Income Tax Appellate Tribunal - Ahmedabad
Bhavana N. Nanavaty vs Gift-Tax Officer on 15 December, 1987
Equivalent citations: [1988]26ITD182(AHD)
ORDER
U.T. Shah, Judicial Member
1. In this appeal, the assessee is contesting the gift-tax levied by the G.T. authorities on the value of certain shares transferred by her to the trust viz. Bhavana Nalinikant Trust. The assessee is an individual. The assessment year is 1980-81 and the relevant previous year ended on 31-3-1980.
2. By a deed of trust dated 19-2-1979, the asseseee had created an irrevocable trust with initial sum of Rs. 1,000. Under the said trust the trustees were required to give the entire income of the trust (after meeting incidental expenses), to the assessee for a period of 30 years from the date of execution of the deed or till the death of the assessee whichever period expired earlier. It was also provided in the said deed as to who shall be the beneficiaries in the event of the death of the assessee. By her letter dated 22-2-1979 addressed to the trustees of the said trust, the assessee informed the trustees that she was making gift of certain shares which were of her individual ownership to the said trust with a request to accept the same. Along with the said letter, the assessee had also sent transfer forms duly completed by her in respect of the said shares. On 1-3-1979 one of the trustees of the said trust vis. Shri Nalinikant Jagabhai received the said shares and issued necessary acknowledgment on the said letter itself.
3. On the aforesaid facts, the assessee filed her gift-tax return on 30-6-1980 showing taxable gift at nil. The GTO, however, framed the assessment on a taxable gift of Rs. 47,744. It may be mentioned that the market value of the shares in question on 22-2-1979 was Rs. 52,744. The GTO allowed statutory exemption of Rs. 5,000 therefrom and worked out the taxable gift of Rs. 47,744. In doing so, the GTO had rejected the assessee's claim for exemption from gift-tax, in the following manner :
The assessee has created a trust for an amount of Rs. 1,000 and has settled the amount with trutees of the trust (Bhavana Nalinikant Trust). Hence the ownership over the corpus of the trust is vested with the trustees and the assessee has no right to possess the corpus and administered it in Ms own way. As a beneficiary he can enjoy the income from the trust but he cannot do any act for investing the corpus. Hence it cannot be said that the donor and donee are the same person as such this is a pure case of gift on which gift-tax is leviable.
4. Before the AAC, the assessee reiterated the submissions which were made before the GTO and urged that since in the instant case, the donor and the donee is the same person, it would not amount to transfer of property to other person. Apart from this oral submission, the assessee had also submitted written arguments, a portion of which has been extracted by the AAC in his order under appeal, which reads as under :
The property settled in the trust by the assessee Bhavana N. Nanavati is her self-owned property and she is the sole beneficiary of the9 trust. There is no transfer of property from one person to the other. In this case the donor and the donee are the same. The trustees are bound to act as per the instructions of the donor i.e. settlor who is a sole beneficiary of the trust. If trustees invest the trust fund, in this case it is the authority given by the beneficiary i.e. settlor, the donor, under that authority the trustees are acting, hence you cannot say that the assessee has no right to possess the corpus merely because a authority given to the trustees to invest the funds.
5. The AAC, however, upheld the action of the GTO, in the following manner :
I have heard the arguments of the appellant's counsel and perused entire material on record, I find that the contentions of the learned counsel for the appellant are not correct. The learned counsel for the appellant pleads that in this case the donor and the donee is the same person. If this situation is taken to be true then the very purpose of creation of trust is defeated and in that case the trust will be treated as invalid. Alternatively, in this case although the donor and the beneficiary are the same person but acting in different capacities, on one hand it is a settlor on the other hand it is beneficiary. Since the donation has been given by the settlor to the trust and not to the beneficiary therefore, the donation will amount to transfer of property to the trust and not to the self. Moreover, the Gift-tax Officer is not concerned with the internal arrangement between the settlor and the trust. What he is to see is whether there is transfer of property from one person to another without any consideration weighing the transaction from this point of view naturally there is transfer of property from one person to another as Smt. Bhavana N. Nanavati has donated the amount on the capacity a settlor to trust which is altogether a different entity. In view of this fact the Gift-tax Officer's action treating the amount of Rs. 52,744 as gift and taxing the same amount under the Gift-tax Act is fully justified and the same is confirmed.
6. Being aggrieved by the order of the AAC, the assessee has come up in appeal with the following grounds :
I. The AAC erred in upholding the order of the Gift-tax Officer taxing Rs. 52,744 as Gift liable to Gift-tax.
II. The AAC ought to have appreciated that the transfer of assets to the Trust where the transferor is the sole beneficiary is sufficient consideration for the transfer.
