Madras High Court
Gift-Tax Officer vs Smt. Valli Alagappan. on 30 December, 1989
Equivalent citations: [1990]33ITD222(MAD)
ORDER
Per Shri. T. V. Rajagopala Rao, Judicial Member - The question involved in this appeal preferred by the Revenue is whether the revocable gift made by the assessee Smt. Valli Alagappan, Madras in favour of M/s. M & L Investments Pvt. Ltd. is liable to gift-tax. Admittedly the gift is made in the accounting year relevant to the assessment year 1982-83. The gift transaction is contained in the letter dated 12-4-1982 addressed by the assessee to M/s. M & L Investments Pvt. Ltd. According to the letter the list of jewelleries appended to the said letter which consisted of 27 items of gold, diamonds, rubies, etc., stated to be of the value of Rs. 7.5 lakhs were transferred in favour of M/s. M & L Investments Pvt. Ltd. on the following conditions; (i) The transferor should have the right to revoke the transfer after the expiry of seventy-four months from the date of transfer. (ii) If however the transfer is not revoked within three months after the expiry of the said period of seventy-four months for any reason whatsoever, the power of revocation will lapse. (iii) During the said period of seventy-four months the transfer shall be irrevocable and the transferor will have no right, title or interest whatsoever in or upon the said property consisting of 27 items and the transferee only should own and enjoy the said property as absolute owner and also deal with the same in the manner it may like. (iv) The transferee is bound to return the said property (27 items) as soon as the transferor revokes the transfer. (v) The notice of revocation of the transfer shall be given by the transferor in writing to the registered address of the transferee and that shall be treated as a valid service. (vi) The transferee is bound to keep the schedule property in the same state as far as practicable in which the said property is found at the time of transfer provided always that the transferee had the powers to change, alter or remark the said property or ornaments made weight by weight or otherwise. (vii) It is expressly understood that the transferor shall not derive any benefit direct or indirect under any circumstances from the said property and the transferor relinquishes all rights and benefits that may be considered as occurring to her during the said period of seventy-four months. The gift as well as the terms of the gift adumbrated in the said letter were accepted by M/s. M & L Investments Pvt. Ltd. by making an endorsement under the said letter stating that they agree to receive the property and they are also conveying their approval and acceptance for the terms and conditions mentioned in the said letter.
2. The Gift-tax Officer proceeded to consider the transfer thus made by the assessee of the jewellery to M/s. M & L Investments Pvt. Ltd. as a gift. While making the assessment the Gift-tax Officer held that the transaction evidenced by the above letter together with acceptance endorsement thereunder by M/s. M & L Investments Pvt. Ltd. amounts to a "gift" within the meaning of section 2(xii) and transfer of property within the meaning of section 2(xxiv) of the Gift-tax Act. Therefore, he held that the gift-tax is to be assessed on the value of the jewellery transferred. He computed the value of jewellery at Rs. 14,68,000. The Gift-tax Officer ultimately held that the transfer effected was with an intent to diminish directly or indirectly the value of the transferors property and to increase the value of transferees property to the extent of Rs. 14,68,000 and therefore the transaction specifies all the ingredients of transfer under section 2(xxiv) (d) of the Gift-tax Act and thus the transaction is liable for gift-tax. He computed the total gift at Rs. 15,40,000 and levied tax thereon.
3. Aggrieved against the gift-tax assessment dated 6-2-1987 the assessee went in appeal before the Commissioner (Appeals). It is contended before him that the gift is void since it is revocable offending the provisions of section 126 of the Transfer of Property Act. Since it is not a valid gift the question of taxing the same does not arise and assessing Rs. 14,68,000 towards the value of the jewellery in the hands of the assessee is not valid. The learned Commissioner (Appeals) accepted this argument advanced on behalf of the assessee before him and held in his impugned order dated 16-6-1988 that the gift is void and consequently gift-tax cannot be levied on Rs. 14,68,000, which was held to be the value of the jewellery gifted by the assessee. He specifically stated in his impugned order that in view of his finding that the gift is void he is not dealing with either the valuation of the gift or the applicability of section 6 of the Gift-tax Act and Rule 11 of the Gift-tax Rules.
