Income Tax Appellate Tribunal - Madras
Gift-Tax Officer vs Smt. Jayalakshmi Doraiswamy on 16 February, 1987
Equivalent citations: [1987]21ITD591(MAD)
ORDER
George Cheriyan, Vice President
1. This appeal by the Gift-tax Officer relates to the assessment year 1984-85. The assessee in the present case filed a gift-tax return showing a taxable gift of Rs. 3,50,200. The assessee had gifted shares in M/s Sundaram Finance Ltd. of the face value of Rs. 10 to 6 different donees. The particulars of names of the donees, the number of shares gifted and the amount of gift-tax, which was reimbursed by each of the donees to the donor are as under :
Name of the No. of shares Amount of
donee gifted gift-tax
Rs.
(1) Mrs. Jayanthi Balaji 1,600 8,838
(2) Miss Divya Krishnan 3,100 17,124
(3) Mr. Shyam Krishnan 3,100 17,124
(4) Madhumita Balaji 1,700 9,392
(5) Mrs. Lakshmi Durai 1,000 5,524
(6) T.N.P. Durai 2,000 11,048
The aggregate amount reimbursed was Rs. 69,050. The plea of the assessee was that the value of the gifts was only Rs. 3,50,200 because the amount of gift-tax reimbursed had to be deducted from the market value following the decision in the case of CGT v. K.A. Sheik Dawood [1983] 139 ITR 261 (Mad.), viz., in other words, the assessee had pleaded that from the market value of the property, the gift-tax reimbursed had to be deducted. The GTO did not agree. He added to the figure of Rs. 3,50,200, the figure of Rs. 69,050 and the value of exempted gift of Rs. 5,000 and came to a figure of Rs. 4,24,250 from which he allowed deduction under Section 5(1) of the statutory amount of Rs. 5.000 and brought to tax Rs. 4,19,250. According to the GTO, the decision reported in 139 ITR 261 had no application because in that case there were debts contracted by the'' donor on promissory notes and the donee in terms of the document of the gift was bound to discharge the same but that was not the position here and there was no specific charge on the property gifted. The gifts in the present case were not onerous gifts.
2. The assessee appealed and pleaded for the deduction before the CIT (A) and reliance was placed in addition on one more citation, viz., the decision of the Calcutta High Court in the case of CGT v. Biswanath Paul [1970] 76 ITR 39. The CIT (A) stated that what had to be estimated was the price which an asset would fetch if sold in the open market on the day when the gift was made and it could not be said that the value of the shares would be diminished by the amount of gift-tax liability. The CIT (A), however, examined the case from another angle and he observed as under in paragraph 5 of his order :
However, there is another aspect of the matter to be considered in this case as the shares were transferred on the clear understanding that the tax liability would be met by the donees only. The Gift-tax Act deals with two kinds of gifts viz., (i) where the transfer is wholly without consideration, and (ii) where the transfer is for inadequate consideration. In the second case there is a gift by statutory fiction to the extent of inadequacy of the consideration. In the present case, the gift to the 6 donees cannot be disassociated from their obligation to meet the tax liability which otherwise would have been a liability of the donor. In such a case the gift would be without consideration to the extent of the value over and above the liability met by the donee. The present case should be considered as one falling under the second category discussed above. In such a case only the net value after adjusting the consideration flowing back from the donee would constitute the gift. In this view of the matter, I find support in the decision of the Madras High Court in CGT v. Late Sheik Dawood [1983] 139 ITR 261. Having regard to the facts of the case and in the light of that decision, I hold that the Gift-tax Officer is not justified in rejecting the appellant's claim for adjusting the gift-tax liability borne by the donee against the value of the shares. The Gift-tax Officer is directed to adjust the gift-tax liability and bring to tax only the net amount after such adjustment.
In the view that he took, he allowed the appeal.
3. The revenue is in appeal before us. The learned departmental representative submitted that the case was fully covered by the ratio of the judgment of the Madras High Court in the case of CGT v. Muthukumaraswamy Mudaliar [1986] 159 ITR 694.
4. The learned counsel for the assessee, on the other hand, stated that there were only passing observations of the High Court in that case and it could not be said that the Court had pronounced on the issue, which is now before us.
