Holding

The prospective estate‑duty liability is an encumbrance and must be taken into account when valuing the remainder interest for wealth‑tax purposes.

Summary

The beneficiaries of the H.E.H. Nizam Jewellery Trust valued their interest in the trust's jewellery based on a valuer's report. The Commissioner of Wealth Tax challenged this valuation, arguing that the estate duty payable on the deemed death of the life tenant had been incorrectly deducted, among other objections. The Tribunal and the Andhra Pradesh High Court held that the probable estate duty liability must be taken into account, reducing the market value of the remainder interest for wealth‑tax purposes. On appeal, the Supreme Court examined whether such estate‑duty liability is a relevant factor in valuation under the Wealth Tax Act. It held that the potential estate duty is an encumbrance that directly affects a willing buyer’s price and therefore must be considered in the market‑value assessment. Consequently, the Court affirmed the High Court’s decision and dismissed the appeals.

Issues considered

The estate duty payable on the deemed death of a life tenant is a relevant factor in determining the market value of the trust property for wealth‑tax assessment.
Whether the legal fiction created by Section 21 of the Wealth Tax Act precludes deduction of estate‑duty liability from the valuation.

Legislation cited

Income Tax Acts. 261
Wealth Tax Act, 1957s. 21(1), s. 21(4)
Wealth Tax Rules, 1957s. Rule 1‑D

Subjects

wealth taxestate dutyvaluationremainder interestlegal fictionencumbrancetrustjewellerymarket valueSection 21Section 74

Judgment

A COMMISSIONER OF WEAL TH TAX, HYDERABAD
V.

TRUSTEES OF HEH

APRIL 16, 2003

B [V.N. KHARE CJ., R.C. LAHOTI, B.N. AGRAWAL, S.B. SINHA AND
DR. AR. LAKSHMANAN, JJ.]

Wealth Tax, /9j7-Sections 21(1) and (4)-Estate Duty Act, /9j3-
C Section 74(2)-Valuation of property-Determination of-Deemed death of
life tenant-Property-jewel/eries subject matter of trust not in possession of
remaindermen, the ultimate beneficiaries-Estate duty payable, if relevant
factor-Held: Risk or hazard of e«n'.~ duty liability has a direct impact on the •
purchaser of remainder interest thus, a relevant factor for determination of
valuation of interest held by remainderman-Further, charge created thereupon
D in terms of Section 74(2) to be taken into consideration.

Assessees-beneficiaries of the Jewellery Trust returned the value of
their interest in the Trust properties on the basis of the valuer's report.
Also the jewellieries, subject matter of trust are not in possession of the
remainderman, the ultimate beneficiaries. Revenue Department held that
E the valuation was incorrect as the Estate Duty payable on the death of the
life tenant was wrongly deducted. Tribunal held that the accepted method
of valuing the remainderman's interest included a deduction of the Estate
Duty. High Court on reference held that Tribunal is correct in law in
holding that the probable Estate Duty payable on the death of the life tenant
p 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
remainderman. On appeal, Division Bench of this Court referred to the
earlier decisions of this Court-Bharat Hari Singhania's case* and Nizam's
Family Trust case**, judgments of three Judge Benches. In Bharat Hari
Singhania 's case it is held that where the statute creates a legal fiction for
G determination of market value, no amount like provision for taxation, PF
and Gratuity etc. can be deducted from the market value of the estate while .:
evaluating the estate for the levy of wealth tax, which is in conflict with
the Nizam 's Family Trust case. Therefore, the matter is referred this Bench.

The question which arose for consideration in these appeals is whether
H 662
COM MR. OF WEAL TH TAX v. TRUSTEES OF HEH 663
the amount of estate duty payable on the deemed death of the life tenant A
would be a relevant factor in determining the valuation of the property.

