Year: 2018

Family-run
businesses continue to be the norm rather than the exception in India; with
most progressing fast on the path to globalisation, succession planning has
never been as important as it is today. Succession planning is not only a means
to safeguard from potential inheritance tax, but also a method to ensure that
legacies remain alive and keep up with changing times with minimum conflict or
impact on business.

 

Succession
planning can be a complex exercise in India. Families are often large with
multiple factions involved in the business, making deliberations around
succession planning prolonged and difficult. The slew of regulations around tax
and other regulatory matters, in addition to personal laws, do not ease
matters.

 

Despite these
factors, it is imperative to plan for succession. A look back at the history of
corporate India reveals the immense disruption due to improper or absent
succession planning. Familial ties have been irreparably damaged, wealth
accumulated over generations has been squandered, protracted and endless
litigation between family members has taken up significant time and effort,
draining valuable resources that could have been put to better use, and most
importantly, once-leading business houses have taken a huge hit to their
finances, glory and reputations.

 

Use and limitation of wills

While a Will
remains the most oft-used mechanism for passing down wealth through generations,
it has its limitations. The chances of a Will being challenged, tying up the
family in litigation for years to come, are high. In addition, it is not
possible to keep ownership or control of assets in a common pool in a Will,
leading to fragmentation of family wealth. Since assets under a Will are
transferred only on the demise of the owner, they were subject to estate duty
under the Estate Duty Act, 1953 (ED Act), which was abolished in 1985. Although
estate duty is currently not on the statute, there have been apprehensions of
its reintroduction. While one cannot predict the provisions thereof, a
reasonable assumption is that passing of property on the death of the owner
would be subject to any such tax.

 

Such
limitations and other concerns, such as ring-fencing assets from legal issues
and setting family protocols, has led India Inc. to once again seriously
consider succession planning through a private Trust set up for the benefit of
family members.

 

Private trusts

As the name
suggests, a Trust means faith/confidence reposed in someone who acts in a
fiduciary capacity for someone else. Essentially, a Trust is a legal
arrangement in which a person’s property or funds are entrusted to a third
party to handle that property or funds on behalf of a beneficiary.

 

While oral
Trusts that were self-regulated have been part of Indian society since time
immemorial, the law relating to private Trusts was codified in 1882, as the
Indian Trust Act, 1882 (the Trust Act). The Trust Act is applicable to the
whole of India, except the State of Jammu and Kashmir and the Andaman and
Nicobar Islands. The provisions of the Trust Act should not affect the rules of
Mohammedan law with regard to waqf, or the mutual relations of the
members of an undivided family as determined by any customary or personal law.
The provisions of the Trust Act are also not applicable to public or private
religious or charitable endowments.

 

A private
Trust is effective for succession planning as the settlor can see its
implementation during his lifetime, enabling corrective action to be taken in a
timely manner. A Trust demonstrates family cohesiveness to the world and
provides effective joint control of family wealth through the Trust deed. Thus,
a Trust provides united control and effective participation of all members in
the decision-making process, leading to mitigation of disputes and legal
battles. It can also ease the path for separation within the family, making it
a smooth and defined process.

A Trust, as a
means of succession planning, is easy to operate and not heavily regulated. The
statutory formalities to be complied with are minimal. The Trust Act is an
enabling Act and does not contain regulatory provisions. Thus, a Trust provides
all types of flexibility. It allows the necessary distribution, accumulates
balance and allows ultimate succession, even separation, as planned. As against
being regulated by laws, a Trust is governed and regulated by the Trust deed.

 

Information
on private Trusts is not publicly available, unless such Trusts have been
registered, providing much- sought-after privacy.

 

Therefore, for several generations, private Trusts
have been a popular means of succession planning, and the spectre of
inheritance tax has only given a boost to its use.

 

A. Basic structure

The basic
structure of a private Trust is as follows:

 

 

Apart from
the settlor, Trustees and beneficiaries, who are the key players in any Trust,
there may also be a protector and an advisory board. The protector is
essentially a person appointed under the Trust deed, who guides the Trustees in
the proper exercise of their administrative and dispositive powers, while
ensuring that the wishes of the settlor are fulfilled and the Trust continues
to serve the purpose for which it was intended. An advisory board is a body
constituted under a Trust deed to provide non-binding advice to the Trustees,
often used more as a sounding board.

 

B. Trust deed

A private
Trust is usually governed by a Trust deed. A Trust deed, as an instrument, is
similar to an agreement and contains clauses similar to an agreement between
two parties, in this case, the settlor and Trustee, however, which would have
implications for the beneficiaries. Therefore, like any other agreement, a
Trust deed usually provides for rules in relation to each of the three parties
and is a complete code by itself for operating the relationship within them.

 

A Trust deed
would—apart from information regarding the relevant parties and Trust
property—also cover aspects such as:

u    Rights, powers (and restrictions
thereon), duties, liabilities and disabilities of Trustees, including the
procedure for their appointment, removal, resignation or replacement and
minimum/maximum number of Trustees

u    Rights, obligations and
disabilities of beneficiaries, including the powers and procedure for addition
and/or removal of beneficiaries, including the person who would be entitled to
exercise such powers

u    Terms of extinguishment of
the Trust

u    Alternative dispute
resolution, etc.

 

It is
preferable that a Trust deed is in simple language and contains clear
instructions, including the process and provisions for amendment thereof.

 

C. Type of private
trust

Usually, when
property is settled into a private Trust for the purpose of succession
planning, it is done through an irrevocable transfer, i.e., the settlor does
not retain or reserve the power to reassume the Trust property/income or to
transfer it back to himself. Thus, once the assets are settled in an
irrevocable Trust, the property no longer belongs to the settlor or the
transferor, i.e., it belongs to the Trust. Since the settlor has no right left
in the Trust property, this typically provides adequate protection to the
assets against claims by creditors, or in case of a divorce, etc. Under the
erstwhile ED Act, if the settlor reserved any right for himself, including
becoming a beneficiary in the Trust, such property may be considered to be
passing only on the death of settlor, resulting in a levy of estate duty. This
is another reason why irrevocable Trusts are typically used for succession
planning, unless some special extenuating circumstances exist.

 

Based on the
distribution pattern adopted by a private Trust, it may be classified as either
a specific (also called determinate) or a discretionary Trust. If the Trust
deed provides a list of beneficiaries specifying their beneficial interest, it
would be a specific Trust. On the other hand, if the Trust deed does not
specify any beneficiary’s share, but empowers someone (usually the Trustees) to
determine such share, it is considered as a discretionary/ indeterminate Trust.
Such discretion may be absolute or qualified.

 

Under the ED
Act, in case of a specific Trust, since the interest of each beneficiary was
identified, the same was considered as passing to others on the death of such
beneficiary, and therefore, subject to estate duty.

 

However, as
no interest was identified in case of a discretionary Trust (based on the
decision of the Trustees, each beneficiary’s share could be anywhere from 0% to
100%), no estate duty was levied upon the death of any beneficiary, as no
property was considered to be passed, making it a commonly used mechanism.

 

Often—and
depending on the requirements—a combination of specific and determinate Trusts
(in either case irrevocable) may be used for succession planning and planning
around the potential levy of estate duty.

 

D. Key aspects of
taxation of a private trust

In general,
moving to a Trust structure is neutral from the point of view of taxation,
i.e., neither a tax advantage nor an additional tax burden is imposed by the
Income-tax Act, 1961 (IT Act).

 

1.  Settlement of a
Trust

Taxation of the settlor

Section
47(iii) contains a specific exemption for any capital gains that may be
considered to arise to the settlor on transfer of capital to an irrevocable
Trust. Therefore, the settlor should not be liable to any tax on settlement of
the irrevocable Trust.

 

Taxation of beneficiaries

Section
56(2)(x), which was introduced by the Finance Act, 2017, provides for taxation
of the value of the property in the hands of the recipient of such property, if
received for nil or inadequate consideration. Certain exceptions, including for
receipt of property by a Trust created for the benefit of relatives of the
transferor of the property have been carved out from the purview of these
provisions.

Thus, when assets are settled into a Trust, assuming the beneficiaries are
considered as “relatives” of the settlor within the definition prescribed for
this purpose under the IT Act, no tax implications would arise u/s. 56(2)(x) of
the IT Act. It is important to note the following aspects:

u    Fundamentally, for
determining taxability u/s. 56(2)(x), the definition of relative is to be
tested in relation to the recipient of the property. However, the exception for
Trusts requires the relationship to be tested with reference to the
giver/settlor. This could give different results, such as in the context of
uncle and nephew/niece, and therefore, should be examined closely.

u    The argument may be that
the provisions of section 56(2)(x) ought not to apply in context of Trusts set
up for beneficiaries who do not fall within such definition of “relatives,”
including corporate beneficiaries, notwithstanding that there is no specific
exception carved out; however, its applicability cannot be ruled out. Hence,
adequate care is necessary in such cases, e.g., separate Trusts may be set up
for relatives and non-relatives.

 

Taxation of Trustees

The
provisions of the aforesaid section 56(2)(x) ought not to apply to the Trustees,
as a Trustee receives the property with an obligation to hold it for the
benefit of the beneficiaries. This obligation taken over should be good and
sufficient consideration for receipt of properties by the Trustees, and
therefore, the receipt of property cannot be said to be without/for inadequate
consideration.

 

2.  Income earned by
a Trust

Broadly, a
specific Trust’s tax is determined as an aggregate of the tax liability of each
of its beneficiaries on their respective shares (unless the Trust earns
business income). A discretionary Trust, on the other hand, is generally taxed
at the maximum marginal rate applicable to the type of income earned by the
Trust.The additional tax on dividends earned from domestic companies (as
provided u/s. 115BBDA[1])
would also apply.

 

Once taxed,
the income should not be taxed once again when distributed to the
beneficiaries.

 

3.  Distribution
of assets/termination of a Trust

There are no
specific provisions under the ITA dealing with dissolution of Trust/taxability
on distribution of assets of the Trust.

 

Since a Trust
holds property for the benefit of the beneficiaries, when the properties are
distributed/handed over to the beneficiaries, it should not result in any
income taxable under the ITA for them.

 

Since the Trust does not receive any consideration
at the time of distribution, no capital gain implications ought to arise.

 

In the past,
tax authorities have attempted to treat a Trust as an AOP, and apply the
provisions of section 45(4)[2]
of the IT Act on dissolution of a Trust. However, the Hon’ble Bombay High Court[3]
has held that Trustees cannot be taxable as an AOP, and therefore, the
provisions of section 45(4) are not applicable.

 

Hence, the
distribution to the beneficiaries at the time of termination of the Trust or
otherwise ought not to result in any tax liability.

 

E. Implications
under other regulations

Depending on the kind of property settled into a
Trust, implications under various other provisions may also arise:

 

1.  Shares of a
listed company

It is
increasingly popular to settle business assets, in the form of shares of listed
companies into a Trust. A family may decide to put part or all of their holding
into a single Trust or multiple Trusts, depending on their specific needs.The
key consideration is whether this triggers any implications under the
regulations framed by the Securities and Exchange Board of India (‘SEBI’),
notably the SEBI (Substantial Acquisition of Shares and Takeover) Regulations,
2011 (Takeover Code).

