Income Tax Appellate Tribunal - Mumbai
Trustees Of The Estate Of R.D. Patel vs Wealth-Tax Officer on 30 August, 1989
Equivalent citations: [1989]31ITD359(MUM)
ORDER
M.A. Ajinkya, Accountant Member
1. These are six appeals by the assessee. The facts leading to these appeals may be briefly stated.
2. One Mr. R.D. Patel died on 13-2-1939. He left behind a will. The Bombay High Court granted a probate of the last will and Testament of the late R.D. Patel on 10-8-1939. Thereafter, the assets left behind by the late Shri R.D. Patel were realized, liabilities paid and distributions made between the persons entitled to the estate, namely, the beneficiaries under the will. However, one piece of agricultural land situated at Andheri-Versova and admeasuring approximately 20 acres was not distributed between the persons entitled to the estate.
3. It appears that the Trustees of the Estate of the late Shri R.D. Patel filed a return of net wealth declaring net wealth at 'nil' on 30-1-1980. The WTO first passed an order under Section 16(5) read with Section 17 of the Wealth-tax Act on 20-7-1980. This order was set aside by the CIT(Appeals) on 19-10-1980. Another assessment was made Under Section 16(3) of the Wealth-tax Act by the WTO on 18-3-1982 which was again set aside by the CWT(A) by his order dated 6-ll-1982.The assessments so set aside for all these years, i.e. for assessment years 1967-68 to 1973-74, were completed by the WTO on 31-3-87. The assessee's legal representative argued before the WTO that the assessments should be made Under Section 21 of the W.T. Act on the Trustees in the like manner and to the same extent as the beneficiaries. The WTO invoked the provisions of Section 19A(5) and held that the assessments will have to be made on the Executors up to the complete distribution to the beneficiaries of the estate according to their several interests. The WTO held that a vast and valuable piece of land belonging to the estate had remained undistributed and therefore the assessments in respect of the land could only be made under Section 19A of the Wealth-tax Act and not Under Section 21. Since the Executors of the estate had not completed the distribution of the land, they were liable to be taxed. The WTO rejected the argument of the assessee's representative that the Executors had realised and recovered all assets except the land under construction as per the probate granted by the Bomaby High Court and that they should be treated as the Trustees of the residue of the estate in law. The WTO observed that by holding to the plot of land and not distributing it, the Trustees under the will continued to be Executors of the Estate and therefore the provisions of Section 19A would apply. In this view of the matter, he adopted the value of the land at Versova as wealth of the Trustees of the estate and taxed it in their hands for all the years under appeal.
4. In appeal, the CWT(Appeals) in a consolidated order dated 2-2-88 for the assessment years 1967-68 to 1974-75 and 1981-82 confirmed the orders of assessment for substantially the same reasons as are stated by the WTO. He referred to the order of CWT(A) dated 16-3-1984 for the assessment year 1978-79. It is against this order that the present set of appeals has been filed by the Executors of the estate.
5. Shri S. Ganesh, the learned counsel appearing for the assessee, argued that the will of the late Shri R.D. Patel, who died on 13-2-1939, had been probated as far back as on 10-8-1939. All the assets of the estate except one, namely the landed property at Versova, were recovered, collected and distributed between the beneficiaries under the will. No liabilities remained to be discharged in respect of the estate as on the relevant valuation dates. The Urban Land Ceiling Act was not on the statute book as on the relevant valuation date. Shri Ganesh argued that after the estate is fully administered, the Executors act as Trustees for the beneficiaries and they may be assessed only as Trustees. This was possible under Section 168 of the I.T. Act. Shri Ganesh referred to the observations of the learned authors in Kanga & Palkhivala's Law & Practice of Income-tax, Vol. I (7th Edition), page 967, to the effect that in some cases Executors may cease to be Executors even while some debts remain undischarged. In this context, he referred to the decision of the Madras High Court in the case of CIT v. Estate of Late Shri T.P. Ramaswamy Pillai [1962] 46 ITR 666 and the decision of Kerala High Court in the case of K.P. Narayanan v. CIT [1975] 98 ITR 130. Shri Ganesh thereafter argued that the question whether the estate was fully administered or not came up for the consideration of the Bombay High Court in Suit No. 2345 of 1983. He filed copies of Notice of Motion No. 1890 of 83 in the above suit. He referred us to para 14 of the order of the Court in which the arguments of Mr. Mehta, the learned counsel appearing on behalf of the Plaintiffs, were recorded. It was argued there that the administration of the estate of the said deceased Rustomji Dhanjibhai Patel had been completed by the executors-defendants by the year 1960. Since the estate had been completely administered, the executors ceased to be the executors as such and became only trustees of the said land. It was also argued that, even according to the defendants, the administration of the estate of the said deceased had been completed. Reliance was placed by Shri Ganesh on the passage appearing in Paruck's Indian Succession Act, 1925 (6th Edition) at page 722, which was cited by Mr. Mehta before the court and which was reproduced by the Court at the conclusion of para 14 of their order. Particular reference was made to the following observations:
Similarly, an Administrator who has paid all expenses and debts of the intestate and has cleared the estate stands in the same position towards the next-of-kin as the Executor stands towards the residuary legatee. He ceased to be an Administrator and becomes a Trustee.