5. We have carefully gone through the judgment. The High Court had stated that a perusal of the order of the Tribunal did not indicate clearly as to what were the reasons for the reduction in the value of the properties which were gifted. In the facts of that case, it has been referred, that in the documents of gift the properties gifted were valued at Bs. 30,000 per ground and the gift-tax deeds also provided that gift-tax payable would be borne by the donees. The High Court proceeded to consider the various factors which would have had the effect of depressing the value of the gifted properties and in respect of some of them the High Court stated that the Tribunal may have been right in taking the same into account. But adverting to the aspect of payment of gift-tax liability of the donor by the donees, which had been mentioned in the deeds of gift, the Madras High Court observed as under :
We are not inclined to agree with the Tribunal that the gift-tax liability which has been fastened on the donees under the gift deeds could at all be taken into account while fixing the value of the gifted properties. Even though the gift deeds have provided that the gift-tax is payable by the donees, the primary liability to pay gift-tax is on the assessees, though by virtue of the gift arrangement, the liability has been fastened on the donees by the donors. It cannot be said that the properties have been gifted in these cases subject to existing liability such as a charge or mortgage which liability has to be deducted from the value of the gifted properties. But as in this case where the properties have been gifted straightaway, the fact that at a future point of time, the donees will have to pay gift-tax will not go to reduce the value of the gifted properties. It may be that for non-payment of gift-tax either by the donors who are primarily liable to pay the same under Section 29 of the Gift-tax Act or by the donees in cases where the whereabouts of the donors may not be found, the gifted properties may be proceeded against for realising the gift-tax. But that does not mean that the value of the gift can be taken to be the market value less gift-tax, as has been assumed by the Tribunal in this case.
It is clear that the High Court has considered whether a liability on the part of the donee to discharge the gift-tax dues of the donor, as stipulated in the deed of gift, would depress the market value of the property and the High Court has pronounced upon the issue and has held that the market value would not be depressed on this score. We consider that the aforesaid decision of the Madras High Court is binding on us as far as this case is concerned and the assessee would not be entitled to the deduction claimed.
6. The learned counsel for the assessee had submitted that the decision of the Calcutta High Court in the case of Biswanath Paul (supra) would support the stand of the assessee. That was a case where a father gifted separately to his three sons certain properties subject to payment to the donor by each donee Rs. 20,000 within tyro years. The Calcutta High Court considered the gifts to be either onerous gifts or having reference to the provisions of Section 40 of the Transfer of Property Act, the Calcutta High Court held that there was an obligation arising out of the contract annexed to the ownership of the properties and, viewed in either way, the market value of the property gifted would be affected. The facts in that case are entirely different.
7. Another case on which reliance was placed was that reported in K.A. Sheik Dawood's case (supra). In that case, the assessee gifted lands to 23 persons and 7 of them were required to discharge debts contracted by the assessee to the extent of Rs. 1,75,000. The High Court held that the gift was clearly a case of conditional or onerous gifts and the value of the gifted property was what it would fetch if sold in the open market subject to that condition. In this case, the donor had written, letters in similar terms to each of the donees. We set out one such specimen letter dated 24-11-83 addressed to one of the donees Mrs. Lakshmi Durai :
Mrs. Lakshmi Durai, 4 Basullah Road, T Nagar, Madras 600 017.
My dear Lakshmi, I propose to make a gift to you of 1000 equity shares of Rs. 10 each of Sundaram Finance Ltd. This gift will be subject to the condition that the gift-tax and stamp duty payable by me thereon shall be ultimately borne by you. In the event of my making any other taxable gifts during the previous year ending 31st March, 1984, the gift-tax payable will be calculated proportionately.
I wish to make it clear to you that this gift is within the meaning of Section 127 of the Transfer of Property Act, 1882 and the gift has to be accepted along with the burden of liability attached to it. Please therefore confirm your acceptance of the gift and arrange to lodge with the Company the transfer deed duly signed and witnessed. I have already handed over the relative share certificate to the Company.
With best wishes.
Yours affectionately, Sd/-
(Jayalakshmi Duraiswamy) The donees had also written to the donor in reply and the reply of Mrs. Lakshmi Durai, which is of the same date, is as under :
Mrs. Jayalakshmi Duraiswamy, 4 Basullah Road, T Nagar Madras 600 017.
My dear Patti, With reference to your letter of date proposing to give a gift of 1000 Equity shares of Rs. 10 each in Sundaram Finance Ltd. saddled with gift-tax and stamp duty liability thereon. I am willing to accept the above gift with the liability attached thereto.