Appellant-revenue contended that the High Court erred in
interpreting Sections 21(1) and 21(4) of the Wealth Tax, 1957 as it failed
to appropriately apply the legal fiction created thereunder; that the same
principles of valuation would apply in relation to the jewelleries held by B
rcmaindermen despite the fact that the persons having life interest in the
trust are alive; and that the High Court should have followed Bharat Hari
Singhania 's case.

Respondent-assessee contended that the valuation of the jewelleries C
will have to be assessed having regard to what a willing and informed buyer
would offer therefor, and then in determining the value the estate duty
liability would be a relevant factor.

Dismissing the appeals, the Court
D

- HELD: I.I. As arrears of the estate duty would be a charge on the
property, the same being 'encumbrance', the potential estate duty liability
shall be a relevant factor while determining the market value of the
jewelleries. Whenever there is a charge or encumbrance in the property,
the right of a seller to sell the same would be subject to such charge. The
restrictions and disadvantages attached to the right of the assessee would E
indisputably diminish the value of the property to the said extent.
1669-E, Fl

1.2. The effect of a legal fiction created by a statute is no longer res
,-- integra. Once the legal fiction under the Act is taken to its logical corollary, F
the conclusion is inescapable that while assessing the net wealth of the
jewelleries in question, the charge created thereupon in terms of Section
74(2) of the Estate Duty Act, 1953 will have to be taken into consideration.
1674-B, CJ

1.3. The question regarding capital gains liability will not affect the G
value of the shares or land inasmuch the same is incurred by the seller. In
. such an event, therefore, the price which the buyer would be prepared to
offer would not be affected by the seller's capital gains liability or any of
the expenses which may be incurred by him. On the other hand, the estate
duty payable by the trustees on the termination of the life interest would
•' H
664 SUPREME COURT REPORTS [2003 J 3 S.C.R.

A be a relevant factor for determination of the price which a willing and
informed buyer would offer for purchase of the remainder interest. The
remainder interest is merely the right of the remainderman to receive an
amount from the trustees on the termination of the life interest of the life
tenant. The purchaser, therefore, would take into consideration any factor
B which would potentially reduce the amount that he would ultimately receive
from the trustees towards his remainder interest. The risk or hazard of
estate duty liability will have a direct impact on the purchaser of the
remainder interest and thus, will be a relevant factor for the purpose of
determination of valuation of the interest to be held by the remainderman.
1676-F-H; 677-AI
c
*Bharat Hari Singhania and Ors. v. Commissioner of Wealth Tax
(Central) and Ors., 119941 Supp. 3 SCC 46, distinguished.

**Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad v. Trustees
of H. E. H. Nizam 's Family (Remainder Wealth Trust), Hyderabad, 119771 3
D SCC 362; Mrs. Khorshed Shapoor Chenai v. Assistant Controller of Estate
Duty, A.P., 11980) 122 J.T.R. 21 and Bhavnagar University v. Palitana Sugar
Mill Pvt. Ltd. and Ors., 120031 2 SCC 111, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4703 of
-
E 1999.

From the Judgment and Order dated 5.3.1998 of the Andhra Pradesh
High Court in C.R. No. 107 of 1989.
WITH
C.A. Nos. 4962/1999, 7102/1999, 2519/2000, 2640/2000, 5688/1999,
F 1794/2000, 1809-1811/2000, 6170/1999, 4913/1999, 6074/1999, 4914/1999,
4316/1999, 5636/1999. 7459/2000, 4912/1999, 5616/1999, 820/2000 and 2354
of 2000.

R.P. Bhatt, Ranbir Chandra, Ms. Neera Gupta, Rajiv Tyagi, K.C.
G Kaushik, Pritesh Kapoor, B.V. Bairam Das and Ms. Sushma Suri for the
Appellant.