 

Under the
Takeover Code, if there is a substantial change in shareholding/voting rights
(direct or indirect) or change in control of a listed company, the public
shareholders are supposed to get an equal opportunity to exit from the company
on the best terms possible through an open offer. Certain exceptions have been
carved out, whereby, upon compliance with certain conditions, the open offer
obligations would not be applicable[4].

There are arguments
that may be taken as to why the Takeover Code ought not to have an implication,
especially since there is no change in control. However, in the absence of
specific exemptions, especially in the context of transfer to a newly set-up
Trust or a Trust, which does not already own shares in the listed company for
at least three years, as a matter of precaution, several families approached
SEBI for seeking a specific exemption. SEBI has, subject to certain conditions
or circumstances being met, generally approved such transfers to a Trust,
albeit with safeguards built in.

 

In December
2017, SEBI released a circular highlighting the guidelines that would need to
be adhered to while seeking exemption for settling shares of a listed company
into a Trust, which broadly mirrors the principles applied by SEBI in its
earlier orders.

 

2.  Immoveable
property

Immoveable
properties in which family members are residing or those acquired for
investment purposes may also be transferred to a Trust. However, typically, stamp
duty would be levied on any such settlement of immoveable property, which
becomes a major deterrent. Often, residential property is gifted to individual
members, since in states such as Maharashtra, the stamp duty on gifts to
specified relatives is minimal; such exception is not available for transfer to
a Trust even if the beneficiaries are such specified relatives.

 

As there is no stamp duty on assets transferred
through a Will, it becomes a more commonly used means of migrating large
immovable properties held by individuals. However, this could lead to a
potential estate duty liability, as it would only pass on on the demise of the
owner. Thus, apart from the concerns around the ownership of the property or
any friction between family members, the trade-off between immediate stamp duty
outflow and potential future estate duty outflow would need to be considered.

 

In case
properties are not held directly by individuals but through entities, the
ownership of the entity itself may be transferred to the Trust. In such case,
stamp duty implications, if any, are likely to be significantly lower than that
which would have arisen on transfer of the immovable property itself.

 

Family wealth may include intangible rights in the
properties, such as development or tenancy rights, which are not transferable
without the approval of landlord/owner of the property. Depending on how such
rights are held and whether such approval is forthcoming, a decision may need
to be taken if they ought to be settled into the Trust.

 

3.  Assets located
overseas

Increasingly,
many families hold assets overseas, be it in the form of shares (strategic or
portfolio investments) or immoveable property. For any such assets to be
transferred to a Trust, or if any of the family members are non-residents, not
only would the provisions of the Foreign Exchange Management Act, 1999 need to
be considered, but also the laws of the country where the assets are located.

 

4.  Business assets

In the
current environment, considering the size of business and other factors, it is
usually not possible or advisable to carry on business from a Trust. Therefore,
it is inevitable that the business is continued or transferred to a company or
other entity.

 

If the
business is carried on through a company, whether wholly owned by the family or
not, the securities in such company will be transferred to a Trust. In case the
business is housed in non-company entities (such as a partnership firm or
Limited Liability Partnership firm), it may be necessary to make the Trust
(through its Trustees) a partner in such an entity. However, it would be
advisable that in case a partnership firm is conducting the business, a
separate Trust is set up to ring-fence and protect other properties, since
partnership firms have unlimited liability for its partners.

 

F. Examples of trust
structures

Depending on
the requirements, a Trust structure may be set up in multiple ways. No
one-size-fits-all approach would work.

 

If it is a
nuclear family, setting up a single Trust may suffice. On the other hand,
multiple factions within the family would require multiple Trusts to be set up.
For example, a family of two brothers owned their business in a company. Their
father created the business, and with his wife (the mother), owned 100% shares
in the company. The parents settled their entire holding in the company to a
master Trust, wherein they were the Trustees, thereby retaining control with
them. The beneficiaries were two separate Trusts (often referred to as baby or
sub-Trusts) set up for each of their sons and their respective families. This
is depicted here as a base structure:

Another
variation could be with multiple master Trusts. In this example, a family of
father and two sons owned two businesses. They decided to have:

u    Two master Trusts for
holding the two businesses through existing companies

u    One master Trust for owning
other assets

u    Three baby Trusts for each
segment of the family

 

 

Clearly, the
facts of each case, combined with the requirements of all stakeholders will
need to be considered while establishing any Trust structure.

 

G. Migration

Any
succession plan would fail unless it is implemented properly, through
appropriate migration of assets to the structure. Not all assets would be
directly owned by the settlor, which can easily be settled into the Trust. In
some cases, they may be owned by companies, partnership firms, LLP, even Hindu
Undivided Families. In such case, the existing structure would first need to be
unwound before the properties are introduced into the Trust.

 

To do so,
especially to unwind a structure, various methods may be used, e.g.:

u    Settlement into a Trust

u    Gift of assets

u    Sale of
assets/business/shares

u    Family
arrangement/settlement

u    Primary infusion

u    Mergers/demergers

 

Any migration
strategy would typically be a combination of the above. Each of the above modes
of transfers could have implications under various statutes, which would need
to be examined closely, e.g.:

u    Income tax

u    Stamp duty

u    SEBI

u    FEMA

u    Laws of foreign
jurisdictions

 

Further, one
would also need to consider the potential levy of inheritance tax/estate duty,
and plan appropriately, considering that there is no law in place currently,
not even in draft form; one can only draw an analogy from the erstwhile ED Act
or even from laws of foreign countries.

 

To conclude

Succession
planning through the use of Trusts has been in use in India since several
generations and is not a new concept. However, with the various complications
of business, the multitude of laws that today surround any kind of action, the
glare that any business house comes under, and the uncertainty surrounding the
reintroduction of inheritance tax, makes it an exciting subject. The intent is
to capture a flavour of Trust structures; however, various nuances would need
to be considered before embarking on such a journey.

 

 

 

This takes us into the area of tax planning
for succession. This was more prevalent in the days India had estate duty law,
which got abolished in 1986 on the ground that the yield from the estate duty
was much lower than the cost of administering that law. This was despite the
fact that the maximum marginal rate of estate duty was as high as 85%! There
is, however, a fear that the draconian law may get resurrected on some pretext
or the other in the near future. While it is bad news for each one of us, it is
also good news for some of us who are engaged in tax practice!!

 

But before moving into that unknown terrain,
let us have a look at the basic aspects of taxation of the income and the
estate of a deceased.

 

Section 159

When a person dies, the assessment of his
income pertaining to the period prior to his death would be pending. Courts
held in the past that an assessment cannot be made on a dead person and, if so
made, would be a nullity in the eyes of law[1].
At the same time, however, it would be unjustifiable to say that upon death of
a person, the tax department cannot collect taxes on the income that he had
earned prior to death and in respect of which assessments are pending, or even
filing of the return may be pending for the last one or two assessment year(s).
In order to overcome this conundrum, section 159 was inserted in the Income-tax
Act, 1961 (“the Act”) to enable assessment of income of a person who was alive
during the relevant financial year but had died before filing the return of
income or before the income was assessed.

 

This section provides that when a person
dies, his legal representatives shall be liable to pay any tax or other sum
which the deceased would have been liable to pay if he had not died “in the
like manner and to the same extent” as the deceased. Thus, there would be
separate assessments of income in the hands of the legal representative which
he has earned in his personal capacity and that which the deceased had earned
prior to his death. The two cannot be assessed as part of the same return of
income of the legal representative. Consequently, therefore, arrears of tax of
deceased cannot be adjusted against refund due to the legal representative in his
individual capacity[2].
A legal representative is deemed to be an assessee for the purposes of the Act
by virtue of section 159(3). The liability of the representative assessee,
however, is limited to the extent to which the estate is capable of meeting the
liability and it does not extend to the personal assets of the legal
representative[3].
If, however, the legal representative has disposed of any assets of the estate
or creates charge thereon, then he may become personally liable. In such cases
also, the liability will be limited to the extent of the value of the assets
disposed of or charged[4].
A legal representative gets assessed in the PAN of the deceased, but in a
representative capacity.

 

Section 168

While the above provision deals with
taxation of income of the deceased in respect of the period prior to the date
of death, questions arise as regards taxing of the income that the estate of
the deceased earns after the date of death but prior to the date of
distribution of the assets of the deceased amongst the legatees. Section 168
deals with this income. This section essentially provides that the income of
the estate of a deceased person shall be chargeable to tax in the hands of the
executor to the estate of the deceased. The executor shall be assessed in
respect of the income of the estate separately from his personal income. Thus,
there would be a separate PAN required for filing the return of the executor.
Executor shall be so chargeable to tax u/s. 168 upto the date of completion of
distribution of the estate in accordance with the will of the deceased. If the
estate is partially distributed in a given year, then, the income from the
assets so distributed gets excluded from the income of the estate and gets
included in the income of the legatee. Legatee is chargeable to tax on income
after the date of distribution[5].
Even if the executor is the sole beneficiary, it does not necessarily follow
that he receives the income in latter capacity. The executor retains his dual
capacity and hence, he must be assessed as an Executor till the administration
of the estate is not completed except to the extent of the estate applied to
his personal benefit in the course of administration of the estate[6].

 

This section applies only in case of
testamentary succession, i.e. when the deceased has left behind a Will. In
cases of intestate succession, the income from the assets earned after the date
of death becomes assessable in the hands of the legal heirs as
“tenants-in-common” till the assets of the deceased are distributed by metes
and bounds[7].

 

The section provides that the executor is
assessable in the status of “individual”. If, however, there are more executors
than one, then, the assessment will be as if the executors were an AOP.
However, the Madhya Pradesh High Court has held, in the case of CIT vs.
G. B. J. Seth and Anr (1982) 133 ITR 192 (MP), that though the
assessment is on the executor or executors, for all practical purposes it is
the assessment of the deceased. The Court has held that the status of AOP is for
statistical purposes and that notwithstanding the status of the assesse being
an AOP, the executors were entitled to claim set-off on account of the balance
of brought forward losses incurred by the deceased prior to his death.

 

Inheritance – extent of
tax exposure

A transfer of a
capital asset under a gift or a will is not regarded as “transfer” for the
purposes of capital gains. Referring to this clause, the learned author, Arvind
P. Datar, in his treatise, “Kanga and Palkhivala’s The Law and Practice of
Income-tax”, Tenth Edn., on page 1206, has said that “However, these
clauses expressly grant exemption where none is needed”. Indeed, wealth
transmitted under a Will is not a ‘transfer’ but a ‘transmission’. Also, there
is no consideration for the same.

 

Hence, the question of capital gains tax can
never arise. The section does not deal with transfer under intestate succession,
it refers only to a transfer under a will. Yet, for the reasons aforesaid,
there can be no capital gains on such transmission.