Shri Ganesh thereafter brought to our notice the quotation from Halsbury's Laws of England, Vol. 17, Fourth Edition at page 703, at para 1355, which was also quoted by His Lordship in para 15 of their order and the relevant portion of which runs as under: -
...the major change in character from representation to trusteeship occurs when the estate has been fully administered in the sense that all debts and liabilities have been discharged and the residue ascertained.
Shri Ganesh then referred to para 25 of the order of the learned Judge where he expressed a view that prima facie there was sufficient material to show that the administration was complete to the extent had been realised, the debts, taxes and other liabilities had been defrayed and the legacies had been paid to the beneficiaries from time to time. Shri Ganesh argued that if the residue had been ascertained and all debts and liabilities discharged and as long as the shares of the beneficiaries in the remaining estate was ascertained, the administration of the estate should be treated as having been completed. Shri Ganesh then referred to the decision of the Gujarat High Court in the case of CIT v. Navnitlal Sakarlal [1980] 125 ITR 67 to argue that the assent of the executors in favour of the legatees can be expressed or implied. The assent of the executor may be inferred when there is clearly nothing more to be done by way of administration.
6. Shri Viswanathan, the learned Representative for the department, first referred to definition of "net wealth" in Section 2(m). He argued that "net wealth" means the amount by which aggregate value of assets belonging to the assessee on the valuation date is in excess of the aggregate value of debts owed by the assessee. The question for consideration, according to Shri Viswanathan, was to whom did these assets belong on the relevant valuation date. He argued that the assets, namely property at Andheri, stood in the name of the executors of the will. This property had not been transferred to the various beneficiaries under the will. Therefore, it should be held that the property belongs to the Executors who were the legal owners of the property as on the valuation dates. He argued that mere vesting of the property was not enough. The executors had been admitted in the Notice of Motion as being in possession of the property concerned. He further argued that the estate had not been completely distributed. It was not divided between the beneficiaries on the relevant valuation date and, therefore, the provisions of Section 19A(5) of the Wealth-tax Act were clearly applicable. Section 19A(5) specifically provided for separate assessment in respect of net wealth on each valuation date as is included in the property from the date of death of the deceased to the date of complete distribution to the beneficiaries of the estate according to their several interests. Shri Viswanathan argued that the "complete distribution to the beneficiaries" occurring in Section 19A(5) referred to physical distribution of assets and as long as such distribution had not taken place, the value of such land was liable to be brought to tax in the hands of the executors in terms of the said Section 19A(5). Shri Viswanathan relied on a decision of the Tribunal in WTO v. Miss K.P. Sarojini [1987] 21 ITD 518 (Delhi).
7. Shri Ganesh, in reply, argued that if Section 19A(5) provided for assessment in the case of executors, Section 21 provided for assessment when assets are held by a court of wards, administrator-general, official trustee, etc. He argued that the executors of the will were effectively functioning as trustees for the beneficiaries and, therefore, the assessments should have been made Under Section 21 on the trustees in the like manner and to the same extent as those on beneficiaries. He then argued that the provisions of Section 19A(5) were similar to the provisions of Section 168 and the observations of the learned authors in Kanga & Palkhivala relied by him earlier provided an adequate reply to the argument of the department. He also argued that in all cases cited by him there was no physical distribution of some of the assets which were still held in the name of the executors. Further, even some of the debts and liabilities had not been paid or discharged. Even then, Courts had held that the assent of the executors for distribution to the legatees had to be inferred. The fact that the probate was obtained in this case, liabilities and dues paid, and the further fact that the shares of the beneficiaries in the remaining property were known and determinate were enough pointers to conclude that the estate had been administered and the executors under the will were holding the same as trustees and therefore such trustees had to be assessed under Section 21 of the Wealth-tax Act in the like manner and to the same extent.