S. Ganesh, J.B. Dadachanji, P. Muralikrishna, Buddy A. Ranganadhan,
A. V. Rangam and A. Ranganadhan for the Respondent.
-
H The Judgment of the Court was delivered by
COMMR. OF WEALTH TAX v. TRUSTEES OF HEH [SINHA, J.] 665
S.B. SINHA, J. Noticing a purported conflict in the decisions of this A
Court in Bharat Hari Singhania and Ors. v. Commissioner of Wealth Tax
(Central) and Ors., [1994] Supp. 3 SCC 46 = (1994) 207 !TR I and The
Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad v. Trustees of
'" H.E.H. Nizam 's Family (Remainder Wealth Trust), Hyderabad, [1977] 3 SCC
362 = (1977) 108 ITR 555, a Division Bench of this Court by an order dated B
1.11.2002 referred this matter to. this Bench observing :

"We do see some force in the arguments of the learned counsel
for the respondent that on facts it could be said that the decision in

- Nizam 's Family Trust case (supra) is more akin to the facts of the
appeals before us now. But then we do not agree with the learned C
counsel for the respondent that what is stated in Hari Singhania 's
case (supra) is only an obiter of an issue decided on facts. A perusal
of the judgment extracted hereinabove clearly shows that this Court
in Hari Singhania 's case (supra) has in specific terms laid down the
principle that in cases where the statute creates a legal fiction for
determination of market value, no amount like provision for taxation, D
PF and gratuity etc. can be deducted from the market value of the ·
estate while evaluating the estate for the levy of wealth-tax. If this be
the correct principle in law then it will not be possible for the
respondents to contend that the value of the estate duty payable, if
any, should be deducted from the market value of the, estate while E
determining the wealth-tax. If the principle what we have understood
it to be, enunciated in the Hari Singhania 's case (supra) is correct
then the same, in our opinion, runs counter to the earlier decisions of
this Court in the case of Nizam 's Family Trust (supra) and both
judgments being judgments of a Bench of three Judges, we think it
appropriate that this issue should be settled by a larger Bench. F
Therefore, we direct that the papers of these appeals and connected
matters be placed before the Hon. CJ.I. for appropriate orders."

The fact of the matter as noticed by the High Court is as under :-

The assesses are all beneficiaries of a Trust called H.E.H. the G
Nizam Jewellery Trust. They returned the value of their interest in
the Trust properties on the basis of the valuer's report. The Wealth
Tax Officer accepted the returns. In some cases, the Commissioner of
Wealth Tax considered such assessments to be erroneous and
prejudicial to the Revenue. In other case, the Wealth Tax Officer, H
666 SUPREME COURT REPORTS [2003) 3 S.C.R.

A 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 per cent or the purpose of
B 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
C 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 Wealth-tax rules itself.

The Tribunal made a reference to the High Court, inter alia, on the
following question:
D
"I. Whether on the facts and in the circumstances of the case, the
ITAT 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 W.T.
in the hands of the remainderrnen?"
E
The High Court answered the question in affirmative, i.e., in favour of
the Assessee and against the Revenue, relying on the decision of this Court
in H.E.H. Nizam (supra).

On an application made under Section 261 of the Income Tax Act by
F the Revenue, the High Court referred the following questions for this Court's
consideration holding that it was a fit case for appeal to this Court :

"(I) Whether the Hon'ble Court was justified in holding that the Estate
Duty liability arising on the assumed death of life interest holder
on notional basis is liable to be deducted from the valuation of
G the asset in the context of valuation of interest of the remainder
interest holder ?
(2) Whether the view of the Hon'ble Court runs counter to the decision
of the Supreme Court in 207 l.T.R. (I)?"

H Mr. R.P. Bhatt, learned Senior Counsel appearing on behalf of the
.~.

COMMR. OF WEALTH TAX v. TPUSTEES OF HEH [SINHA, J.] 667
Appellant, would submit that the High Court went wrong in interpreting the A
provisions of Sections 21(1) and 21(4) of the Wealth Tax Act, 1957 insofar
as it failed to appropriately apply the legal fiction created thereunder. The
learned counsel would contend that the High Court should have followed
Singhania 's case (supra).