 

For the recipient, amounts or property
received by way of inheritance is a capital receipt and not “income”.
Ordinarily, therefore, such receipt is not chargeable to tax. Section 56(2)(x),
however, charges to tax money or value of certain properties received by a
person without consideration or for inadequate consideration. Proviso thereto
exempts, inter alia, money or property received “under a will or by way
of inheritance”. There is thus no tax in the hands of the recipient under this
section.

 

In an interesting decision of the Mumbai
Bench of the Income Tax Appellate Tribunal, in the case of Purvez A.
Poonawalla [ITA No. 6476/Mum/2009 for AY 2006-07], it was held that sum
received by the taxpayer from the legal heir of a deceased in consideration of
the taxpayer giving up his right to contest the Will of the deceased is not
chargeable to tax under the then prevailing section 56(2)(vii), which
corresponds to present section 56(2)(x) in principle.

 

Section 49 provides that when a capital
asset becomes the property of an assessee, inter alia, under a Will
[section. 49(1)(ii)] or inheritance [section 49(1)(iii)(a)], the cost of
acquisition of the asset shall be the cost to the previous owner.
Correspondingly, section 2(42A) provides (in clause (i)(b) of Explanation 1)
that in computing the period of holding the asset by an assessee who had
acquired the property under a will or inheritance, the period of holding by the
previous owner shall be counted. The asset will qualify as a long-term capital
asset or a short term capital asset accordingly. 

 

Expenses incurred in connection with
obtaining probate are held to be not allowable expenses in an early decision of
the Privy Council in the case of P.C. Mullick vs. CIT (6 ITR 206)(PC).

 

Leaving a ‘Will’ – pros
and cons

‘Will’ is a document by which a person
directs his or her estate to be distributed upon his death. It is also termed
as “testament”. Organising succession through a ‘Will’ is certainly a preferred
option as compared to leaving no such written document from the point of view
of certainty. A Will becomes operative upon the death of the testator and
hence, unlike a gift given during the life time, the person is in full
ownership and control of his wealth till the time of his death. Wealth
inherited under a will is not subject to stamp duty. A Will can be amended at
any time during the lifetime of the testator.

 

While these are the pros of writing a
‘Will’, in today’s day and age, one encounters some challenges in
implementation of wills in the form of some claimants emerging from the blue
and throwing spanner in the works to scuttle smooth and easy succession of the
estate. Besides, under a Will simpliciter, it is not possible to segregate the
economic interest of the legatee from controlling interest in a particular
asset. Say, for example, the testator desires to give the benefit of the income
from the shares held by him in a company that he controls to his son, but is
not desirous of handing over control of such shares to him as such control
gives him voting power qua the company. In such a case, simply writing a Will
in favour of the son for bequeathing the shares will not solve the problem.
Finally, the fear of estate duty that we talked about earlier looms large and
if property worth significant value is transmitted under a Will, and if on the
date of death, estate duty law is resurrected, then there would be a sure liability
to estate duty.

 

Planning succession
through trusts

The above cons of a ‘Will’ bring to table
the option of planning succession by creation of trusts. A trust is a structure
involving three persons, namely, a Settlor (or author); a Trustee; and a Beneficiary.
The settlor is the creator of a trust who settles his asset into the trust and
hands it over to the trustee (who becomes the legal owner) to be held for the
benefit of the beneficiary. Thus, the segregation of controlling interest and
beneficial interest happens whereby the control remains with the trustee while
the economic interest travels to the beneficiary.

 

A trust structure may get created during the
lifetime of the testator or may be incorporated in the will so as to create a
trust under the Will. However, creating the trust under a Will may not address
the issue of the Will being challenged by some claimant. It also does not
address the issue of attracting estate duty on death, if such duty is
re-introduced. So, a trust created during the lifetime of the deceased would be
a preferred option from that point of view.

 

When a person creates a trust, he divests
himself of the property which, upon creation of the trust, vests in the
trustee. Hence, at the time of his death, he is no more the owner of that
property and consequently is not liable to estate duty, if such duty becomes
applicable. He can appoint a third party as a trustee or he may himself be a
trustee during his lifetime. He may plan a successor to the trustee as part of
the trust deed itself. If he continues to be sole or one of the trustees, he
retains control over the assets settled in the trust, but in a different
capacity, namely, as a trustee of the named beneficiary. The trustee carries an
obligation to hold the property for and on behalf of the beneficiary and hence
he does not own economic interest in the property so held by him and thereby
such property so held by him as trustee has no economic value. In absence of
any value, there can be no estate duty exposure even if he is himself the
trustee.

 

Care, however, will have to be taken while
choosing the beneficiaries in as much as section 56 of the Indian Trusts Act,
1882 empowers a beneficiary who is competent to contract to require the trustee
to transfer the property to him at any time if he is the sole beneficiary
without waiting for the period mentioned in the trust deed. If there are more
than one beneficiaries, they can so compel the trustee if all of them are of
the same mind. It may therefore be better to have in the list of beneficiaries
a minor and he gets absolute interest in the trust only on his attaining
majority. It may also be better to plant a person as one of the beneficiaries
who enjoys complete confidence of the settlor so that the wishes of the settlor
are not vitiated by the ‘not so matured’ beneficiaries coming together. It
would also be advisable that the trust be a discretionary trust rather than a
specific trust so that none of the beneficiaries have any identified interest
in the trust property.

 

Specific Trust vs.
Discretionary Trust

A Specific Trust is a trust where the
beneficiaries are all known and their shares in the income and assets of the
trust are defined by the settlor in the trust deed. On the other hand, if
either the beneficiaries are not identified or their shares are not defined by
the settlor, the trust would be a discretionary trust. The distribution of
assets and income is left to the discretion of the trustee. A beneficiary of a
discretionary trust does not have any identified interest in the income. He
only has a hope of receiving something if the trustee so decides.  

 

Taxation of income of a specific trust is
governed by section 161 of the Income-tax Act, 1961, (“the Act”) while the
rules for taxation of a discretionary trusts are contained in section 164 of
the Act. For tax purposes, a trustee or the trustees is a “representative
assessee”. Trustee of a specific trust is taxed “in the like manner and to the
same extent” as the beneficiaries. In other words, theoretically, there can be
as many assessments on the trustees as the number of beneficiaries. However,
there is only one assessment, but the income is computed as if the shares of
the beneficiaries are taxed. Section 166 provides an option to the assessing
officer to either tax the trustee or the beneficiaries separately on their
shares of income from a specific trust. In practice, we often find it simpler
that the beneficiaries of specific trusts offer their respective share of
income from a specific trust in their respective returns of income and get
assessed.

 

On the other
hand, trustees of a discretionary trust are taxed at the trust level in view of
the provisions of section 164. This section provides that the income of a
discretionary trust is taxable at maximum marginal rate. Only in cases where
all the beneficiaries are persons having income below taxable limits, then the
trust may be taxed at the slab rates applicable to an AOP. Also, a testamentary
trust, i.e. trust created through a will, enjoys this exception provided it is
the only trust so created under the will. If a discretionary trust has business
income, then such trust (barring a testamentary trust) is taxed at maximum
marginal rates. In cases where the income of a discretionary trust is
distributed by the trustees to the beneficiaries during the year in which is
earned, then, as held by the Supreme Court in the case of CIT vs.
Kamalini Khatau (1994) (209 ITR 101) (SC), the beneficiaries can be
taxed directly on such income instead of the trustees being taxed.

 

Status in which a trust is generally assessable
is as an “individual” and not as an AOP. It is only in cases where the
beneficiaries have come together voluntarily to form a trust, then, they may be
assessed as an AOP[8].
Such would never be the case where a settlor settles a trust for the beneficiaries
as part of his succession planning.

 

Revocable vs.
Irrevocable Trusts

Trust may be revocable or irrevocable. It is
revocable when the settlor retains with himself the right to revoke the trust
after having created it. In substance, therefore, he remains to be the
effective owner of the property settled. It is irrevocable if he retains no
right to revoke it once it is created by him.

 

Sections 61 and 63 of the Act deal with
taxation of revocable trusts. Section 63, by a fiction of law, deems certain
instances where the trust shall be deemed to be revocable. These cases are
where the trust contains any provisions for re-transfer directly or indirectly
of the part or the whole of the income or assets of the trust to the transferor
or it gives right to the transferor to re-assume power directly or indirectly
over part or whole of the income or assets of the trust. Tax implication of
such revocable or deemed revocable trusts is that the income that arises to the
trust by virtue of such revocable or deemed revocable transfer is taxable in
the hands of the transferor and not in the hands of the trust or the
beneficiaries. Thus, in cases where the settlor is himself a beneficiary, such
trusts are deemed to be revocable trusts even though the trust deed may say
that the trust is irrevocable. In such cases, the income of the trust that
arise by virtue of the assets transferred to the trust by the settlor who is
also the beneficiary (or one of the beneficiaries), becomes taxable in the
hands of the settlor and not in the hands of the trustee or the other
beneficiaries, if any.

 

Creation of a trust –
application of section 56(2)(x)

As noted earlier, section 56(2)(x) charges
to tax money or value of certain properties received by a person without
consideration or for inadequate consideration. Having regard to the legal
position that when a trustee of a trust receives any property from a settlor,
he receives it with an obligation to hold it for the benefit of the beneficiary
and not for his absolute enjoyment. The obligation so cast on the trustee can
be viewed as the consideration and an adequate consideration for his receiving
legal ownership of the property. In this view of the matter, receipt by a
trustee of a trust of an asset settled by the settlor in trust for another
beneficiary cannot give rise to a taxable event in the hands of the trustee.
But that does not seem to be the way the law makers seem to view this. In the
proviso to section 56(2)(x), the law provides a clause granting exemption from
this taxing provision in respect of any sum of money or any property received
“from an individual by a trust created or established solely for the benefit of
relative of the individual”. Now, is this exemption inserted out of abundant
caution or is it an exemption to relieve the trusts created for relatives from
the rigours of this section is a vexed question. If I am right in the view
expressed earlier, receipt by a trustee can never be subjected to this tax
since his obligation is an adequate consideration. However, another view of the
matter is that but for this exemption, even trusts created for relatives would
be subjected to the rigours of this taxing provision.

 

Be that as it may. While one is planning his
affairs, one may have to go by the conservative interpretation that but for the
exemption, every trust would be chargeable to tax under this provision.
Consequently, this provision may have to be kept in view while making the
succession plans. It may be stated here that the amounts received under a Will
or by way of inheritance are exempt from the purview of section 56(2)(x) and
hence, if there is a testamentary trust (i.e. a trust created through a Will),
then, this section will not be applicable in any case, whether all the
beneficiaries of the trust are relatives of the testator or not. If one ignores
a possibility of resurrection of estate duty law, then, this seems to be an
efficient mode of planning succession so as to achieve the objective of
segregating the control of the assets from the economic benefits thereof and
pass on only the economic benefits to the legatees and not the control over the
asset which can be retained with the desired trustee or trustees.