8. We have considered the submissions made on behalf of both the parties. The short issue for decision in the present appeals is whether on the facts obtaining on the relevant valuation dates the executors appointed under the will of the late Shri R.D. Patel continued to function as executors in respect of the property which had not yet been physically distributed or they were functioning as trustees of the beneficiaries under the will. In other words, was the WTO justified in assessing the value of land in the hands of the executors under Section 19A(5) of the W.T. Act by treating the said property as undistributed or whether the assessments should have been completed under Section 21 of the Wealth-tax Act on trustees of the will in the like manner and to the same extent. Before pronouncing our finding on this issue, it would be worthwhile to set out basic propositions in law and deal with the cases which "have laid down these propositions. Firstly, it may be stated that the difference between an executor and a trustee is that an executor is the representative of the testator for all purposes, while a trustee is representative of the legatees or beneficiaries. This is clear from Section 211 of the Indian Succession Act, 1921. Still, it cannot be said that an executor cannot shed his character as an executor and assume the character of a trustee. In Estate of Late Sri T.P. Ranta-swami Pillai's case (supra), the Madras High Court held that there is no invariable rule that an executor cannot shed his character as an executor and assume the character of a trustee under the will, before all the debts are discharged and legatees are paid. He can vest the property in the legatees with mutual consent and hold the legacies as a trustee even before all the debts are discharged. In that case, the testator created a trust in respect of the entire properties owned by him for various purposes, some of them being for the benefit of his wife and his descendants and most of them being for certain religious and charitable purposes. The testator's son and brother-in-law were appointed as trustees. They filed returns as trustees stating that they had ceased to be executors, and claiming that as the trust was wholly for religious and charitable purposes, the entire income from the properties was exempt from taxation. On these facts, the Madras High Court held that they should be assessed as trustees under Section 41 of the Indian Income-tax Act, 1922 and only the income from properties specified in the will which had been applied towards the payment of monthly allowances to the various relations of the deceased would be liable to be taxed and the rest of the income was exempt Under Section 4(3)(i) of the Indian Income-tax Act, 1922. In this case, the Court held that the executors appointed under the will had in fact started functioning as trustees, even before the debts were discharged and legacies paid. No doubt, this decision was given in the context of the provisions of the Income-tax Act. A similar decision was given by the Calcutta High Court in Suhasini Karuri v. WTO [1962] 46 ITR 953. In that case a will creating a trust in express terms stated that the trustees were to hold the properties in trust for the sons and grandsons of the donor. The estate was fully administered. On the question whether the trustees could be assessed as executors, the Calcutta High Court held that as soon as debts and legacies are paid and legacies have been assented to, executors drop their position as executors and assume the duties of trustees.
9. The next question is whether an executor can assent to residuary legacy after paying off the specific legacies. An assent may be express or implied. No formality is required for giving assent to a legacy. Where the assent is express, there will be no difficulty in regard to the vesting of the property. Wherever assent is implied, the question will arise whether from the facts and circumstances, i.e. conduct of the executors, an implied assent can be inferred. Reference in this regard may be made to the principle laid down by Rowlatt, J. in IRC v. Sir Abbrey Smith 15 TC 661 at page 668 as under: -
The assent of the executor, it is important to add, may be inferred when there is clearly nothing more to be done by way of administration. It only remains to observe that it makes no difference if the principal representing residue, the subject matter of the executor's asset, remains in the possession of the executor after the administration and with it his functions as executor, has terminated. I think all this is quite clear and the question is whether in fact that position has been reached as regards the principal which has produced the income under discussion in this case.