Mr. Bhatt would urge that having regard to the provisions contained in B
Section 21 of the Wealth Tax Act, the same principles of valuation would
apply in relation to the jewelleries held by remaindermen despite the fact that
the persons having life interest in the Trust are alive.

Mr. S. Ganesh, learned Senior Counsel appearing on behalf of the
respondent, on the other hand, would submit that the valuation of the C
jewelleries will have to be assessed having regard to what a willing and
informed buyer would offer therefor, and then in determining the value the
estate duty liability would be a relevant factor. Apart from the decision of
this Court in Nizam 's Family's case (supra), the learned counsel also relied
~ upon Commissioner of Wealth-Tax, Bihar v. Maharaja Kumar Kamal Singh, D
(1984) 146 l.T.R. 202.

It is not in dispute that the jewelleries which are the subject matter of
Trust are not in possession of the remaindermen, who are the ultimate
beneficiaries.The respondents have also averred in their counter affidavit that
in similar situations 'estate duty' had been charged in the past. E
The question, therefore, must be answered having regard to the relevant
provisions of the Wealth Tax Act vis-a-vis the Estate Duty Act.

Section 3 of the Wealth Tax Act is the charging Section in terms
whereof a tax in respect of the net wealth on the corresponding valuation date F
of every individual is payable. The valuation of the net wealth, in view of
Section 7 indisputably is required to be made in terms of clause ( 18) occurring
in Part G of Schedule 111 appended to the Wealth Tax Act which provides
that the value of the jewellery shall be estimated to be the price which it
would fetch if sold in the open market on the valuation date. G
As regards the liability of a Trustee, Section 21(1) of the Wealth Tax
Act provides that the wealth tax, inter alia, shall be levied upon and recoverable
· from the manager or trustee, as the case may be, in the case of assets chargeable
to tax thereunder. Sub-section (4) of Section 21 reads as under :
H
668 SUPREME COURT REPORTS (2003) 3 S.C.R.

A "(4) Notwithstanding anything contained in the foregoing provisions
of this section, where the shares of the persons on whose behalf or
for whose benefit any such assets are held are indeterminate or
unknown, the wealth-tax shall be levied upon and recovered from the
court of wards, administrator-general, official trustee,. receiver,
manager, or other person aforesaid, as the case may be, in the like
B manner and to the same extent as it would be leviable upon and
recoverable from an individual who is a citizen of India and resident
in India for the purposes of this Act, and -

(a) at the rates specified in Part I of Schedule I; or
C (b) at the rate of three per cent,
whichever course would be more beneficial to the revenue :

Provided that in a case where -
,.
t
(i) such assets are held under a trust declared by any person by will J'

D and such trust is the only trust so declared by him; or
(ia) none of the beneficiaries has net wealth exceeding the amount
not chargeable to wealth-tax in the case of an individual who is
a citizen of India and resident in India for the purposes of this Act
or is a beneficiary under any other trust; or
E (ii) such assets are held under a trust created before the I st day of
March, 1970, by a non-testamentary instrument and the Assessing
Officer is satisfied, having regard to all the circumstances existing
at the relevant time, that the trust was created bona fide exclusively
for the benefit of the relatives of the settlor or where the settlor
F is a Hindu undivided family, exclusively for the benefit of the
members of such family, in circumstances where such relatives or
members were mainly dependent on the settlor for their support
and maintenance; or
(iii) such assets are held by the trustees on behalf of a provident fund,
G superannuation fund, gratuity fund, pension fund or any other
fund created bona fide by a person carrying on a business or
profession exclusively for the benefit of persons employed in
such business or profession, wealth-tax shall be charged at the
rates specified in Part I of the Schedule I.
H Explanation I : For the purposes of this sub-section, the shares of
COM MR. OF WEAL TH TAX v. TRUSTEES OF HEH [SINHA, J.) 669

the persons on whose behalf or for whose benefit any such assets are A
held shall be deemed to be indete1minate or unknown unless the
shares of the persons on whose behalf or for whose benefit such
assets are held on the relevant valuation date are expressly stated in
the order of the court or instrument of trust or deed of wakf, as the
case may be, and are ascertainable as such on the date of such order, B
instrument or deed.

