S. RAJARATNAM, A.M.: ORDER This is Departmental appeal arising out of order of Asstt. CED in respect of estate of Shri Rebala Subbarami Reddy, who died on 15th Oct., 1976. 2 . dispute relates to decision of first appellate authority that debts aggregating to Rs. 1,32,437 (Rs. 82,000 and Rs. 50,437 to S/Shri T. Pradyumna Kumar Reddy and T. Prabhaskumar Reddy) due to three persons from deceased as on date of death do not abate under s. 46(1) of ED Act, 1953 ( Act ') and that, similarly, debts discharged aggregating to extent of Rs. 55,647 (Rs. 33,318 and Rs. 22,329 to Smt. T. Sudarsanamma and Smt. T. Priyamvada, respectively) cannot be roped in under s. 46(2). 3. deceased had settled agricultural lands and borrowed or repaid as on date of death on following four donees, all grandchildren, as under: Debt duel Value Value Date Sl. Name of discharged estimated estimated in of No. donee prior to two by gift-tax settlement years prior to deceased assessment death 1 2 3 4 5 6 Rs. Rs. Rs. T. 30th 1,25,417 1. Pradyumna March, 23,000 82,000 (outstanding) Kumar Reddy 1958 T. 2nd 50,437 2. Prabhaskumar April, 23,000 81,548 (outstanding) Reddy 1958 30th T. 11 3. 52,441 March, 33,318 Sudarsanamma ,000 1958 (repaid on 14th Feb., 1976) T Not 4. 22,389 1958 50,000 Priyamvada available (repaid on 31st March, 1976) settlements were made when settlees were minors. There was total partition in family on 15th June, 1960 and first two settlees (grandsons) obtained substantial properties besides money-lending capital of Rs. 2.25 lakhs even at that time. It is not disputed that agricultural income was invested with deceased. deceased used to borrow from other properties of settlees. Such borrowings were against interest. This was going on with all four settlees for number of years. accounts of last two settlees (granddaughters) were settled in February and March 1976 within two years prior to death. Asstt. CED disallowed debts due to grandsons under s. 46(1) and added back repayments to granddaughters under s. 46(2). He took view that, to extent, debt or repayment is from accretions, in other words, income from settled property, neither s. 46(1) or (2) could have any application. In coming to this conclusion, authorities apparently followed decision of Madras High Court in case of Mrs. Ratnakumari Kumbhat vs. CED (1975) 101 ITR 572 (Mad) and of Andhra Pradesh High Court CED vs. P. Subramanyam (1979) 12 CTR (AP) 11 : (1981) 127 ITR 258 (AP). It is for this reason, Asstt. CED himself limited addition t o value of settled property even where debt was higher than value as at time of gift in case of first settlee, Shri T. Pradyumna Kumar Reddy, under s. 46(1) and settlee, Smt. T. Sudarsanamma, under s. 46(2). It is for this reason, dispute before us is limited to question whether additions made by Asstt. CED could be restored without reference to fact that their deposits with deceased were, to small extent, out of income from settled property. Since settled properties were themselves available among resources of settlees, Asstt. CED was of view that s. 46(1) and/or s. 46(2) would apply to extent of value of settled property. But, first appellate authority found that moneys lent were much larger than income from settled property. settled properties were themselves continued in possession and ownership of donees. moneys advanced to deceased were substantially out of money-lending and/or other funds and had no nexus with property derived from deceased in settlements. It is for this reason that he deleted these additions. learned Departmental Representative relied upon orders of Asstt. CED, while learned counsel for assessee relied upon order of Appellate CED. 3a. We have carefully considered facts as well as arguments. facts are not disputed. Certain agricultural lands had been gifted. It is quite possible that there was some nexus between loans given by donees (either outstanding or repaid within two years before death) and income from these lands. But, Asstt. CED himself had not taken income part into consideration, apparently following decision of Andhra Pradesh High Court in P. Subramanyam's case (supra) which agreed with decision of Madras High Court in Mrs. Ratnakumari Kumbhat's case (supra). These two decisions have laid down that what abates under s. 46(1) out of deductions claimed, is only consideration which consisted of property derived from deceased and not any accretion by way of earnings thereon. We have, therefore, to confine ourselves to question whether fact that donees had in their possession agricultural lands gifted to them, would attract s. 46 either in respect of outstanding loans (sub-s. 1) or amounts repaid within two years (sub-s. 2). 4. Sec. 46 of ED Act, 1953, reads as under : "46. Further limitations. (1) Any allowance which, but for this provision, would be made under s. 44 for debt incurred by deceased as mentioned in cl. (a) of that section, or for incumbrance created by disposition made by deceased as therein mentioned, shall be subject to abatement to extent proportionate to value of any of consideration given therefor which consisted of (a) property derived from deceased; or (b) consideration not being such property as aforesaid, but given by any person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from deceased : Provided that if, where whole or part of consideration given consisted of such consideration as is mentioned in cl. (b) of this sub-section, it is proved to satisfaction of CED that value of consideration given, or of that part thereof, as case may be, exceeded that which could have been rendered available by application of all property derived from deceased, other than such (if any) of that property as is included in consideration given or as to which like facts are proved in relation to giving of consideration as are mentioned in proviso to sub-s. (1) of s. 16 in relation to purchase or provision of annuity or other interest, no abatement shall be made in respect of excess. (2) Money or money's worth paid or applied by deceased in or towards satisfaction or discharge of debt or incumbrance in case of which sub-s. (1) would have had effect on his death if debt or incumbrance had not been satisfied or discharged, or in reduction of debt or incumbrance