Income Tax Appellate Tribunal - Cochin
Ito vs K. Ramullan on 27 April, 2001
ORDER
Dr. O.K. Narayanam A.M.:
There are five appeals in this bunch, One is a gift-tax appeal for the assessment year 1985-86 (GTA No. 2/Coch/1992). Another is income-tax appeal for the assessment year 1989-90 (ITA No. 778/Coch/1993). The remaining three appeals are wealth tax appeals for the assessment years 1985-86, 1986-87 and 1987-88 (WTA Nos, 109/Coch/1993 and 10 & 11/Coch/1992).
2. All these appeals are preferred by the revenue. The respondent is common in all these appeals, Shri K. Ramullan, the late assessee, now represented by Shri K. Abdulla Musaliar, Cheruvathur, Kasargod. The facts and circumstances leading to the assessments under IT, WT and GT Acts now pending in appeals before us are one and the same. In fact, the income-tax and wealth-tax proceedings have been consequential to the proceedings completed under the GT Act. In these circumstances, all these appeals are clubbed todether for analogous disposal.
3. The brief history of these cases, as discernable from the records and papers available before us, is as follows - The late assessee was a resident of Malaysia who had have his family living in Kerala an age-old practice followed by the Muslims of Malabar area. He had maintained non-resident external accounts (NRE accounts) in various banks. The late assessee negotiated for a property known as K.R. Commercial Complex at Mangalore, Karnataka State, for himself and his family members. Finally, the said property was purchased by the late assessee and his family members, all of them as co-owners. The co-owners included the late assessee himself, his wife, six children and his son-in-law, all put together nine persons. The property was purchased by virtue of the sale deed executed on 4-8-1984. At the time of the said purchase, two of the assessee's children were minors and they were represented by his wife. The property was purchased for a consideration of Rs. 25 lakhs. According to the assessee, the registration expenditure was incurred to the extent of Rs. 2 lakhs and both put together, the cost of the said property at Mangalore was Rs. 27 lakhs.
4. When asked for the source for acquiring the said property, the co-owners relied on the remittances made by the late assessee through his NRE accounts. The department enquired the details from the late assessee; the details of the transactions and the flow of consideration, etc. The late assessee filed his gift-tax return declaring a gift of Rs. 15 lakhs made to the co-owners and claimed exemption therefor from the levy of gift-tax under the provisions of section 5(1)(iib) on the ground that the gifts of Rs. 15 lakhs made to his children for the purchase of the property were given out of his NRE accounts. The assessee explained before the GTO his position as donor as well as the transactor of the property purchased. According to him, the property was purchased for Rs. 25 lakhs and the cost of registration thereon was Rs. 2 lakhs, and both put together, the total cost of the property came to Rs. 27 lakhs. There was an assigned loan with Corporation Bank at Mangalore to the extent of Rs. 5,40,000, set off against the consideration payable. The balance amount actually paid in cash was, therefore, Rs. 21,60,000, Out of this, the assessee had his own contribution to the extent of Rs. 3,60,000. He had given loans to his wife, Mrs. Mariyurnma and his son-in-law K. Assainar Rs. 2 lakhs and Rs. 1 lakh respectively. These amount were used by them for making payments towards their shares in the property. The balance left over was Rs. 15 lakhs out of which Rs, 14 lakhs was paid by his children and Rs. 1 lakh was paid by his son-inlaw, Shri K Assainar. This residual amount of Rs. 15 lakhs was given by the assessee to his children and son-in-law for making the said purchase. Therefore, according to the assessee's explanation, he had made a gift of Rs. 15 lakhs to his children and son-in-law and as the gifts were made by way of money drawn frorn his NRE accounts, those gifts were exempt from the levy of gift-tax under section 5(1)(iib) of the GT Act. That is why he filed a return of gift declaring gifts made to the extent of Rs. 15 lakhs and at the same time claimed exemption from the levy of gift-tax. But the GTO did not accept the explanation offered by the late assessee. The GTO had no dispute on the total cost of the property purchased. He had no dispute regarding the source of money utilised for the purchase of the property. All the monies were accounted for or all the monies were explained as withdrawn from NRE bank accounts of the late assessee. The dispute raised by the GTO was on the eligibility of the late assessee to claim the exemption under section 5(1)(iib) and also on the quantum of the gifts made by the assessee. According to the GTO, the value of the gifts made by the late assessee worked out to Rs. 24,30,000, after giving deduction for the share of the assessee in the property. Accordingly, against a gift of Rs. 15 lakhs returned by the late assessee, the assessing officer determined the value of gifts at Rs. 24,30,000. Out of this amount of gifts determined by the assessing officer, he was not able to allow exemption to the extent of Rs. 16 lakhs as claimed by the late assessee. Normally, as it is obvious, any gift made by a person residing outside India in the form of money out of his NRE accounts to another person is exempt from the levy of gift-tax. But the GTO did not extend this benefit of exemption to the late assessee for the following two reasons :
(i) The resident or non-resident status of the assessee for the purpose of exemption under section 5(1)(iib) is determined under the provisions of the Foreign Exchange Regulation Act, then prevailing in force. The expression "person resident outside India" is defined in clause (q) of section 2 of the Foreign Exchange Regulation Act. The GTO found that the assessee had stayed with his family during the relevant time and, therefore, he could not be treated as a person residing outside India within the meaning of section 2(q) and so, the assessee could not be considered as a person residing outside India for claiming the benefits provided under section 5(1)(iib) of the GT Act. The GTO held that the assessee ceased to be a person residing outside India. Therefore, the amounts gifted by him out of his NRE accounts did not qualify for gift-tax exemption.