Explanation 2 : Notwithstanding anything contained in section 5, in
computing the net wealth for the purposes of this sub-section or sub-
section (4A) in any case, not being a case referred to in the proviso
to this sub-section, any assets referred to in clauses (xv), (xvi), (xxii), C
(xx iii), (xx iv), (xxv), (xxvi), (xxvii), (xxviii) and (xx ix) of sub-section
(I) of that section shall not be excluded."

The core question which, thus, arises for consideration is as to whether
the amount of estate duty payable on the deemed death of the life tenant
would be a relevant factor in determining the valuation of the property. It is D
not in dispute that on the death of holder of the life-interest, the provisions
of the Estate Duty Act would be applicable. The estate duty so determined
in terms of sub-section (2) of Section 74 of the Act shall be the first charge
on such interest.

There cannot, therefore be any doubt or dispute that the position has to E
be evaluated having regard to the value of the assets assessable at each
relevant date. It is further not in doubt or dispute that the value of the
jewelleries would be the price which a willing or informed buyer would offer
therefor. As arrears of the estate duty would be a charge on the property, the
same being 'encumbrance', the potential estate duty liability shall be a relevant
factor while determining the market value of the jewelleries. Whenever there F
is a charge or encumbrance in the property, the right of a seller to sell the
same would be subject to such charge. The restrictions and disadvantages
attached to the right of the assessee would indisputably diminish the value of
the property to the said extent.
G
In Mrs. Khorshed Shapoor Chenai v. Assistant Controller of Estate
Duty, A.P., (1980) 122 l.T.R. 21, while considering the question as to whether
a right to receive extra or further compensation is a separate right, this Court
observed :

"In our opinion, the High Court was right in holding that there H
I

"'
670 SUPREME COURT REPORTS [2003] 3 S.C.R.

A are no two separate rights - one a right to receive compensation and
other a right to receive extra or further compensation. Upon acquisition
of his lands under the Land Acquisition Act the claimant has only
one right which is to receive compensation for the lands at their
market value on the date of the relevant notification and it is this
right which is quantified by the Collector under Section 11 and by
B the Civil Court under Section 26 of the Land Acquisition Act. It is
true that under Section 11 the Collector after holding the necessary
inquiry determines the quantum of compensation by fixing the market
value of the land and in doing so is guided by the provisions contained
in Sections 23 and 24 of the Act - the very provisions by reference
c to which the Civil Court fixes the valuation. It is also true that the
Collector's award is, under Section 12, declared to be, except as
otherwise provided, final and conclusive evidence as between him
and the persons interested. Even so, it is well settled that in law the
Collector's award under Section 11 is nothing more than an offer of
compensation made by the government to the claimants whose property
D is acquired. (Vide Privy Council decision in Ezra v. Secretary of
State for India, (1905) ILR 32 Cal 605 and this Court's decisions in
Raja Harish Chandra v. Dy. Land Acquisition Officer, (1962] 2 SCR
676; AIR 1961 SC 1500 and Dr. G. H. Grant v. State of Bihar,
(1965] 3 SCR 576; AIR 1966 SC 237. If that be the true nature of
E the award made by the Collector then the question whether the right
to receive compensation survives the award must depend upon whether
the claimant acquiesces therein fully or not. If the offer is acquiesced
in by total acceptance the right to compensation will not survive but
if the offer is not accepted or is accepted under protest and a land
reference is sought by the claimant under Section 18, the right to
F receive compensation must be regarded as having survived and kept
alive which the claimant prosecutes in a Civil Court. It is impossible
to accept the contention that no sooner the Collector has made his
award under Section 11 the right to compensation is destroyed or
ceases to exist or is merged in the award, or what is left with the
G claimant is a mere right to litigate the correctness of the award. The
Claimant can litigate the correctness of the award because his right
to compensation is not fully redeemed but remains alive which he
prosecutes in Civil Court. That is why when a claimant dies in a
pending reference his heirs are brought on record and are permitted
to prosecute the reference. This, however, does not mean that the
H Civil Court's evaluation of this right done subsequently would be its
COMMR. OF WEALTH TAX v. TRUSTEES OF HEH [SINHA, J.] 671
valuation as at the relevant date either under the Estate Duty Act Jr A
the Wealth Tax Act. It will be the duty of the assessing authority
under either of the enactments to evaluate this property (right to
receive compensation at market value on the date of relevant
notification) as on the relevant date (being the date of death under the
Estate Duty and valuation date under the Wealth Tax Act). Under B
Section 36 of the Estate Duty Act the assessing authority has to
estimate the value of this property at the price which it would fetch
if sold in the open market at the time of the deceased's death. In the
case of the right to receive compensation, which is property, where
the Collector's award has been made but has not been accepted or has
been accepted under protest and a reference is sought or is pending C
in a Civil Court at the date of the deceased's death, the estimated
value can never be below the figure quantified by the Collector because
under Section 25(1) of the Land Acquisition Act Civil Court cannot
award any amount below that awarded by the Collector; the estimated
value can be equal to the Collector's award or more but can never be D
equal to the tall claim made by the claimant in the reference nor
equal to the claim actually awarded by the Civil Court inasmuch as
the risk or hazard of litigation would be a detracting factor while
arriving at a reasonable and proper value of this property as on the
date of the deceased' s death. The assessing authority will have to
estimate the value having regard to the peculiar nature of the property, E
it's marketability and the surrounding circumstances including the
risk or hazard of litigation looming large at the relevant date. The
first contention of counsel for the appellant, therefore, fails."