This principle was accepted by the Gujarat High Court in the case of Navnitlal Sakarlal (supra). The High Court held that the fact that the administrator of an estate continues to be liable or the executor continues to be liable for the income-tax liabilities of the estate of the deceased Under Section 168(3) of the Income-tax Act does not mean that the administration is not complete or that the administration had not reached such a point that it could be inferred that the administration had been completed and the residuary estate had been ascertained. This was a decision under the Income-tax Act. A similar view was expressed by the Madras High Court in another decision under the Wealth-tax Act in the case of CWT v. S. Prakasam [1980] 125 ITR 772. The Madras High Court held that there is no invariable rule that an executor cannot shed his character as an executor and assume the character of a trustee under a will before all the debts are discharged and legacies paid. Merely because the debts have not been discharged nor legacies paid, it cannot be stated that the executorial functions of the executor have not been completely performed. The existence of debts or liabilities of the deceased is no bar for an executor giving assent in favour of the residuary legatees. An assent may be either express or implied and no formality is required for giving assent to a legatee. An implied assent to vest the property in the legatee can be inferred from the conduct of the parties and other facts and circumstances of the case. The assent of the executor can be inferred when there is clearly nothing more to be done by way of administration. This position was accepted by the Kerala High Court in the case of K.P. Narayanan (supra). Their Lordships referred to the observations of Lawrence, LJ. in Sir Abbrey Smith's case (supra) to the following effect: -
It has been mooted, but I do not think seriously contended, that the existence of a debt or debts or liabilities which are outstanding prevents the assent of the executor being inferred by his conduct. In my judgment, that is not so.
Finally, although Section 3 of the Wealth-tax Act read along with the definition of the term "net wealth" in Section 2(m) has to be taken to impose a charge of wealth-tax on individuals to whom the wealth belongs, while interpreting the words "belonging to" occurring in the definition of 'net wealth' in Section 2(m), it is not possible to say that the properties in the hands of the executors, who are appointed under the will for administering the estate of the deceased, belong to them. Normally, when we speak of certain physical objects as belonging to a person without a qualifying expression, the primary natural meaning is that they are his own absolute property. When a person by virtue of a contractual obligation takes up the management of the properties as per the directions of a testator, he cannot be said to own the property absolutely. These observations of the Madras High Court in the case of M. Thirumani Mudaliar v. CWT [1974] 96 ITR 152 are very apposite when we deal with the arguments raised by the department that the assessment has to be made in respect of this property as it belongs to the executors.
10. In the light of the judicial pronouncements on this issue discussed above, we have to decide whether in the present case the executors under the will could be said to have stepped into the shoes of the trustees. For this purpose, certain basic facts will have to be re-stated. The late Rustomji Dhunjibhoy Patel made his Last Will and Testament on 22-5-1935. He appointed his brother's sons Minocher, Sorabji, Jehangir and Meherwanji and sister's son Phiroze as executors and trustees of his will. He required the executors to pay in full certain debts out of his property which were spelt out in Clause (3) of the will. There was no dispute with regard to the fact that the estate had been fully administered by the executors by the year 1960. While disposing of the miscellaneous petition, Justice Mehta of the Bombay High Court in para 25 of his order dated 4-6-1984 made the following observations:
On the question whether the administration had been wound up and consequently the status of the Executors had changed from that of Executors to that of Trustees, I am of the view that prima facie there is sufficient material to show that the administration was complete to the extent that the estate had been realised, the debts, taxes and other liabilities had been defrayed and the legacies had been paid to the beneficiaries from time to time. Only the suit property, it would appear, had not been administered and that was because the property at that time was considered to be a waste land. The Executors, therefore, neglected to transfer the property to the names of the beneficiaries.
He, however, proceeded to add that the above was only a prima facie view and the question will have to be considered in detail with the help of oral evidence that may be adduced at the time of hearing and final disposal of the suit. We were informed that the suit in this regard is still pending and the decision of the Court on this issue still to be obtained. The above observations of His Lordships however, will have to be taken into account to decide the issue that is raised before us in the present appeals.