(ii) Consequently, there was no gift of money from the NRE accounts maintained by the late assessee. The purchase consideration of Rs. 25 lakhs was paid to the sellers of the property at Managalore by the late assessee himself directly from his bank accounts or NRE accounts. Therefore, one cannot say that the assessee had gifted any money from the NRE accounts to the co-owners of the said property. What actually the assessee had gifted to his relatives in the form of co-owners was a right in the said immovable property purchased by him and the gift of such a right did not qualify for exemption under section 5(1)(iib).
5. For the above reasons, the assessing officer declined to allow the exemption from the levy of gift-tax to the late assessee and completed the gift-tax assessment fixing the value of the gifts at Rs. 24,30,000. Once the gift-tax assessment was made on the above premises, the assessing officer felt the need of clubbing of income and wealth pertaining to the Managalore property and attributable to the shares of the late assessee's wife and minor children. Accordingly, income-tax and wealth-tax assessments were also completed by adding the share of income as well as the share of wealth of the assessee's wife and minor children attributable to the Mangalore property. This is how the impugned assessments under income-tax, wealth-tax and gift-tax challenged in these appeals before us happened to be framed.
6. When all these matters were taken in appeal before the Commissioner (Appeals), he set aside the gift-tax assessment and deleted the additions made in income-tax and wealth-tax assessments based on the gift-tax assessment. As far as the gift-tax assessment was concerned, the Commissioner (Appeals) relied on the decision of the Tribunal in the assessee's own case for the assessment year 1983-84 and directed the assessing officer to treat the assessee as a person residing outside India and give the benefit of exemption in respect of the value of gifts claimed to have been made by the assessee amounting to Rs. 15 lakhs. Regarding the balance addition of Rs. 9,30,000 the Commissioner (Appeals) found that the said amount was covered by the loan payable to Corporation Bank, Mangalore, taken over at the time of registration of the property and the amounts of loans given by the late assessee to his wife and son-in-law. Therefore, the Commissioner (Appeals) deleted the addition of Rs. 5,30,000 and virtually allowed the appeal filed by the late assessee. As far as the addition in the income-tax assessment was concerned, the Commissioner (Appeals) relied on the order of the Commissioner (Appeals) in the corresponding wealth-tax appeals. The clubbing of shares in the Mangalore property was deleted in the corresponding wealth-tax appeals and following that line, the clubbing of income was also deleted. As far as the wealth-tax assessments were concerned, the Commissioner (Appeals) again relied on the order of the Tribunal (Cochin Bench).
7. The revenue is aggrieved by the orders of the Commissioner (Appeals) as stated above, and therefore, the second appeals are filed before us.
8. As the leading case, we may first consider the gift-tax appeal filed by the revenue. The relevant ground raised by the revenue in the gift-tax appeal is as follows :
"The learned Commissioner (Appeals) erred in holding that the assessee is entitled to exemption in respect of the gift of Rs. 1 lakh under section 5(1)(iib) of the Gift TAx Act read with section 2(q) of FERA, 1973, following the decision of the Tribunal in this case for the assessment year 1983-84. The said order of the Tribunal has not become final as a reference application filed by the department is pending. The CGT(A) ought to have found that the assessee has not proved that he made gifts by issue of cheques from NRE account. The appellate authority ought to have noticed that the property in question was purchased in 1984 and that there was no evidence to show that loans were given and so the amount invested by the assessee in the name of wife and minor children was assessable as gift by him. The CGT(A) ought to have confirmed the amount as the value of the property, as admitted by the assessee, was taken as the basis of computation of the taxable gift."