III. The AAC erred in interpretation of Section 2(xii) inasmuch as he has wrongly interpreted the Trust Deed and holding that the Gift-tax Officer is not concerned with the provisions in the Trust Deed.
IV. The AAC failed to appreciate that the transfer to trustees is for the benefit of the transferor who is the sole beneficiary.
The learned counsel for the assessee reiterated the submissions which were made before the GT authorities and strongly argued that since the donor and the beneficiary were one and the same person, no gift-tax could be charged on the transfer of shares in question. In this connection, he heavily relied on the decision of the Hon'ble Gujarat High Court in the case of CWT v. Kum. Manna G. Sarabhai [1972] 86 ITR 153, which was rendered in a reference taken up by the revenue under the Wealth-tax Act, 1957. Inviting our attention to the following observations appearing at page 175 of the said report:
This construction of the expression 'belonging to' was accepted by a Division Bench of this Court in CWT v. Harshad Rambhai Patel [1964] 54 ITR 740, 748 which was a case under the Wealth-tax Act, 1957. There the Division Bench pointed out, after referring to the aforesaid passage from the speech of Lord Macnaghten in Heritable Reversionary Co. Ltd. v. Millar [1892] AC 598 (HL) and the decision of the Court of Appeal in In re Miller [1893] 1 QB 327 where the same view was taken as to the meaning of the expression 'belonging to' in the context of bankruptcy law : 'These were cases arising under the Bankruptcy Acts, but the construction of the words 'belonging to' would apply equally to the same words used in Section 4 and in the definition clause, Clause 2(c), in the present Act', that is, the Wealth- tax Act, 1957. It is, therefore, clear that assets held by the trustees in trust for others cannot be said to be assets 'belonging to' the trustees so as to be includible in his net wealth. The assets so held 'are not the trustee's property in any real sense' : they are the property of the beneficiaries and, to use the words of Lord Macnaghten, the beneficiaries are the true owners all along. The trustees of a trust cannot, therefore, be assessed to wealth-tax in respect of the trust properties. The trust properties 'belong to' the beneficiaries and it is the beneficiaries who are assessable to wealth-tax in respect of the interest in the trust properties belonging to them.
The learned counsel for the assessee strongly argued that since the shares in question belong to the assessee both prior and subsequent to the transfer to the trust, the GT authorities were not justified in holding that Rs, 52,744 was exigible to gift-tax. Even assuming for the sake of arguments that the transaction involved in the present case was a transfer within the meaning of Section 2(xxiv) of the Act, the learned counsel for the assessee went on to argue that since the said transfer was for consideration inasmuch as the trustees were required to hand over the entire income to the assessee, it would not fall within the meaning of 'Gift' as defined in Section 2(xii) of the Act. He also submitted that since the assessee herself was the beneficiary of the said trust, she cannot be treated as 'donee' as defined in Section 2(viii) of the Act. The learned counsel for the assessee also gave a background of introduction of Wealth-tax and Gift-tax Acts with a view to impress upon us that in India, we have adopted an integrated scheme of Direct Taxes. Relying on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Rasiklal Balabhai [1979] 119 ITR 303, the learned counsel for the assessee submitted that in a situation like the one, with which we are facing, we must decide the point at issue 'on the plain of common sense' instead of going into long drawn legal debate as to whether the assessee could be charged to gift-tax when she, as a donor had transferred certain shares to her as a beneficiary. Thereafter, the learned counsel for the assessee had also referred to Sections 50, 55, 56, 58 and 69 of the Indian Trusts Act, 1882, which contain 'Trustee may not charge for services', 'Rights to rents and profits', 'Right to specific execution', 'Right to transfer beneficial interest' and 'Rights and liabilities of beneficiary's transferee'. Finally, the learned counsel for the assessee invited our attention to the following commentary at page 52 on Gift-tax by Ramchandran (Second Edition) :
Gifts by way of creation of trust. A gift could be made by transferring the legal title to the property to the trustee to hold it in trust for the benefit of persons whom the donor intends to benefit, and such creation of a trust in property will be subject to the charge of gift-tax by the combined effect of Sections 3, 4 and 2(xxiv)(a). Where a person transfers property to a trustee to hold it for the benefit of the transferor himself, there is a change in the title to or ownership of the property, but it cannot be said that the enjoyment of the property has in any way been affected. Although the property might have been transferred to another, the beneficial enjoyment of the property remains the same. Where a person declares a trust as regards property which he himself holds and appoints himself the trustee and declares that he holds the property for the benefit of third persons, there is only a constructive transfer of property. Though a person transfers property to another person as a trustee, if the beneficial enjoyment is retained in the transferor, there is no gift or transfer of property which could be subject to charge under this Act, and similarly, even though a transferor retains the property himself in second instance, as the beneficial enjoyment of the property has shifted, such a declaration of trust, even if it does not result in the changing hands of legal ownership, is subject to the charge of gift-tax. For the purposes of tax, what is material is the beneficial enjoy ment of property and not the mere transfer of legal ownership. 'Taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed-the actual benefit for which the tax is paid'. Burnett v. Guggenheim (288 US 280). Jenkins L. J. said of the imposition of estate duty in Rose, In re. [1952] Ch 499 at 519 : 'After all, while duty is concerned, the only relevant type of ownership is beneficial ownership and the situation of the legal estate does not affect the question'.
