Kerala H.C : Whether, on the facts and in the circumstances of the case, the liability of the deceased due to the firm, M/s New Guna Shenoy Co., is liable to be abated under s. 46(1)(b) of the ED Act, 1953 ?

Counsel Appeared

P. K. R. Menon, for the Revenue : C. M. Devan, for the Accountable Person

T. KOCHU THOMMEN, J.:

The following two questions have been referred to us by the Tribunal, Cochin Bench:

“(1) Whether, on the facts and in the circumstances of the case, the liability of the deceased due to the firm, M/s New Guna Shenoy Co., is liable to be abated under s. 46(1)(b) of the ED Act, 1953 ?

(2) Whether, on the facts and in the circumstances of the case, only that portion of the liability of Rs. 1,57,431 which bears the same ratio as the value gifted of the property, namely, Rs. 2,55,256, bears to the net value of the resources of the firm could be subjected to abatment and that the balance of the liability could not be subjected to abatement ?

Question No. (1) was referred at the instance of the assessee and question No. (2) was referred at the instance of the Revenue. A. N. Lakshmana Shenoy died on 5th Aug., 1951. He had gifted properties to two sons and a minor grandson. On attainment of majority by the minor, all the three of them, along with others formed a partnership firm. The properties gifted to them, including the value of the goodwill of the erstwhile business, were of the total value of Rs. 255,256. When these three persons entered into a partnership along with others in the new firm, they took with them as their share of the capital the said sum of Rs. 2,55,256. The new firm subsequently gave a loan to A. N. Lakshmana Shenoy in the sum of Rs. 1,57,641. Upon the death of A. N. Lakshmana Shenoy, the question arose, in computing the value of the estate, whether the accountable persons were entitled to claim deduction representing the said loan of Rs. 1,57,641. The Tribunal applying the provisions of s. 46 (1) of the ED Act, 1953, held that, in so far as the persons who received the properties of the deceased subsequently became partners of the new firm into which they had taken the properties received from the deceased and the loan was given to the deceased by the new firm, computation of the value of the estate had to be made with reference to s. 46(1)(b), and not with reference to s. 46(1)(a) as originally found by the assessing authority. The Tribunal further found that in determining the extent to which the debt received by the deceased abated, one had to determine the nexus between the loan granted and the proportionate value of the assets brought in by the recipients of the properties of the deceased, as warranted by the proviso to s. 46(1). It is for that purpose that the Tribunal directed in paragraph 17 of the order (annexure F) in the following words : “………….. it is not as if that the entirety of the resources of the firm were made up of only the property derived from the deceased. If that were the case, the entirety of the loan may require to be abated. But where the resources of the person furnishing the consideration for the debt is not wholly made up of the property derived from the deceased, but consists of other properties, then the section itself provides for proportionate abatement. It is, therefore, necessary to find out the net value of the resources of the firm which had made the advance. As already stated, the value of the property gifted by the deceased to the three individuals, which had been included in the resources of the firm, is known, namely, Rs. 2,55,256. Therefore, only that proportionate portion of the liability of Rs. 1,57,641 which bears the same ratio as the value of the property gifted, namely, Rs. 2,55,256 bears to the net value of the resources of the firm, could be subjected to abatement. The balance of the liability cannot be subjected to abatement. To make matters clear, it may be stated that if the net value of the resources of the firm is taken as X, the portion of the liability to be abated is to be taken as Rs. 2,55,256 x Rs. 1,57,641. We direct accordingly.” X. This direction was, in our view, warranted by the proviso to s. 46(1). See the decision of the Madras High Court in CED vs. Smt. S. T. B. Ameen Khaleeli (1983) 143 ITR 679 (Mad). See also the principle stated in Mc Dougal’s Trustees vs. IRC (1952) 31 Annotated Tax Cases 153 (C Sess) ; (1983) 143 ITR 698 on the basis of s. 31 of the Finance Act, 1939 (U.K.), corresponding to s. 46(1) of the ED Act, 1953. In the circumstances, we answer question No. (1) in the affirmative, that is, in favour of the Revenue and against the assessee. We answer question No. (2) in the affirmative, that is, in favour of the assessee and against the Revenue. We direct the parties to bear their respective costs in these tax referred cases.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Tribunal, Cochin Bench.

[Citation : 172 ITR 71]