The view of ours also finds support from a decision of this Court in
Commissioner of Wealth-Tax, Bihar (supra) wherein in estimating the value F
of the assets for the purpose of computation of compensation on vesting of
lands under the Bihar Land Reforms Act, 1950, this Court held :
•
" .......... But in estimating the value of the assets, this possibility, which
is indeed in the nature of an obligation of the Compensation Officer, G
is a hazard, a clog or a hindrance which, if a proper estimate is made
under s. 7( I) by the WTO, he has to take into consi~eration. It is not
a question of deducting the debt but a question of estimation of the
value of the asset in.question."

This Court in Nizam 's Family's case (supra) categorically held : H
672 SUPREME COURT REPORTS (2003] 3 S.C.R.

A "It is also necessary to notice the consequences that seem to flow
from the proposition laid down in section 21, sub-section (I) that the
trustee is assessable 'in the like manner and to the same extent' as the
beneficiary. The consequences are three fold. In the first place, it
follows inevitably from this proposition that there would have to be
as many assessments on the trustee as there are beneficiaries with
B detenminate 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
c hands of the trustee. This was recognized and laid down by this Court
in N. V. Shanmugham & Co. v. C.I. T, (1970] 2 SCC 139. 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."
D It was further held :

"This immediately takes us to the question as to which of the two
sub-sections, (I) or (4) of Section 21 applies for the purpose of
assessing the assessees to wealth tax in respect of the beneficial interest
in the remainder qua each set of unit or units allocated to the relatives
E specified in the Second Schedule. Now it is clear from the language
of Section 3 that the charge of wealth tax is in respect of the net
wealth on the relevant valuation date, and, therefore, the question in
regard to the applicability of sub-section (I) or (4) of Section 21 has
to be detenmined with reference to the relevant valuation date. The
F Wealth Tax Officer has to determine who are the beneficiaries in
respect of the remainder on the relevant date and whether their shares
are indetenminate or unknown. It is not at all relevant whether the
beneficiaries may change in subsequent years before the date of
distribution, depending upon contingencies which may come to pass
in future. So long as it is possible to say on the relevant valuation
G date that the beneficiaries are known and their shares are determinate,
the possibility that the beneficiaries may change by reason of
subsequent events such as birth or death would not take the case out
of the ambit of sub-section (I) of Section 21. It is no answer to the
applicability of sub-section (I) of Section 21 to say that the
H beneficiaries are indetenninate and unknown because it cannot be
COMMR. OF WEAL TH TAX v. TRUSTEES OF HEH [SINHA, J.] 673
predicated who would be the beneficiaries in respect of the remainder A
on the death of the owner of the life interest. The position has to be
seen on the relevant valuation date as ifthe 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
detem1inate shares, sub-section (I) of Section 21 must apply and it B
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"

