Income Tax Appellate Tribunal - Cochin
Gift-Tax Officer vs Smt. P. Subbammal. on 1 February, 1990
Equivalent citations: [1990]33ITD136(COCH)
ORDER
Per Shri A. V. Balasubramanyam, Judicial Member - The short point involved in this appeal by the Revenue is in regard to deduction claimed towards gift-tax liability.
2. A certain P. Subbammal, the assessee in this case, had some jewellery. She made a gift of the same to her grand-daughter Beena on 10-11-1982 by delivering possession of the same. In respect of that gift, the impugned gift-tax assessment was made where the value of the jewellery was fixed at Rs. 3,41,000. Allowing the basic exemption of Rs. 5,000, the taxable gift was determined at Rs. 3,36,000.
3. The assessee (donor) had preferred an appeal raising two important points. One was in regard to valuation. That was not pressed by the learned representative before the Commissioner (Appeals). The finding in this regard has, in these circumstances, become final. The second point was in regard to deduction of gift-tax liability. It is the claim of the assessee that the gift-tax liability is an allowable deduction. On this issue, the first appellate authority held as hereunder :
"... I hold that the GTO was not correct in his view on the allowance of the tax payable as a liability in determining the value of gifted property. He is directed to do so and revise the order of assessment."
The revenue appeals objecting to the above.
4. The learned Departmental Representative argued that the value of the gifted property is liable to be taxed under the provisions of s. 6 of the Gift-tax Act and that gift-tax liability was not a prior charge or liability for allowing the deduction claimed. In this connection, reliance was placed upon the decision of the Karnataka High Court in the case of CIT v. K. Bhoomiamma [1986] 158 ITR 615. On behalf of the assessee (donor), Shri Rangamani, the learned representative of the assessee, stated that the gift had been made subject to the condition that the donee would undertake to pay the gift-tax and the transfer by way of gift was with a condition attached and that the condition having been accepted by the donee, there was a liability at the time of passing of the property. It was his argument that when a gift is made subject to a condition, the condition cannot be detached and that valuation of the gifted property without making necessary adjustment while fixing up the taxable gift is incorrect. Our attention was invited to the decision of the Calcutta high Court in the case of CGT v. Biswanath Paul [1970] 76 ITR 39, the decision of the Kerala High Court in the case of Kutty Sahib v. CGT [1965] 55 ITR 146, and the decision of the Madras High Court in the case of CGT v. K. A. Sheik Dawood [1983] 139 ITR 261. Our attention was also drawn to the commentary of C. A. Gulanikar in Law and Practice of Gift-tax and Wealth-tax (1989 edition, pp. 3.125-26).
5. We may set out certain facts which are not in the region of controversy. The date of gift is 10-4-1982 when the ornaments (movable) were actually handed over to the donee. At the same time, the donor had addressed a letter to the donee stating that the gift was subject to the condition that the donee would undertake to pay the gift-tax as the donor had no money with her. The donee appended a note to that letter signifying her willingness to undertake the gift-tax liability. The question is whether the deduction claimed can be allowed in view of the above.
6. It is a familiar principle that where a property subject to charge or encumbrance is gifted, the property should be valued as if it is free and the value of the charge or encumbrance should be deducted. Such deduction is allowable in a case where the liability or encumbrance is prior to the point of time the gift is made. Where a donor gifts a property with a condition that certain payment should be made by the donee to the donor, then the condition may be construed as an onerous gift liables to be defeated by non-payment or an obligation arising out of contract annexed to the ownership of the property in which case the value of the gift should be accordingly reduced. The cases cited on behalf of the assessee are all of this type.
7. In the case of Biswanath Paul (supra) the property had been gifted subject to the condition that the donee would pay an amount of Rs. 60,000 to the donor. If the condition had not been accepted by the donee, the gift would have failed. Since certain amount was coming to the donor as a result of the same transfer, the value of the gift, in essence, was being reduced. There Lordships of the Calcutta High Court held that the amount of Rs. 60,000 was deductible out of the value of the gift.
8. In the case of Kutty Sahib (supra) what is held is that charges and liabilities that existed on the property at the time of gift are liable to be deducted whether or not they are mentioned in the gift deed. This is also a case where the liability or encumbrance was prior to the gift.
9. In the case of Late K. A. Sheik Dawood (supra), the donees were directed by the donor to discharge certain debts contracted by donor. That was a condition attached to the gift which the donees had accepted. Since the donees were discharging the liability which the donor was having earlier to the gift. Their Lordships of the Madras High Court held that the value of the liability was deductible from the value of the gifted property.
10. It may be seen from the above that what is deductible is a liability or encumbrance that existed prior to the gift. Whether it is a liability or charge on the property or a liability personal to the donor, in either case it is anterior to the gift. It is only such encumbrance or liability that is liable to be deducted in determining the value of the gift.
11. Irrespective of the contract between the donor and the donee, the liability to gift tax is consequence of the gift. Unless there is a gift there is no liability to pay tax. The liability could arise only when the gift is full and complete. This is clear from the very scheme of the Gift-tax Act. Therefore, the liability to pay gift-tax is the consequence of a full and completed gift. As can be seen from section 29 of the Gift-tax Act, the liability to pay tax is primarily on the donor and only when the tax cannot be recovered from the donor, it may be recovered from the donee.
12. Under section 30 of the Gift-tax Act, the gift-tax payable shall be the first charge on the property gifted leaving away case of a bona fide purchase for value without notice. Should there be a charge under section 30, there should already be a gift. Unless the gift is completed, a charge cannot arise. Here, the charge for gift-tax is the consequence of a gift. For these reasons, the deduction cannot be claimed merely because the donee had agreed to pay gift-tax. Here, it is only an agreement between the donor and the donee inter se and if the donor is made to pay, she may have a personal claim against the donee for the tax so paid. But, however, so far as the revenue is concerned, the donor is decidedly liable.
13. We may refer to two precedents which are directly on the point. In the case of K. Bhoomiamma (supra) the donor had gifted a certain property to her foster son with a condition that he shall pay a sum of Rs. 25,000 to one Ahalya and also the gift-tax payable by her under the Gift-tax Act and these conditions had been accepted by the donee. Their Lordships of the Karnataka High Court held :
"... On the language of the provision as also on legal principles, it is impossible to hold that the gift-tax undertaken to be paid by the donee can be treated as consideration. It cannot be allowed as a deduction."
14. The Madras High Court has in the case of CGT v. Muthukumaraswamy Mudaliar [1986] 159 ITR 694 dealt with the same point. This was also a case where a gift had been made with a condition that donee should meet the gift-tax liability and the question was whether the gift-tax payable is relevant for the purpose of determining the value of the properties that had been gifted. Their Lordships held that the value of the gift cannot be taken to be the market value less the gift-tax and that the fact that at a future point of time the donee will have to pay gift-tax will not go to reduce the value of the gifted properties.
15. It is clear that a condition undertaken by the donee to pay gift-tax would not amount to a pre-existing liability. We have, therefore, to hold that the deduction granted by the first appellate authority was not allowable in law and the impugned order is required to be set aside. In the result, we reverse the finding of the Commissioner (Appeals) and sustain the assessment passed by the Gift-tax Officer.
16. The appeal is allowed.