11. The mere fact that one piece of land was not physically distributed between the beneficiaries is not enough for us to conclude that the Executors continued to function as Executors of this property. It is difficult to hold a view that 30 years after his death the Executors appointed under the will of R.D. Patel continued to function as Executors and represent the deceased. As stated earlier, all the other properties left behind under the will were distributed. Further, the liabilities and other charges were ascertained and paid. Although in the Notice of Motion an argument was taken by the counsel for the Defendants No. 1 and 2 to the effect that the estate had not been fully administered and that the Executors had not ceased to be Executors, this argument was not accepted by the Bombay High Court. The Bombay High Court also held that there was prima facie evidence to show that the administration was complete. The whole tenor of the judgment of the Court in the Notice of Motion is in favour of the beneficiaries, some of whom had filed the Notice of Motion. The court had in effect observed that the Executors had to be treated as Trustees of the property and could not do anything that would be construed as being detrimental to the interests of the beneficiaries. This aspect of the matter cannot be ignored. The properties were not physically distributed between the beneficiaries because of the difficulty in distribution of the land, which, according to the assessee, was an agricultural land and which at the relevant time i.e. in the 1960s did not yield any income to the beneficiaries. The vast track of agricultural land presented difficulties for physical distribution in exact proportion to the share of the beneficiaries who were many in number. That is the reason why there was no physical distribution of the property at Versova. It would appear that the land was agreed to be sold by the Trustees to the Reserve Bank of India @ Rs. 35 per sq. yd. in terms of a letter dated 6-9-74. This property was reserved for public purposes. After the land was offered to be sold to Reserve Bank of India and the agreement for sale was arrived at, the Urban Land Ceiling Act, 1976 came into force with effect from 17-2-1976 and the Reserve Bank of India asked the Trustees to apply the Govt. of Maharashtra and obtained exemption under Section 20 of the said Act. The Govt. of Maharashtra rejected the application for exemption made by the Trustees by an order dated 1-1,1-77. In the meantime, by a notification dated 30-9-74, a part of the land was declared to be reserved for public purposes i.e. for B.E.S.T. Bus Station. However, with the passing of the Urban Land Ceiling Act, land measuring 66,432 sq. metres was declared by the Govt. of Maharashtra as excess vacant land. The Bombay High Court granted an injunction following a writ of certiorari and mandamus passed by the Bombay High Court in Suit No. 1250 following a petition filed by the Trustees. The High Court was again moved by an application under Section 20 of the Urban Land Ceiling Act for exemption under that Act. The Bombay High Court by an order dated 12-11-1981 set aside the orders of the competent authority dated 25-5-1977, 3-6-1978 and notifications dated 30-5-77 and 8-9-78. Thereafter, on 28-2-1983, the Addl. Collector and Competent Authority passed an order in terms of which it was decided that 9.043 sq. metres of this land was within the ceiling limit on the clear understanding that each and every beneficiary in his own right was entitled to permissible ceiling of 500 sq. mts. and that the shares of the beneficiaries are certain. In terms of the said order, 6,267.70 sq. mts. of area was reserved for 60 feet wide development plan road and 50,364 sq. mts. of land was released on the understanding that the same would be sold to the Reserve Bank of India and the same was completed on 15-9-1983.
12. Although the above facts relate to the period subsequent to the valuation dates concerned in the present appeals, they would only indicate that the subsequent events showed that the lands were considered as belonging to the beneficiaries for whom the persons appointed as executors under the will were supposed to be functioning as trustees. What is relevant is that the executors did not have unfettered right over this property and did not continue to function as representatives of the deceased once it was clear that the other properties left under the will were distributed. Debts and other charges on the estate were determined and paid and the shares of the beneficiaries in the land were found to be determinate and certain. These facts could not be ignored for considering the status of the executors for the purpose of wealth-tax.
13. We have already referred to the decision of the Madras High Court in the case of M. Thirumani Mudaliar (supra) where it was held that when a person by virtue of a contractual obligation takes up the management of the properties as per the directions of a testator, he cannot be said to own the property absolutely. It cannot be said that the properties in the hands of the executors, who are appointed under the will for administering the estate of the deceased, belonged to them. Even the existence of debts and liabilities of the deceased was not considered a bar for an executor giving assent in favour of the residuary legatee. The position in law has been discussed in the earlier paragraphs of the order. In view of what is stated above, we would hold that the property was held by the executors appointed under the will as Trustees for the beneficiaries whose shares in this property were known and certain, the liabilities of the estate were paid and therefore the estate could be said to have been administered fully and these facts were accepted by the Bombay High Court as well as by the Collector when he passed his final order. We would, therefore, hold that the assessments should have been made on the trustees in the like manner and to the same extent as that of the beneficiaries under Section 21 of the W.T. Act. The arguments advanced by Shri Ganesh in this regard are accepted and the appeals are allowed.
14. Since the first legal issue which was argued has been decided in favour of the assessee, we do not consider it necessary to deal with the question about the valuation of land in the present appeals.
15. In the result, the appeals will be treated as allowed.