 

The way forward

If you have crossed fifty, and if you are not enjoying
life, i.e. Not lavishly spending the wealth you have created, prepare a ‘will’,
whether you have a ‘will’ to give away everything or not, because it is his
‘will’ that will ultimately prevail and if the affairs are not well planned,
the ‘will’ of the devil will ruin the empire created by you in future. If you
are just worried about the tax on your estate, then, forget everything, start
spending your every rupee, enjoy life. Remember that punch line from the film “Anand”
– “jab tak zinda hoon, tab tak mara nahin. Aur jab mar gaya, to saala mei hi
nahin”.

 

 

The law of succession is the law governing the
transmission of property vested in a person at the time of his/her¹
death to some other person or persons. Generally, succession can broadly be
divided into “intestate” and “Testate/Testamentary” succession.

Intestate succession is when a person leaves behind no Will (or to the extent
of that part of the estate of the deceased not covered under the Will of the
deceased) and the estate of the deceased is distributed among the heirs of the
deceased as per the laws applicable to the succession of the estate of the
deceased (which in India would usually depend upon the religion professed by
the deceased at the time of his death). Testamentary succession is when the
deceased leaves behind a Will and his estate is distributed as per his wishes
as expressed in his Will.

 

In matters
relating to succession of property (both testate and intestate) in the case of
Christians and Parsis in India, the provisions of the Indian Succession Act
1925 (“Succession Act”) would apply. However, in the case of Mohammedans,
Mohammedan personal law would apply to both testate as well as intestate
succession, except under certain circumstances which are dealt with below.

 

B. SUCCESSION FOR
MOHAMMEDANS

Mohammedans are broadly divided into two sects,
namely, the Sunnis and Shias. The Sunnis are divided into four sub-sects,
namely, the Hanafis, the Malikis, the Shafeis and the Hanbalis. Shias are
divided into 3 sects namely, Athna-Asharias, Ismailyas and Zaidyas. The
principles of intestate succession differ for Hanafis (Sunnis) and Shias. As
most Sunnis are Hanafis, the presumption is that a Sunni is governed by Hanafi
law. However, Khojas who are a sect of Ismailyas are, in certain matters
relating to testate succession, governed by Hindu law (by virtue of custom).

_________________________________________

1.  In
this Article, a reference to the masculine gender shall include the feminine
gender, except as otherwise stated.

 

In India, as
per section 2 of the Shariat Act, 1937 (“Shariat Act”), matters relating to
succession and inheritance of a Mohammedan, are governed by Mohammedan Personal
Law (as applicable to the sect of Mohammedans to which the deceased belongs),
except;

 

I)     in respect of certain sects of Mohammedans
viz. Khoja Muslims, in the case of testate succession where such
sect followed a different custom from Mohammedan personal law then in such
cases customary law would apply, (except where the concerned Mohammedan makes a
declaration before the prescribed authority that he/she would like to be
governed by Mohammedan personal law in such matters as contemplated u/s. 3 of
the Shariat Act); and

II)    where a Mohammedan is married under the
provisions of the Special Marriage Act, 1954, in which case the Indian
Succession Act, 1925 becomes applicable to such person and his issues in all
matters of succession (that is both testate and intestate succession).

 

The
principles of Mohammedan law remain mostly uncodified and thus there exists no
statute or legislation that governs succession for Mohammedans. Courts in India
apply the principles of Mohammedan law [(which are derived from 4 sources, viz,
the Koran, the Sunna (tradition), Ijmaa (consensus of opinion) and Qiyas
(analogical deduction)] to deal with matters of succession with respect to the
Mohammedans in India.

 

1. Testamentary
Succession: –

The following
basic rules and principles should be borne in mind in respect of testamentary
succession of Mohammedans, based on Mohammedan personal law read with customary
law (as applicable to Khoja Muslims) and relevant Sections of the Succession
Act.

(i) Subject
to the below, every Mohammedan of sound mind and not a minor may dispose of his
property by Will.

(ii) A
Mohammedan cannot dispose of by Will more than one-third of what remains of his
property after his funeral expenses and debts are paid unless his heirs consent
to the bequest in excess of one-third of his property.

(iii) A Khoja
Mohammedan may dispose of the whole of his property by Will. The making and
revocation of Khoja Wills and validity of trusts and waqfs created
thereby are governed by Mohammedan law, but apart from trusts and waqfs,
the construction of a Khoja Will is governed by Hindu Law.

(iv) In the
case of Sunni Muslims, while a bequest to a stranger (i.e. a person who is not
an heir) to the extent of one-third of his property is permissible, any bequest
to an heir is not valid unless the other heirs of the Testator consent to such
bequest, even if the bequest is within this permissible limit of one-third. The
consent of the other heirs to such bequest must be given after the death of the
Testator.

(v) In the
case of Shia Muslims however, a bequest may be made to a stranger and/or to an
heir (even without the consent of the other heirs) so long as it does not
exceed one-third of the estate of the Testator. However, if it exceeds one-third
of the Testator’s property, it is not valid unless the other heirs consent to
this, which consent may be given either before or after the death of the
Testator.

(vi) A
bequest to a person not yet in existence at the Testator’s death is void, but a
bequest may be made to a child in the womb, provided he is born within six
months from the date of the Will.

(vii)
Succession to the property of a Mohammedan whose marriage is solemnised under
the Special Marriage Act and also of the issue of such marriage, shall be
regulated by the provisions of the Succession Act and accordingly, there would
be no restriction on him bequeathing more than 1/3^rd of his property
to any person and the consent of his heirs would not be required, even to
bequeath more than one-third of the property.

(viii) No
writing is required to make a valid Will and no particular form is necessary.
Even a verbal declaration is a Will. The intention of the Testator to make a
Will must be clear and explicit and form is immaterial.

(ix) A
Mohammedan Will may, after due proof, be admitted in evidence even though no
probate has been obtained.

 

2. Intestate
Succession: –

Distributions on intestacy as per Hanafi Law:

As per Hanafi Law there are three classes
of heirs, namely:

(i)
“Sharers”- being those who are entitled to a prescribed share of the
inheritance as per Mohammedan law

(ii)
“Residuaries” being those who take no prescribed share, but succeed to the
residue after the claims of the Sharers are satisfied

(iii)
“Distant Kindred” are all those relations by blood who are neither Sharers nor
Residuaries

 

The first
step in the distribution of the estate of a deceased Mohammedan (governed by
Hanafi law), after payment of his funeral expenses, debts, and legacies, is to
allot the respective shares to such of the relations as belong to the class of
Sharers who are entitled to a share.

 

The next step
is to divide the residue (if any) among such of the Residuaries as are entitled
to the residue. If there are no Sharers, the Residuaries will succeed to the whole
inheritance.

 

If there are
neither Sharers nor Residuaries, the inheritance will be divided among such of
the distant kindred as are entitled to succeed thereto. The distant kindred are
not entitled to succeed so long as there is any heir belonging to the class of
Sharers or Residuaries. But there is one exception to the above rule where the
distant kindred will inherit with a Sharer, and that is where the wife or
husband of the deceased is the sole Sharer and there are no other
Sharers or Residuaries.

 

The question
as to which of the relations belonging to the class of Sharers, Residuaries, or
distant kindred, are entitled to inherit the estate of the deceased and the
share which such relation will receive will depend upon the relationship of the
Sharer or Residuary with the deceased and the other surviving relations².

 

Distributions
on intestacy as per Shia Law:

As per Shia
law, heirs are divided into two groups, namely (1) heirs by consanguinity, that
is, blood relation, and (2) heirs by marriage, that is, husband and wife.

 

Heirs by
consanguinity are divided into three classes, and each class is subdivided into
two sections. These classes are respectively composed as follows: –

 

(i)    (a) Parents (b) children and other lineal
descendants h.l.s³.

(ii)   (a) Grandparents h.h.s⁴ (true⁵
as well as false⁶), (b) brothers and sisters and their descendants
h.l.s.

________________________________________________________

2. See Mullas Principles
of Mohammedan Law (page [66(A and 74A)] Edn 20 for more details on the exact
share of each relation)

3. How low soever

4.  How high soever

5.  Male ancestor between
whom and the deceased no female intervenes

6.  Male ancestor between
whom and the deceased a female intervenes

 

(iii)   (a) Paternal, and (b) maternal, uncles and
aunts, of the deceased and of his parents and grandparents h.h.s and their
descendants h.l.s.

 

Amongst these
three classes of heirs, the heirs of the first (if living) exclude the heirs of
the second and third from inheritance, and similarly the second excludes the
third. But the heirs of the two sections of each class succeed together, the
nearer degree in each section excluding the more remote in that section.

 

Husband or
wife is never excluded from succession, but inherits together with the nearest
heirs by consanguinity, the husband taking 1/4 (when there is a lineal
descendant) or 1/2 (when there is no such descendant) and the wife taking 1/8
(when there is a lineal descendant) or 1/4 (when there is no such descendant).⁷

 

C. SUCCESSION IN THE
CASE OF INDIAN CHRISTIANS AND PARSIS

The
Succession Act defines an “Indian Christian” to mean a native of India who is,
or in good faith claims to be, of unmixed Asiatic descent and who professes any
form of the Christian religion⁸. However, the term “Parsi” is not
defined under the Succession Act. The Bombay High Court has, however, held that
the word “Parsi” as used in the Succession Act includes not only the
Parsi Zoroastrians of India but also the Zoroastrians of Iran.

 

The
Succession Act applies to Parsis and Indian Christians for both testate and
intestate succession. In the case of testate succession, the same rules apply
to both Parsis and Indian Christians. However, the rules differ in the case of
intestate succession.

 

1. Intestate
Succession for Indian Christians: –

Devolution
of property of Christians in the case of intestacy: –

In the case of Christians, the property of an
intestate devolves upon his/her heirs, in the order and according to rules laid
down under Chapter II, part V of the Succession Act. Some of the salient
principles of devolution are set out below-

________________________________

7.  See Mullas Principles of
Mohammedan Law (page [112] Edn 20 for more details on the exact share of each
relation)

8.  Section 2(d) of the
Act.

 

 

(i)    If the deceased has left lineal descendants
i.e. one or more children, or remote issue, the widow’s share is 1/3^rd
and the remaining 2/3^rd devolves upon the lineal descendants. In
case the deceased has left no lineal descendants but only a father, mother,
other kindred etc., the widow gets one half and the other half goes to the
kindred. But if there is no kindred, the widow gets the whole estate. [Note:
the rights of a widow in respect of her husband’s property are similar to those
of the surviving husband in respect of the property of his wife.]

(ii)   Where the intestate has left no widow, his
property shall go entirely to his lineal descendants and in the absence of
lineal descendants, to those who are kindred to him (not being lineal
descendants) in proportions laid down in sections 41 to 48 of the Succession
Act.

(iii)   Though the Indian law does not otherwise
expressly recognise adoption by Christians, the courts have held that an
adopted child is deemed to have all the rights of succession that are available
to a natural-born child⁹.(iv)            A
posthumous child has the same rights as if he was actually born at the time of
the death of the intestate.

