Research › Browse › Judgment

Madras High Court · body

1996 DIGILAW 739 (MAD)

K. Krishnaveni v. Controller of Estate Duty

1996-07-22

K.A.THANIKKACHALAM, N.V.BALASUBRAMANIAN

body1996
Judgment :- K. A. THANIKKACHALAM J. At the instance of the accountable person, the Tribunal referred the following two questions for the opinion of this court under section 64(1) of the Estate Duty Act, 1953, hereinafter referred to as the Act "(1) Whether, on the facts and circumstances of the case, the honourable Tribunal was right in determining the principal value of the house at 25, Damodaran Street, Madras, after deducting of the liability on the life insurance policies and thus allowing exemption on Rs. 29, 137 only instead of Rs. 70, 000 ? (2) Whether, on the facts and circumstances of the case, the honourable Tribunal was right in not allowing the liability of Rs. 40, 863 which is secured on life insurance policies and house property and treating the entire liability as secured on the house?" * The deceased, Shri Samraj, died on August 25, 1979. He owned a property at Damodaran Street, Madras-10, which was used for residential purpose. The value of this property was adopted at Rs. 70, 000 and there was no dispute about that. Since this was a residential house the accountable persons claimed exemption from levy of estate duty under section 33(1)(n) of the Act. This property was offered as collateral security to the Life Insurance Corporation of India where the deceased also took life insurance policies. The deceased also borrowed a sum of Rs. 38, 668 as loan from the Life Insurance Corporation of India. The accountable person claimed exemption on the value of the residential house valued at Rs. 70, 000 and also separately claimed a deduction of the liability of Rs. 38, 668. The Assistant Controller of Estate Duty deducted the liability to the Life Insurance Corporation of India of Rs. 38, 668 from the value of the house property and allowed exemption only on the balance which worked out to Rs. 29, 137. Aggrieved the accountable person filed an appeal before the Appellate Controller of Estate DutyThe Appellate Controller found that section 44 which related to the deduction referred to debts or encumbrances for which allowance had to be made and that since the property in question was not covered by any of the sub-clauses (a) to (d) of section 44, the accountable person was entitled to the deduction of the liability separately as well as the exemption of Rs. 70, 000 in full under section 33(1)(n) of the Act. According to him, there was no authority for deduction of the liability from the amount of exemption claimed. Accordingly, he held that the accountable person was entitled to exemption in full as well as deduction for the liability Aggrieved, the Department filed an appeal before the Appellate Tribunal. Before the Tribunal the Department relied on an earlier order of the Tribunal on this aspect in the case of CEO v. Pushparani (EDA 91 Madras) 1973-74, dated December 12, 1975, wherein it was held that the exemption allowable under section 33(1)(n), could be only on the net amount after deducting the liability and not on the full amount. Following the above-said decision, the Tribunal held that rights in the property which the deceased had at the time of his death were something short of the full bundle of the ownership including the rights of enjoyment and possession. None the less the property was subject to the interest which is passed to the mortgagee. The property was thus subjected to an encumbrance consequent on the mortgage at the time of the death of the deceased. The Tribunal further held that the provisions of section 36 were attracted which stipulated how the true value of the property was to be estimated, the property subjected to a mortgage would fetch only that amount which would be in excess of the encumbrance. For this purpose, it relied on section 55(1)(g) of the Transfer of Property Act which provides that in the absence of a contract to the contrary the seller is bound to discharge all encumbrances on the property then existing except where a sale itself is subjected to encumbrance. The encumbrances will have the effect of depressing the market value. Therefore, it cannot be ignored. Therefore, the Tribunal rejected the assessee's contentions and confirmed the view taken by the RevenueBefore us, learned counsel for the accountable person submitted that the Tribunal was not correct in setting aside the order passed by the Appellate Controller of Estate Duty and restoring the order passed by the Assistant Controller of Estate Duty. According to learned counsel, the immovable property in question is a dwelling house valued at Rs. 70, 000. According to learned counsel, the immovable property in question is a dwelling house valued at Rs. 70, 000. It was offered as a collateral security for the amount borrowed on the life insurance policy and also for guarantee to pay the instalments without fail to the Life Insurance Corporation. After the death of the deceased, the accountable persons are entitled to get the insurance amount minus the amount borrowed by the deceased on the insurance policies. The property offered as security would get discharged after the death of the deceased. In such a case, it was submitted that the accountable person is entitled to exemption under section 33(1)(n) of the Act with regard to the dwelling house valued at Rs. 70, 000. So also the accountable person is also entitled to get deduction of Rs. 38, 668 being the amount borrowed by the deceased on the life insurance policies out of the insurance amount payable. In such a case, out of Rs. 1, 87, 606 -- Rs. 38, 668 is deducted and the balance would come to Rs. 1, 48, 938. Therefore, learned counsel submitted that the Appellate Controller of Estate Duty was correct in permitting the assessee for exemption of the dwelling house under section 33(1)(n) of the Act and also for the deduction of Rs. 38, 668 from Rs. 1, 87, 606 On the other hand, learned standing counsel for the Department while supporting the order passed by the Tribunal submitted that when the property was offered as security for the loan obtained from the Life Insurance Corporation, the loan obtained, viz., Rs. 38, 668, should be deducted from the value of the property. It was further submitted that when the property was offered as security, the value of the property would get depressed to the extent of the security offered. Again, it