9. Shri K.A. Gopinathan, senior Departmental Representative, was fair enough to concede before us that the revenue has no case as far as the residential status of the late assessee was concerned. He stated that even though the Hon'ble High Court of Kerala in the case of CIT v. K. Ramullan (1997) 226 ITR 265 (Ker) had decided against the late assessee, the Hon'ble Supreme Court set aside the order of the Kerala High Court and held that the late assessee has to be treated as a person resident outside India as reported in K. Ramullan v. CIT JT 2000 (8) SC 593. In view of the above, the senior Departmental Representative submitted that he is not pressing the ground relating to the residential status of the late assessee. But, he objected to the order passed by the Commissioner (Appeals) on the issue of "subject of the gift". The learned Departmental Representative submitted that the Commissioner (Appeals) has grossly erred in not appreciating the true nature of the gifts made by the late assessee to his relatives. He submitted that even admitting that the late assessee was a person resident outside India, still he was not entitled to claim exemption contemplated under section 5(1)(iib) of the GT Act. He also submitted that even though the money necessary for the purchase of the Mangalore property was withdrawn from the bank accounts of the late assessee including his NRE accounts, those monies were not directly gifted to his wife and children. Those monies were directly paid to the sellers of Mangalore property by way of cheques and demand drafts. By paying money to the sellers of Mangalore property, the late assessee purchased the said property and got it registered in his name as well as in the names of his wife and children and son-in-law as co-owners. If the consequences of these facts are closely examined, the Departmental Representative submitted that one could find that what the late assessee had gifted to his relatives is not the money standing to his credit in his NRE account but a share in the property in K.R. Commercial Complex at Mangalore. The assessee had actually gifted shares in the immovable property purchased by him and such gifts were not exempt from the levy of gift-tax, and therefore, the assessee was not entitled to claim exemption provided in section (5)(1)(iib) of the GT Act. The learned Departmental Representative submitted that exemption from the levy of gift-tax would be available only when a person resident outside India makes any gift out of the money standing to his credit in an NRE account in any bank in India. Here in this case, even though the assessee could be considered as a person resident outside India, what he had gifted was not money standing to his credit in his NRE accounts but shares in an immovable property purchased at Mangalore.
10. Shri T.M. Sreedharan, learned counsel for the assessee, argued at length. He pointed out that the assessee could not have gifted any share in the Mangalore property to his relatives in the form of co-owners for the simple reason that the late assessee did not own that property even for a single day prior to the transfer of that property or purchase of that property. The late assessee acquired his share in the said property only along with the other co-owners. He never had a prior right in that property. The late assessee himself and other co-owners acquired ownership rights in the said property simultaneously on the basis of the same instrument of conveyance registered on 4-8-1984. Therefore, when he never owned that property, he could never make a gift of a share in that property to anybody. The late assessee acquired his share in that property for the first time along with other co-owners. The assessee could not make gift of any right in a property that he never owned. Therefore, the contention of the revenue that the late assessee had gifted a right in Mangalore property is against facts and law. The learned counsel further submitted that the assessee had, in fact, gifted only money from his NRE accounts as already stated several times before the lower authorities as also on the basis of the details now filed before the Tribunal.
11. We have considered the matter in detail. As rightly pointed out by the learned Departmental Representative, the status of the late assessee has to be treated as person resident outside India in view of the decision of the Hon'ble Supreme Court in the case of K Ramullan (supra). Therefore, the order of the Commissioner (Appeals) on the question of statue of the late assessee has to be upheld. The ground raised by the revenue on this point fails.
12. Now, the issue to be considered by the Tribunal is the "subject of the gift", i.e., whether the late assessee had gifted money from his NRE accounts or whether he had gifted any share in the property known as K.R. Commercial Complex. On detailed examination of the particulars of the payments made to the vendors of the Mangalore property as evidenced by the sale deed and the details of withdrawals made from the NRE accounts maintained by the late assessee, we find that the payment of a sum of Rs. 15 lakhs made to the vendors of the Mangalore property is out of the NRE accounts maintained by the late assessee. We find that the entire amount of Rs. 15 lakhs covered by the gift-tax return filed by the late assessee was paid by the respective co-owners to the vendors of Mangalore property by cheques or drafts. Those payments have been directly linked to the NRE accounts maintained by the late assessee. It follows that the assessee had gifted that much amount to the respective co-owners from his NRE accounts and in turn those co-owners paid that sum to the vendors of Mangalore property. The only technical objection that could be raised on this point is that those cheques and drafts were directly issued to the vendors of Mangalore property instead of first giving to the co-owners and then the co-owners making the payments to the vendors of the Mangalore property. We find that this is a hyper-technical objection. Each and every payment made to the Mangalore party was traceable directly to the NRE accounts maintained by the late assessee. There is very clear and apparent nexus between the withdrawals of funds from the NRE accounts maintained by the late assessee and the corresponding payments made to the vendors of Mangalore property. We find that there is no basis for raising a hyper-technical objection that the cheques were not first issued in the names of the co-owners but they were actually issued in the names of the vendors of the Mangalore property. At this stage, we should state that even these matters were not clearly verified or examined by the assessing officer. Therefore, we consider this hyper-technical objection as a possibility that could be. When the whole transaction is explained very clearly, there is no need to rely on presumptions. We examined the details of payment of Rs. 15 lakhs to the vendors of Mangalore property made by the assessee's children and son-in-law and covered by his gift-tax return and find that all those payments have the direct source in the form of NRE accounts maintained by the late assessee. Therefore, in the facts and circumstances of the case, we are of the considered opinion that the sum of Rs. 15 lakhs declared by the late assessee as gifts made to the co-owners of the Mangalore property has to be treated as exempted gifts as provided under section 5(1)(iib) of the Gift Tax Act.