In this view of the matter, he strongly urged that the assessment framed by the GTO Under Section. 15(3) of the Act, should be quashed inasmuch as there was no gift involved in the aforesaid transaction.
7. The learned representative for the department, on the other hand, strongly supported the action of the GT authorities. According to him, since the assessee and the trustees of Bhavana Nalinikant Trust are two separate and distinct entities and since the assessee had gifted the shares in question to the trustees, the GT authorities were fully justified in holding that Rs. 52,744 was exigible to tax. In support of his submission, he relied on the decision of the Hon'ble Gujarat High Court (Full Bench) in the case of CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652. He also submitted that since the shares in question which were originally held by the assessee are now transferred in the name of the trustees in the share registers of the companies whose shares were transferred by the assessee to the trustees, the trustees were the legal owner of the shares in question and not the sole beneficiary as contended on behalf of the assessee. Inviting our attention to the trust deed, he also pointed out that in the event of the death of the assessee, her brother, sister, mother etc. were entitled to receive not only the trust income but also corpus which clearly shows that the assessee was not the sole beneficiary to whom she had transferred the shares in question. As for the expression 'belonging to', the learned representative for the department invited our attention to a recent decision of the Hon'ble Supreme Court in the case of Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888. He further submitted that since the trustees were bound to administer the trust as per the terms and conditions contained in the trust deed, there was no question of contending that since shares in question were transferred for consideration, no gift was involved. He further submitted that in order to etermine the value of shares in question, we have to imagine a hypothetical transaction in which a willing buyer would be ready to pay to the willing seller of the shares in question. According to him, the various sections of the Trust Act pointed out on behalf of the assessee would not in any way support her case that Rs. 52,744 were not exigible to tax. He, therefore, urged that we should uphold the order of the AAO under appeal.
8. We have carefully considered the rival submissions of the parties and the material already available on record and we do not find any infirmity in the action of the GT authorities in taxing Rs. 52,744 under the Act. At this stage, it would be necessary to refer to certain relevant portions of the deed of trust dated 19-2-1979 :
THIS INDENTURE made this 19th day of February one thousand nine hundred and seventy nine between Bhavana daughter of Nalinikant Jagabhai Nanavaty and wife of Bharat Arunchandra Surti aged about 21 years of Ahmedabad Hindu Inhabitant (hereinafter called 'the Settlor') (which term so far as the context will admit will include his/her heirs, executors and administrators) of the one part and -
(1) Shri Nalinikant Jagabhai Nanavaty aged about 55 years, (2) Smt. Pramila Nalinikantbhai Nanavaty aged about 45 years, (3) Shri Kanakbhai S. Hutheesing aged about 48 years, (4) Shri Nitin Jagabhai Nanavaty aged about 41 years, (5) Smt. Maya Nitin Nanavaty aged about 34 years, all of Ahmedabad Hindu Inhabitants (hereinafter called 'the Trustees') which term so far as the context will admit will include the survivors or survivor of them and the Trustee or Trustees for the time b3ing of these presents and the heirs, executors and administrators of the last survivor of them and their, his or her assigns) of the other part:
WHEREAS the Settlor is seized and possessed of or otherwise well and sufficiently entitled to a cash sum of Rs. 1,000 (Rupees one thousand only) ;
AND WHEREAS the Settlor is desirous of settling the said amount for Settlor's own benefit on Settlor's death for Settlor's children, Settlor's brother, Settlor's sister and their children and Settlor's mother in the manner hereafter appearing ;
AND WHEREAS at the request of the Settlor the Trustees have agreed to act as the First Trustee of these presents as is testified to by their joining in and executing these presents ;
AND WHEREAS the Settlor has prior to the execution of these presents handed over to the Trustees the said amount;
NOW THESE INDENTURE WITNESSETH AS FOLLOWS :
1. In consideration of the premises and in order to effectuate the said desire of the Settlor and for diverse other causes and considerations hereunto moving the Settlor DOTH HEREBY ASSIGN unto the Trustees the said amount and the investments for the time being and from time to time representing the same and all other property and assets for the time being subject to the trusts of these presents upon the trusts and subject to the powers and provisions hereinafter declared and contained of and concerning the same ;
2. The Trustees shall stand possessed of and hold the same amount, shares and investments for the time being and from time to time representing the same and such further property and assets or additions to corpus or voluntary contributions received or accepted or acquired by the Trustees from time to time (all of which are hereafter referred to as 'the Trust Fund') upon the following trusts ;
(a) ...
