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Wednesday, Mar 17, 2004

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Will and settlement of property

C. H. Gopinatha Rao

There is a large gap in the amount to be spent after death compared to settling when one is alive. It is high time the Law Commission took initiatives to set right this discrimination.

A WILL is the disposition of the assets made by a person during his lifetime intended to take effect after death. When a person dies without making a will, he is said to have died intestate, that is, the property is inherited by the heirs according to the law of succession. In this case the heirs need to obtain a legal heir certificate.

When a person dies after making a will, it can be enforced only after a probate is issued. A probate is identified as the copy of the will certified under the seal of the court of competent jurisdiction. No right as executor or legatee can be established unless a court of competent jurisdiction in India has granted probate of the will under which the right is claimed or has been granted. Probate can be granted only to the executor appointed by the will.

A petition for the probate is to be filed in the court concerned along with the will. The petitioner should remit court fees of value equal to specified percentage (3 per cent in Tamil Nadu) of the value of assets to be inherited. The assets may include immovable properties for which to arrive at the stamp duty the value should be worked out.

In Gorhandas Hargoindas vs Municipal Commissioner Ahmedabad (1964) 66 Nm LR 68, 78 AIR 1963 Sc 1742 1747, the Court stated that "... annual value or rateable value is arrived at by one of the three methods:

  • Annual rent fetched by land or building where it is actual let,

  • Where it is not let, rent based on hypothetical tenancy, particularly in the case of buildings, and

  • Where either of these two methods is not available, by valuation based on capital value... "

    It has been held by the Bombay High Court, in a petition filed by Madhusudhan Dwarkda Vora vs Superintendent of Stamps that the wealth tax rules provide a method for assessing the value of unutilised surplus land where the difference between the unbuilt area and specified area is less than 20 per cent of the aggregate area. The same method must be applied for the grant of probate.

    Relevant extract of Rule 3 of Wealth Tax Act

    Where Rule 3 is applicable the value of the immovable property being a building or land appurtenant thereto or part thereof shall be amount arrived by multiplying the net maintainable rent by 12.5.

    The net maintainable rent in relation to an immovable property shall be the gross maintainable rent as reduced by

  • The amount of taxes levied by any local authority in respect of the property, and

  • A sum equivalent to 15 per cent of the gross maintainable rent.

    Gross maintainable rent

  • Where the property is let the amount received or receivable by the owner as annual rent or the annual value assessed by the local authority in whose area the property is situated for the purpose of levy of the property tax or any other tax on the basis of such assessment whichever is higher.

  • Where the property is not let the annual rent assessed by the local authority in whose area the property is situated for the purpose of levy of property tax or if there is no such assessment or the property is situated outside the area of any local authority, the amount the owner can reasonably expect to receive as annual rent had such property been let.

  • Where the owner has accepted any amount as deposit (not being advance payment towards rent for three months or less) by the amount calculated at the rate of 15 per cent per annum on the amount of deposit outstanding from month to month for number of months (excluding part of a month) during which such deposit was held by the owner in the previous year and if the owner is liable to pay interest on such deposit the increase made in this clause shall be limited to the sum by which the amount calculated as afore said exceeds the interest actually paid.

    Rent received or receivable shall include all payments for the use of the property, by whatever name called, the value of all benefits or prerequisites whether convertible as money or not obtained from the tenant or occupier of the property and any sum paid by a tenant or occupier of the property in respect of any obligation which but for such payment would have been payable by the owner.

    Example for the adjustment to value arrived at under Rule 3 for unbuilt area of plot of land:

    Mr X was the owner of a property at Chennai with an extent of 7,200 sq ft of land and a building with 3,000 sq ft on the ground floor and 1,500 square feet in the first floor. X passed away in 2002 leaving a will and the Registrar valued the property in 2003 at Rs 40 lakh as per their guidelines.

    Valuation of the property as per Rule 3 of the Wealth Tax Act

    Extent of land: 7,200 sq ft

    Extent of building in the ground floor: 3,000 sq ft

    Extent of unbuilt area 7,200 sq ft - 3,000 sq ft = 4,200sq ft.

    Percentage of unbuilt area = 4,200sq ft/7,200sq ft*100 = 58.33 per cent

    Specified area for Chennai = 60 per cent.

    Percentage of unbuilt area is less than the specified area. Hence Rule 3 is applicable without adjustment.

    The property is owner occupied throughout.

    Annual value filed by the Corporation of Chennai: Rs 16,380

    Gross annual income: Rs 16,380.91 - 18,000

    Deduct property tax and other taxes: (-) Rs 3,000

    15 per cent of gross annual income: Rs 2,700

    Net annual income = Rs 18,000 - Rs 5,700 = Rs 12,300

    Value of the property: Rs 12,300*12.5 = Rs 1,53,750

    The value of the property is only Rs 1,53,750 when worked out by application of Rule 3 of the Wealth Tax Act against Rs 40 lakh assessed by the Registrar.

    According to the Tamil Nadu Court Fees and Suits Valuation Act the fee chargeable for the grant of probate or letters of administration shall comprise a fee at the rate of 3 per cent on value if it exceeds Rs 5,000.

    When the application is made within one year of the death of a person, the market value of the estate on such a date is to be worked out for payment of fees.

    A circular released on January 11, 2002 by the Inspector-General of Registration, Government of Tamil Nadu (Circular No. 45794) mentions, "The stamp duty payable for the instrument of settlement in favour of a member or members of a family is based on the value as set forth in the settlement and not the market value." Incidentally, gift tax has also been abolished under the Income-Tax Act.

    This means that a man seeking settlement in his lifetime ends up spending far less on stamp duty to be paid than when he is dead. The court fees payable at the rates prescribed under the Court Fees Act may vary in the other States.

    Besides this, immovable property in territories other than West Bengal, Mumbai and Chennai require no probate for wills made by Hindus.

    A living person making a settlement in favour of his family members has to pay a stamp duty of 5 per cent (4 per cent stamp duty and 1 per cent registration) for the property valued at his discretion and not the market value. If the property changes hands after his death through probate the court fee paid is 3 per cent of its market value of the property.

    For example, if the market value of the property is Rs 50 lakh, he can settle at 5 per cent of Rs 1 lakh or even less, which will cost only Rs 5,000. In the latter case the amount to be spent is Rs 1.5 lakh. Thus, there is a large gap in the amount to be spent after death compared to settling when one is alive. It is high time the Law Commission took initiatives to set right this discrimination by recommending to the government, an amendment to the Act.

    (The author is former National President, Institution of Valuers.)

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