in case of which that sub-section has effect on his death shall, unless so paid or applied two years before death, be treated as property deemed to be included in property passing on death and estate duty shall, notwithstanding anything in s. 26 be payable in respect thereof accordingly. (3) provisions of sub-s. (2) of s. 16 shall have effect for purpose of this section as they have effect for purpose of that section." Madras High Court in case of Ismail Mulla Gulamally vs. CED 1976 CTR (Mad) 196 : (1983) 143 ITR 669 (Mad), no doubt, pointed out that there need be no contemporaneous intention to get loan at time of bequest so as to attract s. 46. However, in case of CED vs. Smt. S.T.B. Ameen Khaleeli (1983) 143 ITR 679 (Mad), it also required that there should be some nexus between asset gifted and loan/repayment of loan so as to attract s. 46. It repeated earlier view expressed by same High Court in A. Kandaswami Pillai vs. CED (1969) 73 ITR 564 (Mad) as under : ". . . debt to come within ambit of s. 46(1)(a) should be debt which satisfies s. 44(a). That means it must be debt bona fide, for full consideration; and such consideration; in money or money's worth should be for deceased's own use and benefit. If for such debt consideration constitutes property derived from deceased, to extent of such consideration, allowance of debt will not be made. In other words, there should be nexus between debt which falls under s. 44(a) and consideration, which must consist of property derived from deceased." Madras High Court proceeded to observe in case of Smt. S.T.B. Ameen Khaleeli (supra): "The difference between provisions of s. 46(1)(a) and s. 46(1)(b) may be broadly stated as difference between direct nexus and nexus which is somewhat less direct. In cases to which cl. (a) applies, debt is to be abated because consideration for debt incurred by deceased happens to be directly and undisguisedly property derived from deceased. In cases provided for by s. 46(1)(b), however, consideration is not directly any property derived by creditors from deceased. debt to be abated under this clause is one which person who was at some time entitled to, or amongst whose resources there was at some time included, any property derived from deceased. In present case, contention of Mr. Jayaraman, learned counsel for CED, was that person from whom deceased obtained loan, namely, his son, Afsur, was person to whom deceased had earlier given gift of vacant land in 1963. Learned counsel was quite aware of considerable time lag between gift in 1963 and loans taken in 1969 and 1970. He also granted that there was no direct relation between gifted property on one hand and debt on other, each of which could be regarded as providing mutual consideration for other. Yet since gift of vacant site by deceased to his son can be regarded as property derived from deceased and since that property was held by son at least from date of gift, namely, 29th Aug., 1963, up to date of sale by him after raising superstructure over it, namely, in January, 1966, learned counsel for Department urged that this property derived from deceased must be held as part of resources of person from whom debt was incurred by deceased, rendering it necessary to abate debt to that extent under s. 46(1)(b) of Act." Applying nexus test, it came to following conclusion : "...We have earlier referred to grounds on which Tribunal had come to conclusion that there was no nexus whatever between disposition of property by deceased in favour of his son in 1963 and borrowing effected by deceased from his son after interval of six or seven years. house site was certainly not one of resources from which deceased's son could have advanced loan to his father. It was not one of properties available to him which son could look to for recoupment of loan. There was no other kind of relation which could be established between outstanding debt of Rs. 30,000 and gift of house site 7 years earlier." In coming to conclusion, High Court referred to English decision in McDougal's Trustees vs. IRC (1983) 143 ITR 698 (Appendix) dealing with analogous provisions in Finance Act, 1984, and Finance Act, 1939 (UK). Great stress had been laid by learned Departmental Representative on words at any time entitled to and at any time included in s. 46(1)(b). In McDougal's Trustees' case (supra) it was, with reference to these words, pointed out as under : "This is how I think just construction should run. For over forty years all charge of estate duty was only legitimate on net assets, i.e., against every solid asset, owned in whole or in part by deceased, there should be set debts, and it is still law, unless, in relation to some particular debt, words used in s. 31 be found fatally to strike. Moreover, to allow to Crown using conception of property, which by its mere existence at any time has this remarkable effect, Crown must point finger to very property which either alone, or in cumulo with other like properties, is or could be made available and be applied '. It is wholly ineffective form of pleading just to echo general terms of somewhat obscure sub-section, and give party and Court no aid as to how each phrase applies to facts of this composite transaction. . ." Madras High Court, while referring to this case, also pointed out to Dymond's Death Duties for this view. We find that same view was taken by Madras High Court in earlier decision in CED vs. N. Balaji (1979) 11 6 ITR 534 (Mad), where there was no nexus to show between fact that donees had brought gifted amounts to firm in which donees were partners and fact that deceased was indebted to same firm, there could be no abatement under s. 46. Though this decision turned partly fact that it was not firm which was donee, nexus test had also its application in this decision. On facts found by authorities and not in dispute before us, no such nexus between assets gifted and loans (either advanced or repaid). Hence, order of first appellate authority has to be confirmed. In view we have taken, it is not necessary to consider alternative arguments relating to value of land at time of disposition into consideration. 5. Departmental appeal is dismissed. *** ASSTT. CONTROLLER OF ESTATE DUTY v. REBALA SUBBARAMI REDDY