountable person to deduct half the said amount from the estate of the deceased, the accountable person had no estate duty liability. Hence, he did not file reference against the Tribunal’s order. However, as the Revenue assailed the Tribunal’s order by raising the first question, it is the contention of the accountable person that it is now open to him to raise the question of calculating the rate of estate duty also. Hence, the second question has also been referred to us.

3. In respect of the first question, Mr. Jetley drew our attention to s. 44 of the ED Act, 1953. Under s. 44(a) of the said Act, debts incurred by the deceased which were incurred or created bona fide for full consideration in money or money’s worth wholly for the deceased’s own use and benefit and which are to take effect out of his interest are liable to be deducted from the value of the estate of the deceased. Under s. 44(b), however, an allowance shall not be made for any debt in respect of which there is a right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained.

In the present case, the agreement of 1st May, 1944, whereby the deceased and Bhagwandas Mehra agreed to act as guarantee-brokers of the bank, was an agreement for full consideration. The liability which has arisen as a result of the guarantee which was given by the deceased and Bhagwandas Mehra and on the basis of which the bank advanced the said amount to Ashok Woollen Mills, Amritsar, is also a guarantee for full consideration. Therefore, this is a liability which is to be deducted from the estate of the deceased.

In this connection, Mr. Dastur has relied upon a decision of the Calcutta High Court in the case of Rupchand Mullick vs. CED (1982) 30 CTR (Cal) 106 : (1983) 143 ITR 103, under which the Calcutta High Court has held that a debt owed by the deceased arising from a guarantee given by the deceased is liability which can be deducted from the estate of the deceased. He also relied upon a decision of the Madras High Court in the case of CED vs. A. V. S. (P) Ltd. (1986) 55 CTR (Mad) 127 : (1987) 166 ITR 285 (Mad). In our view, therefore, a liability which has arisen as a result of a contract of guarantee is a liability which can be deducted from the value of the estate of the deceased.

6. It was contended by Mr. Jetley that the deceased as a guarantor will not become liable to the bank unless it could be established that the principal debtor is unable to pay the amount. He, therefore, submits that the liability had not ripened on the date of the death of the deceased. This submission cannot be accepted. Under s. 128 of the Contract Act, the liability of a surety is coextensive with the liability of the principal debtor. As a guarantor, the deceased was liable to pay the said amount to the bank. The deceased, however, was entitled to reimbursement of the amount from the principal debtor. In the present case, however, the bank had already taken recovery proceedings against the principal debtor and was not able to recover any amount. The deceased, therefore, could riot obtain any reimbursement from the principal debtor.

7. The liability of the deceased, however, and of Bhagwandas Mehra is joint and several. Hence, in view of the provisions of s. 44(b) of the ED Act, 1953, the Tribunal has, in our view, rightly held that the accountable person can claim deduction of half the amount from the value of the estate of the deceased. Question No. (1) is, therefore, answered in the affirmative and in favour of the accountable person.

8. In respect of question No. (2), Mr. Jetley contends that in view of the decision of the Supreme Court in CIT vs. V. Damodaran (1979) 13 CTR (SC) 191 : (1980) 121 ITR 572 (SC) it is not open to the assessee to raise this question. Mr. Dastur, however, contends that, as a result of the Tribunal’s order, the accountable person has no estate duty liability and hence he could not have filed reference before this Court in respect of that question. We need not examine this contention. In view of the answer which we have given to question No. (1), it is not necessary for us, in any event, to answer question No. (2) because, on account of our answer to question No. (1), no estate duty is payable by the accountable person. We, therefore, decline to answer question No. (2).

9. In the circumstances, there will be no order as to costs.

[Citation : 186 ITR 449]