 

1.1. The rules for
distribution of Intestate’s property with some examples: –

Distribution
where there are lineal descendants:

Sections 37
to 40 of the Succession Act lay down the rules of distribution of the property
of an intestate (after deducting the share of a widow, if the intestate has
left a widow), where the intestate had died leaving lineal descendants and the
rules of distribution are as under:

_____________________________________

9. Joyce Pushapalath
Karkada Alias vs. Shameela Nina Ravindra Shiri (Regular First Appeal No. 849 of
2010)

 

 

 

1.	If only a child or children and no more lineal descendants	Property belongs to the surviving child or equally divided amongst the surviving children	(s.37)
2.	If there are no children, but only a grandchild or grandchildren	Property belongs to the surviving grandchild or equally divided amongst the surviving grandchildren	(s.38)
3	If there are only great-grandchildren or other remote lineal descendants all in the same degree only	Property belongs to the surviving great-grandchildren or other remote lineal descendants, equally, for both males and females.	(s.39)
4.	If the intestate leaves lineal descendants not all in same degree of kindred to him, and those through whom the more remote are descended are dead	Property is divided in such a number of equal shares as may correspond with the number of the lineal descendants of the intestate who either stood in the nearest degree of kindred or of the like degree of kindred to him, died before him, leaving lineal descendants who survived him. For example; A had three children, J, M and H; J died, leaving four children, and M died leaving one, and H alone survived the father. On the death of A, intestate, one-third is allotted to H, one-third to John’s four children, and the remaining third to M’s one child.	(s.40)

 

 

Distribution where there are no lineal
descendants:

Sections 42 to 48 of the Succession Act lay
down the rules of distribution of the property of an intestate, where the
intestate had died without leaving children or remoter lineal descendants and
the rules of distribution are as under in order of priority:

 

1.	Widow (1/2)	Father (1/2) (even if there are other kindred)	(s.42)
2	Widow (1/2)	Mother, Brothers and Sisters (1/2) equally	(s.43)
3.	Widow (1/2)	Mother, Brothers, Sisters and Children of any deceased Brother or Sister (1/2) equally per stirpes.	(s.44)
4.	Widow (1/2)	Mother and Children of Brothers and Sisters (1/2) equally per stirpes	(s.45)
5.	Widow (1/2)	Mother (1/2)	(s.46)
6.	Widow (1/2)	Brothers and Sisters and Children of predeceased Brothers and Sisters 1/2 equally per stirpes	(s.47)
7.	Widow (1/2)	Remote kindred 1/2 (in the nearest degree)	(s.48)

 

 

2. Succession for
Parsis: –

 

2.1 Intestate
Succession: –

Parsis
are governed by the rules for Parsi intestates which are laid down under Part V
Chapter III of the Act. A Parsi intestate’s property is distributed among his
heirs in accordance with sections 51-56 of the Act. General principles
relating to intestate succession:

 

2.2 No share for a
lineal descendant of an Intestate who dies before the Intestate

If a child or
remoter issue of a Parsi intestate has predeceased him, the share of such child
shall not be taken into consideration, provided such predeceased child has left
neither;

 

(i) a widow
or widower; nor

 

(ii) a child
or children or remoter issue; nor

 

(iii) a widow
of any lineal descendant of such predeceased child. If a predeceased child of a
Parsi intestate leaves behind surviving any of the above mentioned relatives,
then such a child’s share shall be counted in making the division as provided
in section 53. If a predeceased child or remoter lineal descendant of a Parsi
intestate leaves a widow or widower and a child or children, then if such
predeceased child is a son, his widow and children will take the share of such
predeceased son. If such predeceased son leaves a widow or a widow of a lineal
descendant, but no lineal descendant, then the share of such predeceased son
shall be distributed as provided u/s. 53(a) proviso.

 

Further, if
such predeceased child is a daughter, her widower shall not be entitled to
anything u/s. 53(b), but such daughter’s share shall be distributed amongst her
children equally and if she has died without leaving lineal descendant, her
share is not counted at all.

 

No share is
given to a widow or widower of any relative of an intestate who has married
again in the lifetime of the intestate. However, the exception to this rule
would be the mother and paternal grandmother of the intestate and they would
get a share even if they have remarried in the lifetime of the intestate.

 

2.3
Rules for division of the Intestate’s property:

Sections 51 to 56 lay down the rules of division of the property of
an intestate Parsi and the rules of distribution are as under:

1	Son	Widow	Daughter	Equal shares	(s.51)
	No widow	Son	Daughter	Equal shares
.	Father/Mother or both and widow	Son	Daughter	Widow, son and daughter get equal and each parent gets half the share of each child.
2	If intestate dies leaving a deceased son		Widow and children take shares as if he had died immediately after the intestate’s death		(s.53)
	If intestate dies leaving a deceased daughter		The share of the daughter is divided equally among her children
	If any child of such deceased child has also died		Then his/her share shall also be divided in like manner in accordance with the rules applicable to the predeceased son or daughter
	Remoter lineal descendant has died		Provisions set out in the box immediately above shall apply mutatis mutandis to the division of any share to which he or she would be entitled to
3	intestate dies without lineal descendants and leaving a widow or widower but no widow or widower of any lineal descendants		Widow or widower (1/2) And residue as below*		(s.54)
	intestate dies leaving a widow or widower and also widow or widower of lineal descendants		Widow or widower (1/3) Widow or widower of lineal descendant (1/3) Residue as below*
	intestate dies without leaving a widow or widower but leaves one widow or widower of a lineal descendant		The widow or widower of the lineal descendant (1/3) Residue as below*
	intestate dies without leaving a widow or widower but leaves more than one widow or widower of lineal descendants		The widows or widowers of the lineal descendants together (2/3) in equal shares Residue as below *
	*Residue after division as above		Residue amongst relatives in Schedule II Part I
	If no relatives entitled to residue		Whole shall be distributed in proportion to the shares specified among the persons entitled to receive shares under this section.
4	Neither lineal descendants nor a widow or widower, nor a widow or widower of any lineal descendant		The next-of-kin, in order set forth in Part II of Schedule II (where the next-of-kin standing first are given priority to those standing second) shall be entitled to succeed to the whole of the property of the intestate.		(s.55)
5	No relative entitled to succeed under the other provisions of Chapter 3 of Part V, of which a Parsi has died intestate		Property shall be equally divided among those of the intestate’s relatives who are in the nearest degree of kindred to him.		(s.56)

 

D. SUCCESSION
PRINCIPLES COMMON FOR CHRISTIANS AND PARSIS

 

1. Rights of an
illegitimate child

Christian and
Parsi law do not recognise children born out of wedlock and deal only with
legitimate marriages (Raj Kumar Sharma vs. Rajinder Nath Diwan AIR 1987 Del
323). Thus, the relationship under various sections under the Succession
Act relating to the Christian and Parsi succession, is the relationship flowing
from a lawful wedlock.

 

1.1 Difference between
Christian and Parsi succession laws and succession laws of other religions:

The law for
Christians and Parsis does not make any distinction between relations through
the father or the mother. In cases where the paternal and maternal sides are
equally related to the intestate, all such relations shall be entitled to
succeed and will take equal share among themselves¹⁰.

Further there is no difference when it comes to full-blood/half-blood/uterine
relations; and a posthumous child is treated as a child who was present when
the intestate died, so long as the child has been born alive and was in the
womb when the intestate died¹¹.

 

2. Testamentary
Succession (applicable to both Christians and Parsis)

 

2.1 Wills and Codicils

2.1.1 Persons capable of making Wills: Every person of sound mind not being a
minor may dispose of his property by Will¹². Thus, a married woman,
or other persons who are deaf, dumb or blind are not thereby incapacitated from
making a Will if they are able to know what they do by it. Thus, the only
people who cannot make Wills are people who are in an improper state of mind
due to intoxication, illness, etc.

 

2.1.2 Testamentary
Guardian:
A father has been given the right to appoint by Will, a guardian or guardians
for his child during minority.

___________________________________

10.            Section 27
of the Act

11.            Section 27
of the Act

12.            Section 59
of the Act

 

2.1.3 Revocation
of Will by Testator’s marriage: All kinds of wills stand revoked by marriage which takes place
after the making of the Will¹³.

________________________________

13.            Section 69

 

2.1.4 Privileged and Unprivileged Wills: Wills that fulfil the essential
conditions laid down u/s. 63 of the Succession Act are called Unprivileged
Wills and Wills executed u/s. 66 of the Succession Act are called Privileged
Wills.

 

As per section 63 of
the Succession Act inter alia states that every Will must be signed by
the person making the Will (“Testator”) or his mark must be affixed thereto or
signed by a person as directed by the Testator and in the presence of the
Testator. The Will must also be signed by at least two witnesses, each of whom
has seen Testator sign the Will or affix his mark or seen some other person
sign the Will in the presence of the Testator.

 

A Privileged Will
made u/s. 66 of the Succession Act is one which is made by a soldier employed
in an expedition or engaged in actual warfare, or by an airman so employed or
engaged, or by mariner being at sea and such Wills can be either in writing or
oral. A Privileged Will need not be signed by the Testator, nor attested in any
way. In case of unprivileged wills, the mode of making, and rules for executing
privileged Wills shall be in accordance with Section 66 of the Act and many
requirements such as attestation or signature of the Testator are not required
in such special Wills.

 

2.1.5  Bequests to religious and
charitable causes: Section 118 of the Succession Act (which applies to Christians but
not Parsis) which provides that no man having a nephew or niece or any nearer
relative shall have power to bequeath any property to religious or charitable
uses, except by a Will executed not less than twelve months before his death,
and deposited within six months from its execution in some place provided by
law for the safe custody of the Wills of living persons, was struck down as
being unconstitutional by the Supreme Court, and therefore Christians and
Parsis can leave their property to charity without being bound by the above
condition.¹⁴

 

2.2 Probate: –

 

2.2.1 Parsis: In case of
a Parsi dying after the commencement of the Act, a probate is necessary if the
will in question is made or the property bequeathed under the will is situated
within the “ordinary original civil jurisdiction” of Calcutta, Madras and
Bombay and where such wills are made outside those limits in so far as they
relate to immovable property situated within those limits¹⁵.

 

2.2.2 Christians: It is not
mandatory for a Christian to obtain probate of his Will¹⁶.

 

To
conclude, it may be noted that the laws of
succession differ drastically depending upon the personal law by which the
deceased person is governed at the time of his death. The religion which a
person purports to profess at the time of his/her death (or is known to have
last followed) would determine the personal law applicable to the succession of
the deceased person’s property. Therefore, it is essential to know and
understand the personal laws applicable to the person making a Will or planning
the succession of his estate. Further, in some cases, the law has evolved
through judicial precedents and therefore apart from the letter of the law
spelt out in the statute, it would be advisable to acquaint oneself with
judicial precedents, to ascertain the present position.

_______________________________

14.            Section 213
(2)

15.            Section 213
(2)

16. Section 213 (2)

 

Prior to the codification of Hindu Law which
was started in 1955, Hindu Law was based on customs, traditions and
inscriptions in ancient texts and also on judicial decisions interpreting the
same. There were two schools of law, viz., Mitakshara and Dayabhaga.
While Dayabhaga school prevailed in Bengal, Mitakshara school
prevailed in the other parts of India. The Bengal school differed from Mitakshara
school in two main particulars, viz., the law of inheritance and joint family
system.