was submitted that the deduction of Rs. 38, 668 cannot be granted since that is the loan amount received by the deceased. In order to support this line of argument learned counsel relied on the decisions in CWT v. Smt. Shiribanoo 1976 (102) ITR 735 (Guj) and CIT v. K. S. Vaidyanathan 1985 (153) ITR 11, 1985 (47) CTR 101, 1985 (23) TAXMAN 169 , 1985 (47) CTR(Mad) 101 (Mad) [FB]We have heard learned counsel for the accountable person and also learned standing counsel for the Department. In so far as the house property at 25, Damodaran Street, Madras-10, is concerned, it is valued at Rs. 70, 000. The deceased was using this house property as a dwelling house. Therefore, the accountable person claimed exemption under section 33(1)(n) of the Act. Under the abovesaid provision, if the value of the dwelling house is less than Rs. 1 lakh, it would be deemed to be an exempted asset in the matter of levying estate duty. Therefore, the claim made by the accountable person is perfectly justified. The accountable person is entitled to claim the dwelling house as an exempted asset under section 33(1)(n) of the Act The deceased also took four insurance policies and on those policies the assessee also took a loan from the Life Insurance Corporation of India to an extent of Rs. 38, 668. The deceased died on August 25, 1979. On the death of the deceased, the Life Insurance Corporation is liable to pay the insurance amount to the accountable person. The total insurance amount payable by the Life Insurance Corporation comes to Rs. 1, 87, 606 out of which the loan taken by the deceased is to be deducted. If Rs. 38, 668 is deducted out of Rs. 1, 87, 606 the balance would come to Rs. 1, 48, 938 which is the insurance amount passing on the death of the deceased Instead of that, the Tribunal considered that the security as a matter of fact would depress the value of the property. As soon as the death occurred, the accountable person is entitled to the insurance amount and the collateral security offered for the loan would also get discharged. Therefore, on the death of the deceased, the property would be without any encumbrance. In such a case, the value of the property would not get diminished on account of the security which was offered earlier. In these circumstances, the Department cannot deduct Rs. 38, 668 out of Rs. 70, 000 since this amount of Rs. Therefore, on the death of the deceased, the property would be without any encumbrance. In such a case, the value of the property would not get diminished on account of the security which was offered earlier. In these circumstances, the Department cannot deduct Rs. 38, 668 out of Rs. 70, 000 since this amount of Rs. 38, 668 was already deducted out of the insurance amount payable by the Life Insurance Corporation of India to the legal heirsFor the purpose of the proposition that if a property is offered as security, the value of the said property would get diminished to the extent of the security offered, learned standing counsel relied on a decision in CWT v. Smt. Shirinbanoo 1976 (102) ITR 735 (Guj) wherein, while considering section 7, Schedule, Part I, paragraph A, clause (c) ; Part B, rule 2, as it stood before amendment by the Finance Act, 1970, of the Wealth-tax Act and the Wealth-tax Rules, the Gujarat High Court held that the Tribunal was perfectly justified in reaching the conclusion that while estimating the value of an encumbered asset in the particular assessment year under reference the assessee was entitled to claim deduction of the amount of the mortgage debt in evaluating the encumbered asset Another decision relied on by learned standing counsel was that in CIT v. K. S. Vaidyanathan 1985 (153) ITR 11, 1985 (47) CTR 101, 1985 (23) TAXMAN 169 , 1985 (47) CTR(Mad) 101 (Mad) [FB]. This is a Full Bench decision of this court wherein while considering the provisions of section 2(m) of the Wealth-tax Act, 1957, this court held that if the entire asset is completely excluded in the computation of the net wealth, the debt in question obtained on the security of the said asset cannot be deducted in computing the net wealth. Similarly when a debt is incurred or acquired in relation to a property which is only partially exempted from wealth-tax, that portion of the debt which is attributable to the portion of the property exempted from wealth-tax cannot be deducted in the computation of the net wealth of the deceased It remains to be seen that the above decisions were rendered while considering the ascertainment of the net wealth in accordance with the Wealth-tax Act. There is no corresponding provision as such as occurred in the Wealth-tax Act in the Estate Duty Act. There is no corresponding provision as such as occurred in the Wealth-tax Act in the Estate Duty Act. Further, even if according to the Department, the creation of security would depress the value of the property, in the present case, on the death of the deceased, the legal heirs of the deceased are entitled to the insurance policy amount and the security offered would get discharged. Therefore, after the death of the deceased, the property would be free from encumbrance. In view of these factual positions, the Tribunal was not correct in stating that the dwelling house was mortgaged and, therefore, the mortgage amount should be deducted from the value of the propertyLearned counsel for the accountable person did not dispute the inclusion of the Housing Board amount amounting to Rs. 1, 239 and the property tax amounting to Rs. 956, and these two amounts are deductible from the value of the property at 25, Damodaran Street, Madras-10. In that view of the matter, we hold that the Tribunal was not correct in coming to the conclusion that Rs. 38, 668 should be deducted out of the value of the dwelling house Inasmuch as the questions framed and referred by the Tribunal do not reflect the true issue that is involved in the present case, we would like to reframe the questions as under Whether, on the facts and in the circumstances of the case, the Tribunal was right in determining the principal value of the house at No. 25, Damodaran Street, Madras-10, after deducting the liability on the life insurance policies amounting to Rs. 38, 668 instead of allowing the same as deduction from the policy amount received by the accountable person ?" In view of the foregoing discussion, we answer the question referred to us in the negative and in favour of the accountable person/applicant. No costs.