13. So also, as right IV argued by the learned counsel for the assessee, the late assessee never had any right in the property known as K.R. Commercial Complex at Mangalore prior to the execution of the sale deed on 4-8-1984. All the co-owners of the said property including the late assessee acquired ownership rights in the said property simultaneously and at the same time on the basis of the sale deed executed on 4-8-1984. The assessee became a co-owner of the said property for the first time along with the other co-owners. Therefore, the argument of the revenue that the assessee had gifted shares in the said property to the co-owners of the property will not stand the test of law. The assessee could not have gifted any property which he did not actually own at the relevant point of time. In view of the above legal position, we have to hold that what the late assessee had gifted to his children was money standing to his credit in his NRE accounts. Therefore, we uphold the order of the Commissioner (Appeals) that the gift of Rs. 15 lakhs made by the late assessee was exempt from the levy of gift-tax.
14. In respect of the balance amount of Rs. 9,30,000, Rs. 5,40,000 was the loan payable to Corporation Bank at Mangalore. That amount could not be considered as gift. The balance leftover is Rs. 3,90,000. The assessee has already stated that though the sum of Rs. 3 lakhs was paid by his wife and son-in-law for acquiring their shares in the Mangalore party, the said sum of Rs. 3 lakhs was paid by the late assessee to his wife and son-in-law by way of loan. The assessing officer treated this amount of Rs. 3 lakhs as gifts. We do not find any basis for the finding of the GTO on this point. The assessee who was the lender as well as the assessee's wife and son-in-law who were the borrowers confirmed that the amounts were paid as loans. The late assessee, his wife and his son-in-law are the parties to decide the exact nature of the transaction entered into between them. They categorically stated before the assessing officer that the sum of Rs. 3 lakhs was availed as loan. When the parties to such a transaction confirmed that the amount was handed over as loan, the assessing officer cannot make any different inference unless he was having any evidence against the proposition made by the parties to the contract or to the transaction. We do not find any such evidence against them. Not only that, the parties who entered into these transactions- are governed by Mohammedan Law. The validity of gifts made by Muslims has to be tested according to the rules of Mohammedan Law and not and not according to the Transfer of Properties Act, 1882 (please see section 129 of the Transfer of Properties Act, 1882). According to the Mohammedan Law, there are three conditions essential for establishing a gift or recognising a gift
(a) Declaration of gift by the donor, either by statement or by conduct M. Rawther Charayil AIR 1972 Ker 27.
(b) Acceptance of the gift expressly or impliedly.
(c) Delivery of possession of the subject of the gift.
In the present case before us, there is a declaration by the late assessee that it was not a gift or else there was no declaration of gift. So also, there was no acceptance of any gift by the borrowers or wife and son-in-law of the late assessee. When there is no declaration or acceptance of the gift, it is not permissible under the law for the Gift Tax Officer to presume that the sum of Rs. 3 lakhs given by the late assessee to his wife and son-in-law could be treated as gift. The balance of Rs. 90,000 comes from the source of bank accounts of the late assessee and there could be no gift as far as that residual amount was concerned.
15. In the circumstances, we find that the Commissioner (Appeals) was justified in setting aside the impugned gift-tax assessment. The gift-tax appeal filed by the revenue is, therefore, liable to be dismissed.
16. We have already mentioned that the impugned wealth-tax and income-tax appeals have been necessitated consequent to the gift-tax assessment considered above. As we have already confirmed the order of the Commissioner (Appeals) as far as the gift-tax matter is concerned, we do not find that there is any necessity to set aside the orders passed by the Commissioner (Appeals) in the respective income-tax and wealth-tax appeals. Moreover, the Commissioner (Appeals) has stated clear reasons for deleting the clubbing of wealth as well as income in the hands of the late assessee. We are in agreement with the reasons given by the Commissioner (Appeals). Therefore, the wealth tax appeals as well as the income-tax appeal by the revenue are also liable to be dismissed.
17. In the result, all the appeals filed by the revenue are dismissed.