 

The rules relating to succession under the
uncodified customary and traditional Hindu Law were quite confusing and led to
different interpretations by courts. Moreover, enactments by several states and
by some princely states added to the problems. The rules regarding succession
were codified for the first time by the Hindu Succession Act, 1956 (“the Act”)
which came into effect from 17^th June 1956. Under the Act, the word
“Hindu” has been used in a very wide context and includes a Buddhist, a Jain or
a Sikh by religion. The Act gives clarity and effects of basic and fundamental
change on the law of succession. The main scheme of the Act is to clearly lay
down rules of intestate succession to males and females and establish complete
equality between male and female with regard to property rights. Moreover, the
old notion of what was known as ‘limited estate’ or ‘limited ownership’ of
women was abolished and the right of a female over property owned by her was
declared absolute.

 

With a view to give clarity, the Act has
been given an overriding effect over any text, rule or interpretation of Hindu
law or any custom or usage as part of that law in force immediately before
commencement of the Act as also over any other law in force immediately before
commencement of the Act so far as inconsistent with any of the provisions of
the Act. After passing of the Act, the rules regarding succession are governed
by the provisions of the Act replacing the provisions which were applicable
under the uncodified Hindu law.

 

There are two modes of succession, one is
intestate succession (when the testator dies without leaving a Will) and the
other is testate succession (when the testator leaves a Will). The Act only
applies when a Hindu male or female dies without a Will. But testate or
testamentary succession will be governed by the testamentary document/s, left
by
the testator.

 

Wills or rules relating to testamentary succession

This article being mainly for the chartered
accountants readers it is proposed to limit its scope to only give basic understanding
of testamentary documents without going into various complexities.

 

The basic testamentary document for
testamentary succession is a Will. Jarman in his treatise on Wills defines a
Will as ‘an instrument by which a person makes disposition of his property to
take effect after his demise and which is in its own nature ambulatory and
revocable during his life’. A declaration by a testator that his Will is
irrevocable is inoperative. A covenant not to revoke a Will cannot be
specifically enforced.

 

While the Act does not cover testamentary
disposition, the same is governed under the provisions of the Indian Succession
Act, 1925 and u/s. 57 thereof many of its provisions apply to Wills made by any
Hindu, Buddhist, Sikh or Jain. The term ‘Will’ has been defined in section 2(h)
of the Indian Succession Act to mean ‘the legal declaration of the intention of
a testator with respect to his property which he desires to be carried into
effect after his death’. It is not necessary that any technical words or particular
form is used in a Will, but only that the wording be such that the intentions
of the testator can be known therefrom.

 

(Section 73 of the Indian Succession Act) A ‘codicil’ is a supplement by which a testator alters or adds to
his Will. Section 2(b) of the Indian Succession Act defines the term ‘codicil’
to mean ‘an instrument made in relation to a Will and explaining, altering or
adding to its dispositions and shall be deemed to form part of the Will’.
Therefore, a Will is the aggregate of a person’s testamentary intentions so far
as they are manifested in writing duly executed according to law and includes a
codicil.

 

There is no specific form or legal
requirement about a Will nor is it required to be on stamp paper. The only
legal requirement is that it should be properly witnessed by not less than two
witnesses as explained in detail hereafter.

 

Every person of sound mind not being a minor
may dispose of his property by a Will. A married woman may dispose by Will any
property which she could alienate by her own act during her life. Persons who
are deaf or dumb or blind can make their Wills if they are able to know what
they do by it. It may be interesting to note that even a person who is
ordinarily insane may make a Will during interval in which he is of sound mind.
A father may by Will appoint a guardian for his child during minority. A Will
or any part of it obtained by fraud, coercion or importunity is void. If a
bequest is made in favour of someone based on deception or fraud, only that bequest
becomes void and not the whole Will.

 

When a person wants to execute his/her Will,
one of the normal questions which is raised is whether it is necessary to
register the Will. A Will need not be compulsorily registered. There is no rule
of law or of evidence which requires a doctor to be kept present when a Will is
executed (See Madhukar vs. Tarabai (2002) 2SCC 85).

 

However, if a Will is to be registered, the
Registrar as a matter of procedure requires production of a doctor’s
certificate to the effect that the testator is in a sound state of mind and
physically fit to make his/her Will. It has been held by the Supreme Court that
there was nothing in law which requires the registration of a Will and as Wills
are in a majority of cases not registered, to draw any inference against the
genuineness of the Will on the ground of non-registration would be wholly
unwarranted (See Ishwardeo vs. Kamta Devi AIR(1954) SC 280). In case of Purnima
Devi vs. Khagendra Narayan Deb AIR(1962) SC 567, the Supreme Court has
observed that if a Will has been registered, that is a circumstance which may,
having regard to the circumstances, prove its genuineness. But the mere fact
that a Will is registered will not by itself be sufficient to dispel all
suspicion regarding it where suspicion exists, without submitting the evidence
of registration to a close examination. If the evidence as to registration on a
close examination reveals that the registration was made in such a manner that
it was brought home to the testator that the document of which he was admitting
execution was a Will disposing of his property and thereafter he admitted its
execution and signed it in token thereof, the registration will dispel the
doubt as to the genuineness of the Will.

 

The Supreme Court in Venkatachala Iyengar
vs. Trimmajamma AIR (1959) SC 443 held that as in the case of proof of
other documents so in the case of proof of Wills it would be idle to expect
proof with mathematical certainty. The test to be applied would be the usual
test of the satisfaction of the prudent mind in such matters. Though in the
same case, the Supreme Court further held that being the non-availability of
the person who signed it there is one important factor which distinguishes a
Will from other documents and observed that in case of a Will other factors
like surrounding circumstances including existence of suspicious circumstances,
if any, should be clearly explained and dispelled by the propounder.

 

Section 63 of the Indian Succession Act
requires that a Will shall be attested by two or more witnesses, each of whom
has seen the testator sign or affix his mark to the Will or receive from the
testator a personal acknowledgement of his signature or mark. Each witness is
required to sign the Will in presence of the testator. Under law it is not
necessary that the attesting witnesses should know the contents of the Will.

 

A person can change or revoke his Will as
often as he likes. Ultimately it is the last Will which prevails over earlier
Wills. Even a registered Will can be revoked by a subsequent unregistered Will.
Moreover, it may be noted that u/s. 69 of the Indian Succession Act, a Will
stands revoked by the marriage of the maker and in such a case it will be
necessary for the testator to make a fresh Will.

 

It is open for a testator to give or
bequeath any property to an executor and such bequest is valid. If a legacy is
bequeathed to a person who is named as an executor of the Will, he shall not
take the legacy unless he proves the Will or otherwise manifests an intention
to act. However, care should be taken to ensure that no bequest is made to a
person who is an attesting witness or spouse of such person as in such a case
while validity of the Will is not affected, such bequest shall be void.

 

The ancient rule of a share in HUF going by
survivorship does not now apply. A coparcener in a HUF can bequeath his
undivided share in HUF by way of Will.

It may be noted that any bequest in favour
of a person not in existence at Testator’s death subject to a prior bequest
contained in the Will or a bequest in breach of rule against perpetuity is
void. A bequest will be in breach of rule against perpetuity if it provides for
vesting of a thing bequeathed to be delayed beyond the lifetime of one or more
persons living at the Testator’s death and minority of a person who shall be in
existence at the expiration of that period and to whom the thing is bequested
on attaining majority.

 

These days it
is normal to use the facility of nomination for ownership flats in co-operative
housing societies, depository/demat accounts, mutual funds, shares, bank
accounts, etc. Once a person dies, the nominee gets a right on the asset.
However, it has been held by courts and the legal position is that although the
nominee has easy access to the asset and can get it transferred to his/her name,
the nominee holds it only as a trustee and ultimately the asset would go to the
legal heirs of the deceased under the testamentary succession or as per
applicable rules of the intestate succession, as the case may be.

 

Although the Indian Succession Act also
applies to testamentary succession of Parsis and Christians, Mohammedans are
governed by their own law and there are several restrictions in their making a
Will.

 

Tips for drafting

It is known that some chartered accountants
have been drafting legal documents and that such practice is not restricted to
just simple documents like deeds of partnership or deeds of retirement but now
extends to drafting ownership of flat, sale/purchase transactions and even
Wills and Trusts. For the benefit of such chartered accountant friends who
venture to draft Wills, the following tips may be helpful:-

 

(1)   As mentioned above, there is no specific form
or legal requirement about the Will. However, it is advisable to use clear and
unambiguous language and where names of beneficiaries are to be given, it would
be advisable to give full names, preferably with relationship with the
Testator. Again where any asset is subject matter of the Will, the item should
be clearly indentifiable and proper details of the asset should be given.

(2)   Any obliteration, interlineation or
alteration should be avoided and in case of any such alteration, the same
should be executed by the Testator and the witnesses in like manner as required
for the execution of the Will.

(3)   Care should be taken to ensure that the
attesting witness is one who or whose spouse is not getting any benefit or
bequest under the Will as otherwise the bequest will be void.

(4)   Wills containing bequest of any property to
religious or charitable uses have certain restrictions and need to be avoided.

(5)   Apart from specific bequests and legacies, a
Will should also provide for what happens to the rest and residue of the estate
of the Testator as otherwise whatever is not specifically included would
devolve as per rules of intestate succession i.e. as if there is no Will.

(6)   It is normal to appoint some family elders as
executors possibly out of respect. However, it is suggested that the executors
selected by the testator ought to be persons who are easily available and accessible
and who are able to coordinate and co-operate with each other. Preferably, the
executors should be people who have interest in the estate as beneficiary/ies.

(7)   In case of a Testator who has acquired
citizenship of any other country, the draftsman should keep the applicable laws
of that country in mind before preparing any Will. For instance, Sharia Law
applies to persons who have acquired citizenship in any Middle East country,
and some special provisions will have to be added depending on the local
lawyer’s advice to take care of the legal requirement of each country to make a
valid and effective Will based on the personal law (e.g. Hindu Law) applicable
to the individual. In the same way, foreign domicile of the Testator who holds
Indian citizenship may also need advice from local lawyers.

(8)   While drafting a Will for a person who is
resident in Goa it should be noted that Goa residents are still governed by
Portuguese Law. Therefore, a Will is likely to be challenged if it is not in
conformity with the provisions of the local law.

(9) So far as the Will is in simple form,
any educated person can draft the same. However, if it is proposed to provide
for any complicated provisions for succession planning or any kind of tax
planning by way of Trusts, it will be advisable to leave the drafting to a
competent lawyer. The reason for this piece of advice is to ensure that the
Will does not contain any provision which would in law be void.