This Court clearly observed that the position is as if the preceding life
interest had come to an end on that date and if upon that hypothesis, it is C
possible to determine who precisely would be the beneficiaries and on what
determinate shares, sub-section (I) of Section 21 would 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.
D
The effect of a legal fiction created by a statute is no longer res integra.

In Bhavnagar University v. Pa/itana Sugar Mill Pvt. Ltd. and Ors.,
[2003] 2 SCC 111, it was held :

"The purpose and object of creating a legal fiction in the statute E
is well-known. When a legal fiction is created, it must be given its
full effect. In East End Dwelling Co. Ltd v. Finsbwy Borough Council,
(1951) 2 All.E.R 587, Lord Asquith, J. stated the law in the following
tem1s:-

"If you are bidden to treat an imaginary state of affairs as real, F
you must surely, unless prohibited from doing so, also imagine as
real the consequences and incidents which, ifthe 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 G
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."

The said principle has been reiterated by this Court in M Venugopal
v. Divisional Manager, Life Insurance Corporation of India, H
r•

674 SUPREME COURT REPORTS [2003] 3 S.C.R.

A Machilipatnam, A.P. and Anr., [1994] 2 SCC 323. See also Indian
Oil Corporation limited v. Chief Inspector of Factories and Ors.
etc., [1998] 5 SCC 738, Voltas limited, Bombay v. Union of India
and Ors., [1995] Supp. 2 SCC 498, Harish Tandon v. Addi. District
Magistrate, Allahabad, U.P. and Ors., [(1995) I SCC 537 and G.
Viswanathan etc. v. Hon 'ble Speaker, Tamil Nadu Legislative
B Assembly, Madras and Anr., [1996] 2 SCC 353."

Once the legal fiction under the Act is taken to its logical corollary, the
conclusion is inescapable that while assessing the net wealth of the jewelleries
in question, the charge created thereupon in terms of Section 74(2) of the
C Estate Duty Act will have to be taken into consideration.

Bharat Singhania 's case (supra) whereupon strong relianc, has been
placed by Mr. Bhatt cannot be said to have any application in 1he instant
case.

D This Court posed six questions as would appear from paragraph 9 of
the judgment.

The question as to whether the Valuation Officer is bound by Rule I-
D or not was answered in the affirmative.

E As regards the question as to whether the application of the break-up
method in Rule 1-D means that the capital gains tax, which would be payable
in case the said shares are sold on the valuation date, is liable to be deducted
from the market value determined, it was held :

"The contention of the learned counsel, in this behalf, is rather
F involved if not obscure. The argument runs thus : Section 7(1) says
that the value of an asset shall be the price which such asset would
fetch if sold in the open market on the valuation date. In other words,
the sub-section creates a fiction of sale of such asset on the valuation
date for the purpose of determining its market value. Once a fiction
is created, it must be carried to its logical extent and the court should
G not allow its imagination to be boggled by any other considerations.
lfan asset is sold, it would be subject to capital gains tax. For finding
out the net wealth received in the hands of assessee, one must
necessarily deduct the capital gains tax. Then alone one can arrive at
the net price which the assessee will receive - and that should be the
market value. We must say that the entire argument is misplaced
H
COMMR. OF WEALTH TAX v. TRUSTEES OF HEH [SINHA, J.) 675
There is no sale of the asset and there is no question of capital gains
tax being attracted or being paid. For the purpose of detennining the
market value, the sub-section says that the Wealth Tax Officer shall
make an estimate of the price which the asset would fetch if sold in
the open market on the valuation date. The sub-section speaks of the
I
market value of the asset and not the net income or the net price B
I
/ received by the assessee. This is not a case where a fiction is created
by Parliament. It is only a case of prescribing the basis of detennination
of market value. On the same reasoning, it must be held that no other
amounts like provision for taxation, provident fund and gratuity etc.
can be deducted. The contention of the learned counsel for the
assessees is, therefore, wholly unacceptable." c
This Court in that case was concerned with the applicability of Rule I-
D of the Wealth Tax Rules, 1957 which lays down the criteria fordetennining
the valuation of shares.