I am accordingly signing the transfer deed getting it witnessed and arranging to lodge the same with the Company in due course.
Please let me know the amount payable by me in due course towards gift-tax and stamp duty.
Yours affectionately.
Sd/-
(Lakshmi Durai) The other replies are in similar terms. The donor has referred to the provisions of Section 127 of the Transfer of Property Act and has stated that the gift made was a gift within the meaning of that section. Section 127 of the Transfer of Property Act reads as under:
127. Where a gift is in the form of a single transfer to the same person of several things of which one is, and the others are not, burdened by an obligation the donee can take nothing by the gift unless he accepts it fully.
Where a gift is in the form of two or more separate and independent transfers to the same person of several things, the donee is at liberty to accept one of them and refuse the others, although the former may be beneficial and the latter onerous.
A donee not competent to contract and accepting property burdened by any obligation is not bound by his acceptance. But if after becoming competent to contract and being aware of the obligation, he retains the property given, he becomes so bound.
It is clear that this is not a case of gift in the form of a single transfer to the same person of several things of which one thing is burdened and the others are not burdened by an obligation. Nor is this gift in the form of two or more separate and independent transfers to the same person of several things of which one may be beneficial and other onerous. The present is, therefore, not a case to which the provisions of Section 127 of the Transfer of Property Act would apply. The gifts cannot be labelled as onerous gifts.
8. The learned counsel submitted that under the definition of gift in terms of Section 2 of the Gift-tax Act, the first part contemplated a transfer voluntarily made and without consideration. This was the same definition as under the general law. The second part included a transfer deemed to be a gift in terms of Section 4, i.e., where the consideration was inadequate. According to the learned counsel, the present one was a case which would become a gift only in terms of Section 4 and the consideration was inadequate and to the extent of the gift-tax paid since there was consideration the gift-tax reimbursed by the donees would have to be deducted. As far as this argument is concerned, we consider that the decision of the Karnataka High Court relied by the learned departmental representative in CGT v. K. Bhoomiamma [1986] 158 ITR 615 supports the stand of the revenue that the gift-tax undertaken to be paid by the donees cannot be treated as consideration. The Karnataka High Court had also eventually held that no deduction was permissible.
9. The learned counsel submitted that the tax liability to pay gift-tax arose contemporaneously with the transfer and, therefore, the transaction of gift became embedded with the liability to pay gift-tax and hence in valuing the market value the liability to pay gift-tax, which had to be borne by the donees, had to be deducted because they were taking the gifts subject to the liability to pay gift-tax. As far as this aspect is concerned, we have given our anxious consideration to the same. Until the transaction of gift is complete, the liability to pay gift-tax does not arise. It is only on completion of the transfer by way of gift that the liability to gift-tax arises. If at any stage prior to the completion, the donor stops short, then there is no liability to pay gift-tax. A gift may be executed in terms of a document, or by delivery of possession, etc. depending upon the nature of the property or in accordance with the requisite provisions of the general law. But in all cases the completion of the gift takes place, in our view, at a moment of time which precedes the liability occurring. In other words, a liability to pay gift-tax would occur immediately on a gift having been completed, though the document may be only a single one. In coming to this conclusion, we derive some support from the interpretation which could toe placed on a document having regard to the observations of the Supreme Court in the case of CIT v. M.K. Stremann [1965] 56 ITR 62. There the document referred to was excited on the 19th December, 1952 and was styled as a deed of partition. The observations -of the Supreme Court in that regard were as under :
We agree with the High Court that whether the averment in relation to the past was supported by other evidence or not, it certainly was unequivocal that the properties dealt with at the partition were treated by the volition of the assessee as the properties available for partition, between the members of the joint family. It was certainly an unequivocal declaration that all the properties dealt with under that partition had been impressed with the character of joint family properties, properties belonging to the joint family of the assessee and his son. The genuineness of the transaction itself was never in issue. The result was that at least on 19th December, 1952, antecedent to the partition, the properties became impressed with the character of joint family property. There was a partition on 19th December, 1952. Thereafter, the properties allotted to the shares of the assessee and his divided sons were held by them in severalty.
Viewed from the aforesaid angle also, we have to hold that immediately on the transfer becoming complete alone the liability to gift-tax arose. For all the aforesaid reasons, we would set aside the findings of the CIT(A) and restore the valuation as made by the GTO.
10. In the result, the appeal of the revenue is allowed.