The Hindu
Succession Act, 1956, was enacted on 17.06.1956 to amend and codify the law
relating to intestate succession among Hindus. It extends to the whole of India
except the State of Jammu & Kashmir. It brought about changes in the law of
succession among Hindus and gave rights which were till then unknown in
relation to women’s property. However, it did not interfere with the special
rights of those who are members of Hindu Mitakshara coparcenary except
to provide rules for devolution of the interest of a deceased male in certain
cases. The Act lays down a uniform and comprehensive system of inheritance and
applies, inter alia, to persons governed by the Mitakshara and Dayabhaga
schools. The Act applies to Hindus, Buddhists, Jains or Sikhs. In the case of a
testamentary disposition, this Act does not apply and the succession of the
deceased is governed by the Indian Succession Act, 1925.  Section 6 of the Act deals with the
devolution of interest of a male Hindu in coparcenary property and recognises
the rule of devolution by survivorship among the members of the coparcenary. To
remove the gender discrimination, the amending act of 2005 has given equal
rights to the daughter as that of the son in the Hindu Mitakshara
Coparcenary property. The daughter has been made a coparcener, with right to
partition. Sections 8 – 13 contains general rules of succession in the case of
males and section 14 made property of a female Hindu to be her absolute
property. Sections 15 – 16 enact general rules of succession in the case of
females. Section 17 – 30 deal with general provisions with testamentary
succession. It is a self-contained code and has overriding effect and makes
fundamental and radical changes.

 

2. COPARCENARY / HINDU UNDIVIDED FAMILY
PROPERTY AND DEVOLUTION OF INTEREST

Mitakshara, which is prevelant in large number of states except West Bengal,
recognises two modes of devolution of property, namely, survivorship and
succession. The rule of survivorship applied to joint family (coparcenary)
property; the rules of succession apply to property held in absolute severalty.
Dayabhaga recognises only one mode of devolution, namely, succession. It
does not recognise the rule of survivorship even in the case of joint family
property. The reason is that while every member of a Mitakshara
coparcenary has only an undivided interest in the joint property, a member of a
Dayabhaga joint family holds his share in quasi-severalty, so that it
passes on his death to his heirs, as if he was absolutely seized thereof, and
not to the surviving coparceners as under the Mitakshara law. The
essence of a coparcenary under the Mitakshara law is unity of ownership.
The ownership of the coparcenary property is in the whole body of coparceners.
According to the true notion of an undivided family governed by the Mitakshara
law, no individual member of that family, whilst it remains undivided, can
predicate of the joint and undivided property, that he, that particular member,
has a definite share, that is, one-third or one-fourth. His interest is a
fluctuating interest, capable of being enlarged by deaths in the family, and
liable to be diminished by births in the family. It is only on a partition that
he becomes entitled to a definite share. No female could be a coparcener under Mitakshara
law. Share of wife is not as her husband’s coparcener, but is entitled to equal
share where there is a partition between her husband and her children.

 

2.1. Where a Hindu dies after 09.09.2005, his
interest in the property shall devolve by testamentary or intestate succession
and the coparcenary property shall be deemed to have been divided as if a
partition had taken place. A notional partition and division has been
introduced. Upon such notional partition, the property would be notionally
divided amongst the heirs of the deceased coparcener, the daughter taking equal
share with son, the share of the pre-deceased son or a pre-deceased daughter
being allotted to the surviving child of such heirs. To put a stop to escape
the consequences, it has been specified that partition before 20.12.2004 made
by registered partition deed or affected by a decree of court, alone would be
treated as valid.

 

2.2. The Supreme Court in Gurupad Magdum vs. H.
K. Magdum – AIR 1978 SC 1239 : (1981) 129-ITR-440 (S.C.). observed : “What
is therefore required to be assumed is that a partition had in fact taken place
between the deceased and his coparceners immediately before his death. That
assumption, once made, is irrevocable. In other words, the assumption having
been made once for the purpose of ascertaining the shares of the deceased in
the coparcenary property, one cannot go back on that assumption and ascertain
the share of the heirs without reference to it. The assumption which the
statute requires to be made that a partition had in fact taken place must
permeate the entire process of ascertainment of the ultimate share of the
heirs, through all its stages…. All the consequences which flow from a real
partition have to be logically worked out, which means that the share of the
heirs must be ascertained on the basis that they had separated from one another
and had received a share in the partition which had taken place during the
lifetime of the deceased”. On reading the said judgment the Supreme Court
does not say that the fiction and notional partition must bring about total
disruption of the joint family, or that the coparcenary ceases to exist even if
the deceased was survived by two coparceners. It is submitted that the notional
partition need not result in total disruption of the joint family. Nor would it
result in the cessation of coparcenary. In Shyama Devi (Smt.) and Ors. vs.
Manju Shukla (Mrs.) and Anr. (1994) 6 SCC 342 followed the judgment in Magdums
case (supra). The Hon’ble Court went on to state that Explanation 1
contains a formula for determining the share of the deceased on the date of his
death by the law effecting a partition immediately before a male Hindu’s death
took place.

 

2.3. In State of Maharashtra vs. Narayan Rao Sham
Rao, AIR 1985 SC 716 : (1987) 163-ITR-31 (SC), the Supreme Court carefully
considered the above decision in Gurupad’s case and pointed out that Gurupad’s
case has to be treated as authority (only) for the position that when a female
member who inherits an interest in joint family property u/s. 6 of the Act,
files a suit for partition expressing her willingness to go out of the family,
she would be entitled to both the interest she has inherited and the share
which would have been notionally allotted to her as stated in Explanation 1 to
section 6 of the Act. It was also pointed out that a legal fiction should no
doubt ordinarily be carried to its logical end to carry out the purposes for
which it is enacted, but it cannot be carried beyond that. There is no doubt
that the right of a female heir to the interest inherited by her in the family
property, gets fixed on the date of the death of a male member u/s. 6 of the
Act, but she cannot be treated as having ceased to be a member of the family
without her  volition as otherwise it
will lead to strange results which could not have been in the contemplation of
Parliament when it enacted that provision. It was also pointed out in this
later decision of the Supreme Court that the decision in Gurupad’s case has to
be treated as an authority (only) for Explanation 1 to section 6 of the Act.
The decision of the Supreme Court in Raj Rani vs. Chief Settlement
Commissioner, Delhi – AIR 1984 SC 1234 say the explanation speaks of share
in the property that would have been allotted to him if a partition of the
property had taken place. Considering these words used in the explanation, it
is clear that such property must be available for computation of share and
interest.  In my view, not in automatic
partition under the Income-tax law.

 

2.4. In a recent judgment the Apex
Court in Uttam vs. Saubhag Singh – AIR 2016 S.C. 1169, considered both
the above cases and held (i) Interest of the deceased will devolve by
survivorship upon the surviving members subject to an exception that such
interest can be disposed of by him u/s. 30 by Will or other testamentary
succession; (ii) A partition is effected by operation of law immediately before
his death, wherein all the coparceners and the male Hindu’s widow get a share
in the joint family property; (iii) On the application of section 8 such
property would devolve only by intestacy and not survivorship; (iv) On a
conjoint reading of sections 4, 8 and 19 of the Act, after joint family
property has been distributed in accordance with section 8 on principles of
intestacy, the joint family property ceases to be joint family property in the
hands of the various persons who have succeeded to it as they hold the property
as tenants in common and not as joint tenants. While coming to the above
proposition the Hon’ble Court observed in para 13 “In State  of Maharashtra vs. Narayan Rao Sham Rao
Deshmukh and Ors., (1985) 3 S.C.R. 358 : (AIR 1985 SC 716), this Court
distinguished the judgment in Magdum’s (AIR 1978 SC 1239) case in answering a
completely different question that was raised before it. The question raised
before the Court in that case was as to whether a female Hindu, who inherits a
share of the joint family property on the death of her husband, ceases to be a
member of the family thereafter. This Court held that as there was a partition
by operation of law on application of explanation 1 of Section 6, and as such
partition was not a voluntary act by the female Hindu, the female Hindu does
not cease to be a member of the joint family upon such partition being
effected.

2.4.1.    In my humble opinion the
last proposition as to “the joint family property ceases to be joint family
property in the hands of the various persons who have succeeded to it” needs
clarification, reconsideration and review. If so, the joint family property
would become extinct in all cases where section 6 applies and the sons of the
last recipient would not get any share and the recipient’s property would have
character of individual property. To illustrate ‘A’ has coparcenary property;
the family consists of ‘A’ father, ‘ H‘ wife, ‘B’, ‘C’ sons and ‘D’ daughter.
‘B’ & ‘C’ are married and have sons ‘G’ & ‘H’ and wives, ‘N’ & ‘M’
respectively. They are living together and carrying on family business – on
death of ‘A’ his interest would devolve and there would be notional partition
of the family. The share received by ‘B’ and ‘C’ respectively would become
their individual property governed by section 8 and not section 6, resulting in
extinguishment of share and interest of ‘G’, ‘H’, ‘N’ and ‘M’ and debarring
them to inherit ancestral property.

 

2.4.2.    Though the members live
and want to continue to live jointly and do not want to exercise the volition
of living separate, separation would be thrusted upon them, with extinction of
family property. Section 171 of the Income-tax Act, 1961 which requires
division by meets and bounds and an application u/s. 171(2) on there being
total or partial partition, would become iotise and non-existent. ‘G’ &
‘H’, who have share and interest in coparcenary/ancestral property would lose and
‘B’ & ‘C’ would gain. Considering from all angles, the share received on
notional partition by ‘B’ and ‘C’ would have the character of H.U.F. property
and the share received by each would be for and on behalf of himself, his wife
and son.

 

2.4.3.    Many old judgments of the Apex Court like Gowli
Buddana vs. C.I.T. (1966) 60-ITR- (SC) 293; N. V. Narendra Nath vs. C.W.T.
(1969) 74-ITR-190 (S.C.) holding that : “When a coparcener having a wife
and two minor daughters and no son receives his share of joint family
properties on partition, such property, in the hands of the coparcener, belongs
to the Hindu undivided family of himself, his wife and minor daughters and
cannot be assessed as his individual property for the purposes of wealth-tax” –  C. Krishna Prasad vs. C.I.T. (1974)
97-ITR-493 (S.C.). Surjit Lal Chhabra vs. C.I.T. (1975) 101-ITR-776 (S.C.);
Controller of Estate Duty vs. Alladi Kupuswamy (1977) 108-ITR-439 (S.C.) and
Pushpa Devi vs. C.I.T. (1977) 109-ITR-730 (S.C.) needs be considered,
discussed and deliberated. The Hon’ble Supreme Court escaped (sic) the above
cases, which are of material substance and direct on the point at issue.

2.5. An unfounded controversy has been created by
the two-judge judgment in Uttam’s case (supra) after distinguishing the
three-judge judgment in Narayan Rao Sham Rao (supra). In my analysis
better view is in Narayan Rao Sham Rao case and later judgment in Kaloomal
Tapeshwari Prasad (H.U.F.) (1982) 133-ITR-690 (S.C.) where it has been held
that mere severance of status under Hindu Law would not be sufficient to
establish partition and there must be division of property by meets and bounds
coupled with application after voluntary separation. Case of Uttam (supra) is
on its own facts and completely distinguishable on facts and under the
Income-tax Act. Otherwise also judgement in Narayan Rao Sham Rao (supra)
is by three judges, whereas in case of Uttam (supra) by two judges. For
purposes of income-tax assessment judicial precedent would be the case of Kaloomal
Tapeshwari Prasad (supra). At best such observations in Uttam’s case
(supra) would be obiter dicta and inapplicable as a judicial
precedent.