Explanation II appended to Rule 1-D is as under : D
"Explanation II : For the purposes of this rule
(i) the following amounts shown as assets in the balance-sheet shall
not be treated as assets, namely
(a) any amount paid as advance tax under Section 18-A of the E
Indian Income Tax Act, 1922 (11of1922), or under Section 210
of the Income Tax Act, 1961 (43 of I961 );
(b) any amount shown in the balance-sheet including the debit
balance of the profit and loss account or the profit and loss
appropriation account which does not represent the value of any F
asset;
(ii) the following amounts shown as liabilities in the balance-sheet
shall not be treated as liabilities, namely
(a) the paid-up capital in respect of equity shares;
0
(b) the amount set apart for payment of dividends on preference
shares and equity shares where such dividends have not been
declared before the valuation date at a general body meeting of
the company;
(c) reserves, by whatever name called, other than those set apart H
)

676 SUPREME COURT REPORTS (2003] 3 S.C.R.

A towards depreciation; '·

(d) credit balance of the profit and loss account;
(e) any amount representing provision for taxation [other than the
amount referred to in clause (i)(a)] to the extent of the excess
over the tax payable with reference to the book profits in
B accordance with the law applicable thereto; (f) any amount
representing contingent liabilities other than arrears of dividends ,_
payable in respect of cumulative preference shares."

The following principles emerge from the said decision :

C (a) What is relevant is the market value of the shares i.e. what sale
price the shares would fetch if sold in the open market on the
valuation date.
(b) There is no legal fiction of sale created by Parliament; and therefore
no deemed capital gains tax on sale is to be considered.
D (c) The net realization by the assessee after meeting expenses is not
material.

It is very important to note that this judgment was not concerned with
what price a buyer would offer for the shares on the valuation date but only
E whether the seller can claim certain deductions from the price which the
buyer would be willing to offer. In this case, however, this Court is only
concerned what price the buyer would offer for the interest of the
remainderman.

There cannot be any doubt or dispute that the question as regards
F capital gains liability will not affect the value of the shares or land inasmuch
the same is incurred by the seller. In such an event, therefore, the price which
the buyer would be prepared to offer would not be affected by the seller's
capital gains liability or any the expenses which may be incurred by him. On
the other hand, the estate duty payable by the trustees on the termination of
the life interest would be a relevant factor for determination of the price
G which a willing and informed buyer would offer for purchase of the remainder
interest. The remainder interest is merely the right of the remainderman to
receive an amount from the trustees on the termination of the life interest of
the life tenant, the purchaser, therefore, would take into consideration any
factor which would potentially reduce the amount that he would ultimately
receive from the trustees towards his remainder interest. The risk or hazard
H
COM MR. OF WEAL TH TAX v. TRUSTEES OF HEH [SINHA. .J.] 677
of estate duty liability will have a direct impact on the purchaser of the A
remainder interest and, thus, will be a relevant factor for the purpose of
determination of valuation of the interest to be held by the remainderman.

For the reasons aforementioned, we are of the opinion that the judgmen.
of the High Court is correct. These appeals, thus, being devoid of any merits,
are dismissed. However, in the facts and circumstances of the case, there B
shall be no order as to costs.

N.J . Appeals dismissed.

•