(b) The trustees shall give the entire income for a period of thirty years to the Settlor from the date of execution of these presents or till the death of Settlor whichever period expires earlier.
(c) On the date of distribution to hold the Trust Fund and the investments for the time being representing the Trust Fund upon trust for the Settlor and if the Settlor is not alive for children of the Settlor as may then be living in equal shares.
The date of distribution shall arrive at the end of the period of 30 years and in case the Settlor of the trust expires earlier than the said period of 30 years, the period of distribution shall arrive on the date of the death of the Settlor.
(d) On the date of distribution none of the beneficiary mentioned in Clause (c) above are living to hold the Trust Fund and the investments for the time being representing the Trust Fund upon trust for brother of the Settlor Hemal Nalinikant, sister of the Settlor, Bhargavi Nalinikant and mother of the Settlor Pramilaben Nalinikant in equal shares.
(e) On the date of distribution if none of the beneficiaries mentioned in Clause (d) above are living to hold the Trust Fund and the investments for the time being representing the Trust Fund upon Trust for the children of brother of the Settlor Hemal Nalinikant and children of the sister of the Settlor Bhargavi Nalinikant per stripes.
3...
4. The Trustees shall at any time before the date of distribution be entitled to accelerate the date of distribution of the Trust Fund or any part thereof and in the event of the Trustees deciding to do so, the Trusts referred to in Sub-clause (b) as the case may be shall forthwith cease and the Trusts contained in Sub-clauses (c), (d) or (e) as the case may be shall become operative to the extent of the Trust Fund or any part thereof to which the decision of the Trustees applies.
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10. The Trustees are empowered to accept from any person or persons gifts or any movable or immovable properties and the Trustees shall upon receipt thereof hold the same trusts and subject to the same powers and provisions as are herein contained.
9. On the plain reading of Clause (4) of the aforesaid deed, it is quite apparent that the trustees have been empowered to accelerate the date of distribution of the Trust Fund or any part thereof. In such event, Sub-clause (6) of Clause (2) shall cease to operate and Sub-clauses (c), (d) and (e) of the said Clause shall become operative. This would clearly show that the trustees of the trust have a power to eliminate the assessee altogether as a beneficiary 'at any time before the date of distribution'. In this view of the matter, we fail to appreciate how the doctrine of self to self could be invoked. It cannot be disputed that the assessee and the trust are two distinct and different persons. Further, it cannot be disputed that the assessee had transferred the shares in question to the trust and not to self. Therefore, in our view, the aforesaid transaction would fall within the provisions of the Act, inasmuch as the definitions of 'donee', 'donor', 'gift', 'transfer', 'property' contained in Section 2 of the Act, are fully complied with. As indicated earlier, in the instant case, the assessee is not the only beneficiary under the trust, as under certain contingencies including the power given to the trustees under Clause (4), the assessee can be eliminated as the beneficiary and in her place her brother, sister, mother etc. would be the beneficiaries. In this view, of the matter, the trustees of the Trust in question would qualify as 'donee' as defined in Section 2(viii) of the Act. Further, the shares transferred by the assessee to the trust in question were without consideration inasmuch as the terms and conditions contained in the deed of trust would be automatically applicable to any property transferred to the trust. We have carefully gone through the decision in the case of Kum. Manna G. Sarabhai (supra) and are of the view that the assessee cannot get any support therefrom as in that case, the Hon'ble High Court was considering certain provisions of the Wealth-tax Act, 1957 vis-a-vis the facts and circumstances obtaining in that case. Since the provisions of the Act, with which we are concerned in the present appeal have no bearing to the provisions considered in that case, certain observations made by the Hon'ble High Court have to be read in the context in which they expressed their opinion. We have also gone through certain sections of the Indian Trust Act referred to by the learned counsel for the assessee and are of the view that none of them could further the case of the assessee in the manner the learned counsel for the assessee urged before us.
10. In view of the aforesaid discussion, we are of the opinion that the GT authorities were fully justified in taxing Rs. 52,744 under the Act.
11. In the result, the appeal is dismissed.