4. As against the impugned order the Revenue came up in second appeal before this Tribunal. We have heard Shri Anil Kumar, the learned departmental representative and Dr. Gowri Shankar, the learned advocate for the assessee. It is admitted before us that the donor (assessee) along with her husband and her husbands brother are the directors and shareholders of the donee company, M/s. M & L Investments Pvt. Ltd. Dr. Gowri Shankar did not dispute that there is a transfer involved in this transaction evidence by the letter dated 12-4-1982, which is already adverted to supra. His contention, however, is that the transfer does not amount to gift. It is also submitted before us that for the assessment years 1984-85 and 1986-87 the donee was showing these assets (27 items of jewellery) as part of its wealth in its wealth-tax returns filed for those assessment years. It is also submitted that the assessee exercised her right of revocation in July 1988 and from the assessment year 1989-90 the assessee only had included these assets as part of her wealth. Dr. Gowri Shankar argued that simply because the transaction involves transfer it does not necessarily amount to a gift and to strengthen this proposition he brought to our notice the Bombay High Court decision in CGT v. Dr. R. B. Kamdin [1974] 95 ITR 476, wherein it is held that under section 126 of the Transfer of Property Act irrevocability of the gift is one of the essential features of the gift. It is so in ordinary parlance also. However under section 78(b) of the Indian Trusts Act irrevocability is not an essential feature of a trust. That means a revocable trust at the mere will of the settlor can be valid under section 78(b) of the Indian Trusts Act. Thus His Lordship of the Bombay High Court Justice Vimadalal contemplated a situation where though there is a valid trust under the Indian Trusts Act, there is no valid gift by means of a trust under the Gift-tax Act. In the above case Justice Vimadalal of the Bombay High Court after considering the Mysore High Court decision in Smt. Laxmibai Narayana Rao Nerlekar v. CGT [1967] 65 ITR 19, and the Supreme Court decision in Barsi Light Railway Co. Ltd. v. Joglekar AIR 1957 SC 121 agreed with the view expressed in the above two decisions wherein it was held that there must be compelling words in the statute to show that a meaning different from or in excess of the ordinary meaning was intended. Where within the framework of the ordinary acceptation of a word, every single requirements of the definition clause was fulfilled, it would be wrong to take the definition as destroying the essential meaning of that word. It is further found as follows at page 482 of the reported decisio : "applying the same to the present case, in my opinion, it must be stated that irrevocability is an essential feature of a gift in ordinary parlance, as well as under the substantive law relating to gift contained in section 126 of the transfer of Property Act to which I have already referred. I may, however, clarify that section 126 of the Transfer of Property Act would not, in terms, be applicable to a question that arises under the Gift-tax Act. Though irrevocability is an essential feature of a gift, it is, as the provisions of clause (b) of section 78 of the Indian Trusts Act show, not an essential feature of a trust under the law of trusts. That is why, as already stated earlier, there is no provision to be found in section 6, or in any other provision of the Gift-tax Act, for a gift with an unrestricted power of revocation; and that is also the reason why section 6(2) of the Act deals only with a situation in which there is a complete divestment at least for a limited period and tolerates a gratuitous transfer which is irrevocable for a limited time within the concept of a gift under the Gift-tax Act." Dr. Gowri Shankar argued that there can be revocable transfer, revocable gift after some time and there can be irrevocable gift. However, under the ordinary acceptation of the term gift a transfer should be irrevocable. So for purposes of gift-tax also a revocable transfer cannot be taken to be a gift. There must be compelling words in the statute to show that a revocable gift after some time also comes within the definition of gift under the Gift-tax Act. Unless such a definition is there in the Gift-tax Act a revocable gift should not be taken to be a gift at all, as ordinarily gift is always an irrevocable gift. Since in this case the gift is revocable after certain period, namely 74 months, such a gift should be taken to have not been comprehended under the Gift-tax Act and therefore the present gift is not at all taxable under the gift-tax provisions. Further, the learned advocate argued that in order to explain the provisions of section 4(5) of the Wealth-tax Act the word irrevocable transfer was defined in the Explanation given under that section. A similar definition of irrevocable transfer is not found in the Gift-tax Act and this omission to frame definition of irrevocable transfer or irrevocable gift for purposes of Gift-tax Act is very significant. In the absence of such a definition revocable gift of any sort cannot be taken to be a gift at all, which is assessable for gift-tax. A revocable trust is permissible under section 78(b) of the Indian Trusts Act. An irrevocable gift only is found to be valid for purposes of section 126 of the T. P. Act. Though in all these different types of transfers there is a valid transfer, yet all the transactions are not gifts within the meaning of the Gift-tax Act. This argument of the learned counsel for the assessee does not appear to us to be advancing his case to any extent in the present appeal. Firstly we hold that the Bombay High Court decision in Dr. R. B. Kamdins case (supra) is quite distinguishable on facts. In that case their Lordships found that clause 15 of the trust deed, which came up for decision before the Bombay High Court contained a clause empowering the settlor at any time during his life time by deed or by will, to revoke wholly or partially the trusts declared by the said document. Their Lordships found that since it is revocable gift at any time after the execution of the document at the sweet will and pleasure, of the settlor, and since section 6(2) of the Gift-tax Act contemplates a revocable gift only after a specified period, it cannot be said to be a gift. Section 6(2) of the Gift-tax Act is in the following term : "Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from