 

2.6. Recently on 02.07.2018 the Supreme Court in Shyam
Narayan Prasad vs. Krishna Prasad – AIR 2018 S.C. 3152 observed in para 12
: “It is settled that the property inherited by a male Hindu from his
father, father’s father or father’s father’s father is an ancestral property.
The essential feature of ancestral property, according to Mitakshara Law, is
that the sons, grandsons, and great grand-sons of the person who inherits it,
acquire an interest and the rights attached to such property at the moment of
their birth. The share which a coparcener obtains on partition of ancestral
property is ancestral property as regards his male issue. After partition, the
property in the hands of the son will continue to be the ancestral property and
the natural or adopted son of that son will take interest in it and is entitled
to it by survivorship”. It referred to C. Krishna Prasad Case (supra); M.
Yogendra and Ors. vs. Leelamma N. and Ors, 2009 (15) SCC 184; Rohit Chauhan vs.
Surinder Singh and Ors. AIR 2013 S.C. 3525 etc. Thus it can be said that
Uttam’s case would be completely distinguishable and inapplicable.

 

2.7. Eliminating gender discrimination, putting a
daughter on same pedestal as that of a son, making her as a coparcener as that
of son and with equal rights and obligations is a right step after 50 long
years towards women empowerment and equality. Son and daughter are born out of
the same womb, why should there be preferential treatment to son dehorse
the daughter? Now a daughter would get her interest in coparcenary property of
her father as also share on partition of family of her husband, being a wife.
Double share is laudable. Now she can be sole coparcener. A doubt is raised as
to whether a daughter i.e. a female can be Karta/Manager of her father’s
family? In my humble submission, she being a coparcener, if is possessed of the
property and manages it, she can be a Manager and perform her duties. It is a
misnomer that, only the eldest son can be a Karta / Manager. In the family of
His Late Highness Maharana Bhagwat Singh of Mewar, the honourable Rajasthan
High Court accepted younger son Shreeji Shri Arvind Singh of Mewar as a Manager
instead of Shri Mahendra Singh of Mewar. However, she cannot be a Karta/Manager
of her husband’s family. It shows a daughter remains as daughter married or
unmarried, until her last and also Karta of her father’s family in appropriate
eventuality. It is noticed that some persons persuade the sisters and
pressurise them to release their interest in their favour, which is unethical
and needs to be eschewed and criticised. Women’s rightful gain must go in their
kitty.

 

3.     SUCCESSION OF PROPERTY OF MALE HINDU

The property of a
male Hindu dying intestate i.e. without a Will, shall devolve upon his heirs as
specified in class I of the Schedule; if none, then upon the heirs specified in
Class II of the Schedule and in the absence of the said heirs, then upon the
agnates of the deceased and lastly if there is no agnate, then upon the
cognates. Heirs specified in Class I of the Schedule shall take simultaneously
and equally. The property is distributed as per rules in section 10. All widows
together would take one share; sons and daughters and mother each shall take
one share and the heirs of each predeceased son or each predeceased daughter
shall take between them one share. Heirs specified in any one entry as in Class
II of the Schedule would have equal share. Agnates and Cognates shall receive
as per section 12 with computation of degress as specified in section 13.
Property possessed or acquired by a female Hindu would be held by her as a full
owner, with all powers to transfer, gift, encumber or bequeath.

 

3.1. The Supreme Court after considering preamble
and its over-riding effect on Hindu Law observed in C.W.T. vs. Chander Sen
and Others – AIR 1986 S.C. 1753 : (1986) 161-ITR-370 (S.C.), it is not
possible when Schedule indicates heirs in Class I and only includes son and
does not include son’s son but does include son of a predeceased son, to say
that when son inherits the property in the situation contemplated by section 8
he takes it as karta of his own undivided family. It also stated it would be
difficult to hold today the property which devolved on a Hindu u/s. 8 of the
Hindu Succession Act would be HUF in his hand vis-à-vis his own son. This view
has been followed in C.I.T. vs. P. L. Karuppan Chettair (1992) 197-ITR-646
(S.C.).

 

 

4.     WOMEN’S PROPERTY

Under the ancient
Hindu Law in operation prior to the coming into force of this Act, a woman’s
ownership of property was hedged in by certain delimitations on her right of
disposal by acts inter vivos and also on her testamentary power in
respect of that property. Absolute power of alienation was not regarded, in
case of a female owner, as a necessary concomitant of the right to hold and
enjoy property and it was only in case of property acquired by her from
particular sources that she had full dominion over it. Section 14 provides that
any property whether movable or immovable or agricultural acquired by
inheritance or devise or at a partition or in lieu of maintenance or by gift
from any person, at or before or after marriage or by her own skill or
exertion, or by purchase or stridhan or in any other manner whatsoever
possessed by a female Hindu, whether acquired before or after the commencement
of this Act, shall be held by her as full owner thereof and not a limited
owner. The said section is not violative of article 14 or 15(i) of the
Constitution and is capable of implementation as held in Pratap Singh vs.
Union of India – AIR 1985 S.C. 1694.

 

4.1. If a male dies leaving only a widow, she would
be sole owner, but if two widows, each would share equally. Once a widow
succeeds to the property of her husband and acquires absolute right over the
same under this section, she would not be divested of that absolute right on
her remarriage. Property received, acquired or possessed by a female Hindu
would be her individual property. Share received from her father’s coparcenary
u/s. 6 of the Act on partition between her husband and son, would be of the
character of an individual property. She has right to give away by testamentary
succession. In case of her intestacy, succession would be in accordance with
section 15 of the Act. It is a right step towards women’s empowernment and
eliminates gender vice. Now there is no distinction between a man and a woman.

 

5.     SUCCESSION OF PROPERTY OF A FEMALE HINDU

The property of a female Hindu dying intestate shall devolve as mandated
in section 15 and in accordance with the rules set out in section 16. Firstly,
upon the sons, daughters, children of pre-deceased son or daughter and the
husband. Secondly, on the heirs of the husband; thirdly, upon the mother and
father of the female; fourthly, upon the heirs of the father, and lastly, upon
the heirs of the mother. However, any property inherited by a female from her
father or mother shall devolve upon the heirs of her father, if in the absence
of any son or daughter or children of any pre-deceased son or daughter or their
children only.

 

Secondly any property inherited by a female from her husband or from her
father-in-law shall devolve, in the absence of any son or daughter or children
of any pre-deceased son or daughter, upon the heirs of the husband. These
exceptions are on property inherited from father, mother, husband or
father-in-law and not from others or her self-acquired property. Object is to
revert back to the heirs of the same from whom acquired. The order of
succession and manner of distribution amongst heirs of a female Hindu are:
Firstly among the heirs specified hereinbefore in one entry simultaneously in
preference to any succeeding entry; Secondly in case of pre-deceased son or
daughter to his/her deceased son or daughter living at the relevant time. Other
rules would apply.

 

6.     GENERAL PROVISIONS

Heirs related to
full blood shall be preferred as against half blood. When two or more heirs
succeed together, they would receive per capita and not per stirpes and as
tenants-in-common and not as joint tenants. A child in womb at the time of
death of deceased, shall have same right to inherit as a born child.

 

In case of
simultaneous deaths, it shall be presumed, until the contrary is proved, that
the younger survived the elder. Preferential right to acquire property by the
heirs specified in Class I of the Schedule, shall vest in other heirs, if a
heir proposes to transfer his share at the consideration mutually settled or
decided by the Court. If a person commits murder or abates in the crime he
would dis-inherit the property of person murdered. It is based upon principles
of justice, equity and good conscience. Converts to any other religion and his/her
descendants are disqualified and would not inherit. He/she shall be deemed as
died before the deceased. Any disease, defect or deformity would not disqualify
from succession. If there is none to succeed, the property of the deceased
shall devolve on the Government along with obligations and liabilities.

7.     TESTAMENTARY SUCCESSION

‘Will’ as defined
u/s. 2(h) of the Indian Succession Act means “the legal declaration of the
intention of a Testator with respect of his property which he desires to be carried
into effect after his death”. A Will comes into effect after the death of the
Testator and is revocable during the life-time of the testator. Every person of
sound mind not being a minor can dispose of his property by Will. The testator
is at liberty to bequeath the disposable property to any person, he likes.
There is no restriction that a Will has to be made in favour of legal heirs,
relatives, close friends, etc. A Will or codicil need not be stamped or
registered though it deals with vast immovable properties. A Will can be on a
sheet of paper. It need not be on a stamp or Government paper. However, to
generate confidence, it is advisable to execute on a stamp of any denomination.
It is advisable to get each sheet of the Will signed in the aforesaid manner
from the testator and to put photo of the testator.  Attestation should be as per section 63 of
the Indian Succession Act.  However, it
is desirable to get it Notarised or registered under the Indian Registration
Act.

 

A Hindu male or
female can bequeath individual property as well as share in the coparcenary
property by way of a Will. Manifold benefits are inherent by making a Will.
However, it has been noticed that very negligible few tax payers are taking
advantage of the medium of Will. It can be a tool for further reducing the
nominal rate of tax and expanding units of assessments with manifold advantages
to regulate the members of family and relatives. Its importance need not be
emphasised but is well known. It is highly desirable that every person makes a
Will to avoid and avert litigation amongst legal heirs and representatives and
in order to reduce the rate of tax in the hands of relatives and would-be
children, grand-children, daughters and sons-in-law and to create Hindu
undivided family, to add more units. Such persons could be surely reminded :
“Have you executed your Will, if so, please see that it is in a safe place and
do inform your spouse about it. If not, please fix up the earliest appointment
with the ever-friendly lawyer next door! All the ladies should ask their
husbands that there is a proper Will duly executed by them and insist on seeing
it and also to ensure that the (wife) is the sole beneficiary under that Will.
One should advice to act expeditiously. Liability of tax after death of an
individual can be better managed through a Will. It is high time to explore the
multi-fold benefits of a WILL.

 

8.     CONCLUSION

Old Hindu Law and
outdated customs stand deleted, codified in succession and inheritance with
overriding effect given to the enacted provisions. A child in the womb has been
conferred birthright in property. Gender discrimination between son and
daughter eliminated, bestowing share and interest in coparcenary property to
make females self-sufficient and financially strong. Right of testamentary
succession granted in share in coparcenary property, Will has become a strong
tool to choose beneficiaries, avoid stamp duty and family disputes. One can
better manage tax with sound planning. A female can throw her individual
property in common hotch-potch or impress with the character of H.U.F. property
being a coparcener. She can be even Karta of father’s family, but not of
husband’s family. Male predominance stands curtailed. Rule of primogeniture
stands abolished. View expressed in Uttam’s case would be distinguishable on
facts and under income-tax Act. Correct view is in Narayan Rao Sham Rao
(supra) and Shyam Narayan Prasad (supra).