such property during the period for which the gift is not revocable". Section 6 deals with how to determine the value of the gift. In our opinion section 6(2) deals with gifts which are revocable after a specified period. In view of the clear language of section 6(2) of the Gift-tax Act the whole argument of Dr. Gowri Shankar that revocable gift of any sort cannot be taken to be gift for purposes of Gift-tax Act especially in the absence of a definition of irrevocable transfer, just like the one which is available under section 4(4) Explanation (b) of the Wealth-tax Act, seems to us to be not tenable. In our opinion the Parliament is definitely aware of revocable gifts or transfers of different varieties as well as irrevocable gifts or transfers. Out of revocable gifts of may sorts, the Legislature in its wisdom thought it fit to choose only revocable gifts after a specified period for purposes of levy of gift-tax. In the absence of definition of irrevocable transfer just like the one available under section 4 Explanation of the Wealth-tax Act for purposes of gift-tax even if a gift is revocable after any specified period, which is not necessarily over a period of more than six years is also a gift within the meaning of the Gift-tax Act. For instance a gift which is revocable after a period of one year, in our understanding is a taxable gift within the meaning of section 6(2) of the Gift-tax Act. In our opinion it is enough if the period of revocation is specified in deed of gift. That period may be any specified period like one year or two years and so on. Further section 126 of the Transfer of Property Act cannot be applicable to a question which arises under the Gift-tax Act. At page 480 of Dr. R. B. Kamdins case (supra) the essentials to be seen before deciding "What the court must, therefore, see for the purpose of deciding whether a valid gift under the Act has been made is whether the donor has really divested himself of the property. In my opinion, the donor cannot be said to have transferred property if, whilst ostensibly handing it over, he holds on to it by keeping unrestricted power to take it back the next minute. That, in my opinion, is the basis of section 6(2) of the Gift-tax Act itself, for it lays down a mode of valuation only in regard to gifts which are not revocable for a certain period and taxes the donor only to the extent to which he shed the property. That in effect, is what it provides when it lays down that the value of the property. That in effect, is what it provides when it lays down that the value of the property so gifted is to be the capitalised value of the income thereof during the period for which the gift is not revocable, that being the period during which the donor has really divested himself of the property. Neither section 6 of the Gift-tax Act, nor any other provision of the said Act, deals with a trust in which an unlimited power of revocation is contained, for, in my opinion, such a trust cannot be regarded as a transfer of property by the donor. It follows that it cannot, therefore, amount to a gift within the meaning of the Gift-tax Act though as a trust it is binding as between the settlor, the trustees and the beneficiaries because the law of trusts expressly recognises such trusts as valid (vide section 78(b) of the Indian Trusts Act)". As can be seen from the above, the Bombay High Court in that very case cited for the assessee, stated the ambit of section 6(2) of the Gift-tax Act and the essentials to be sees before applying the said provisions. Here in our opinion a fair reading of the document of gift discloses that for a period of 74 months from the date of execution of the document, the donor-assessee has no right of revocation. During that period the donee is entitled to use the property as it likes which included the power of converting one type gold ornament into another. The done under the terms of gift deed is entitled to exercise her right of revocation only within the period of 3 months soon after the expiry of 74 months period which the gift is irrevocable. If she fails to revoke the gift within a period of three months after the expiry of 74 months then the gift would become absolute. Having regard to the abovesaid essential features of the gift document we have to hold that this is a gift of jewellery under which the donor had divested herself of the jewellery in favour of the donee at least for 74 months. Therefore it comes under a gift revocable after a certain period and it falls under section 6(2) of the Gift-tax Act and hence the value of such gift should be computed according to the terms of rule 11 of the Gift-tax Rules. Dr. Gowri Shankar argued that assuming without admitting his argument that there was no gift involved in the transaction is not accepted by us and assuming that we hold that the transaction falls under section 6(2) and the value of the gift should be determined according to rule 11 of the Gift-tax Rules since no income is derived from the jewellery during the period of 74 months during which the donee company held the said assets and since the computation of the value of the gift can be made on the basis of the capitalised value of the income from such assets during the period for which the gift is not revocable, that means in this case 74 months, there is no income in order to capitalise and in those circumstances the value of the gift should be determined at nil. We consider that this is not the stage where the value of the gift can be determined. Since we found that none of the lower authorities applied section 6(2) to the gift in question and determined the value of such gift by applying rule 11 of the Gift-tax rules, we feel that this aspect of the matter should be left to be done by the Gift-tax Officer and the assessee may canvass the present argument that the gift has no value and on that ground the computation of gift tax is not tenable may be made before the Gift-tax Officer.
5. In view of the above we set aside the orders of the Gift-tax Officer as well as that of the Commissioner (Appeals) and we direct that the matter should go back to the Gift-tax Officer who has to apply the provisions of section 6(2) of the Gift-tax Act to the gift in question and try to find out its value by applying the provisions of rule 11 of the Gift-tax Rules allowing the assessee to raise all contentions relating to the value of the gift and decide the question according to law. Therefore the appeal of the Revenue is allowed for statistical purposes.