Income Tax Appellate Tribunal - Ahmedabad
Shrenik Kasturbhai (Huf) vs Gift-Tax Officer on 21 August, 1986
Equivalent citations: [1986]19ITD252(AHD)
ORDER
U.T. Shah, Judicial Member
1. The grounds taken up in this appeal read as under :
1. (a) The learned Commissioner of Gift-tax (Appeals) erred in confirming the value of taxable gift adopted by the Gift-tax Officer.
2. (a) The learned Commissioner of Gift-tax (Appeals) erred in adopting the discounting rate of 4 per cent per annum instead of 15 per cent per annum for the purpose of finding out the capitalised value of the income under Sub-section (2) of Section 6 of the Gift-tax Act, 1958 read with Rule 11 of the Gift-tax rules, 1958.
(b) The learned Commissioner of Gift-tax (Appeals) failed to appreciate that Rule 1.1 which prescribes the rate of discount at 4 per cent was enacted when prevalent rate of interest under Direct Tax Laws were as low as 4 per cent and that present rate of interest under Income-tax Act is 12 per cent up to 30-9-1984 and 15 per cent with effect from 1-10-1984.
2. The assessee is a HUF. The assessment year is 1983-84 and the relevant previous year is Samvat year 2038.
3. Under an indenture dated 18-3-1982, Shri Shrenik Kasturbhai, as the karta of the assessee, settled in a trust Rs. 500 for the benefit of Master Punit Sanjay Lalbhai. The said trust was not revocable for a period of 73 months. During the relevant previous year, the assessee had, inter alia, gifted the following shares of public limited companies to the said trust:
Name of the company No. of shares (1) Arvind Mills 48 (2) Atul Products 663 (3) Raipur Mfg. Co. 1509 (4) Anil Starch Products 38
4. On the aforesaid facts, the assessee filed its gift-tax return declaring the value of gift at Rs. 1,15,084 in respect of the aforesaid shares. During the course of the assessment proceedings, vide its letter dated 15-12-1984, the assessee supported the value of gifted shares estimated by it at Rs. 1,15,084, in the following manner :
This has reference to today's hearing of the above case.
We furnish herewith copy of the trust deed of Shrenik Kasturbhai Revocable Trust, a revocable trust created by the assessee. Section 6(2) of the Gift-tax Act, 1958 provides for valuation of such gifts. The gift is not revocable for a period of not less than 72 months. Therefore, as per Rule 11 for the purposes of levy of gift-tax, the capitalised value of income has to be worked out as per said rule. However, the rate for discounting adopted by us is 15 per cent as against the rate of 4 per cent prescribed under Rule 11(1) of the Rules. It is submitted that the rate of discounting prescribed under Rule 11 at 4 per cent is unreal and has no connection with the commercial rate of return after taking into account various other factors. In our opinion, the just, reasonable and appropriate rate of capitalisation would be 15 per cent because, at present, the prime money rates for advances by the banks are between 16 per cent to 18 per cent. The rule which prescribes the rate of capitalisation at 4 per cent ignoring the reality, is not supported on the basis of income-earning capacities of the fund. Therefore, we request you to please accept the rate of discount at 15 per cent adopted by us while determining the capitalised value.
Our above submissions are supported by rule IBB of the Wealth-tax Rules which prescribes the capitalisation rate at 12 per cent in respect of immovable properties. For valuation of the life interest under the Wealth-tax Rules, rate of interest prescribed is 6.5 per cent. The rates adopted for capitalisation under gift-tax and for determining the life interest under wealth-tax were enacted many years earlier when the lending rate was 12 per cent per annum. Rule 1BB which was enacted subsequently when the lending rate was high prescribes the rate of capitalisation at 12 per cent. According to us, the rate of capitalisation shall be 3 per cent less than the primary lending rate of interest which is as high as 18 per cent.
Without prejudice to our above submission, the capitalised value on the basis of discounting rate of 4 per cent works out to Rs. 2,10,383.
We request you to please accept the capitalised value on the basis of discounting rate of 15 per cent and oblige.
5. In his order dated 27-1-1984, the GTO did not accept the assessee's stand and valued the gifted shares at Rs. 2,10,383, with the following observations :
3. The assessee's contentions cannot be accepted in view of the mandatory provisions of Rule 11 of the Gift-tax Rules. Moreover, for considering the reasonableness of the prescribed rate of interest, interest rates of Government loans and securities and the return on shares of companies (known as blue chips) which are very low, have also to be kept in mind.
4. The assessee has declared the value of gifted shares at the rate of 15 per cent at Rs. 1,15,084. As per the rate of 4 per cent prescribed by Rule 11 of the Gift-tax Rules, the value of gifted shares works out to Rs. 2,10,383.
6. Being aggrieved by the order of the GTO, the assessee went up in appeal before the Commissioner (Appeals) with the following grounds :
1. (a) The Gift-tax Officer erred in adopting the discounting rate of 4 per cent per annum instead of rate of 15 per cent for the purpose of finding out the capitalised value of the income under Sub-section (2) of Section 6 of the Gift-tax Act, 1958 read with Rule 11 of the Gift-tax Rules, 1958.
(b) The Gift-tax Officer failed to appreciate that the rule which prescribes the rate of capitalisation at 4 per cent was enacted when the bank rate was as low as 4 per cent and that Rule 1BB of the Wealth-tax Rules, 1957 which became operative from 1-4-1979 recognises the captalisation rate as high as 12 per cent.
It was urged on behalf of the assessee that Rule 11 of the Gift-tax Rules, 1958 ('the Rules') was enabling one and not mandatory and, therefore, the rate of discounting at 4 per cent mentioned in the said rule need not be adhered to as 'it is out of tune with the present rate of interest'. In this connection, the Commissioner (Appeal s)'s attention was drawn to the rate of interest of 12 per cent and 15 per cent mentioned in the Income-tax Act, 1961 ('the 1961 Act') for the purpose of advance tax. According to the assessee, the income should be capitalised as per Rule 11, read with Section 6(2) of the Gift-tax Act, 1958 ('the Act'). But the rate for the purpose of discounting should be adopted at the rate of 12 per cent instead of 4 per cent mentioned in the said rule. Reliance was placed on the decision in the case of Smt. Kusumben D. Mahadevia v. N.C. Upadhya [1980] 124 ITR 799 (Bom.) and CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC). Adverting to Section 6(3) it was submitted that since the right to receive the income under a revocable trust for a specific period can be sold in the open market, its value can be estimated depending on the prevailing rate and, therefore, one need not go to the rule prescribed under the Act.
7. The Commissioner (Appeals), however, upheld the action of the GTO, as under :
6. I do not agree with the contentions of the learned representative of the appellant. As stated by the Gift-tax Officer, the assessee has made gift to a revocable trust. This gift is, however, not revocable for 6 years. According to Section 6(2) of the Gift-tax Act, 1958, where a person makes a gift which is not revocable for a specified period the value of the property gifted is to be taken as a capitalised value of the income from the property gifted during the period for which the gift is not revocable. Rule 11 of the Gift-tax Rules, 1958 prescribes method of fixation of capitalised value. According to Rule 11(1) in case of property referred to in Sub-section (2) of Section 6 of the Gift-tax Act, the capitalised value of the income is to be taken to the product of the number of complete years included in the period for which the gift is not revocable and the average of the income received from the property during the 3 years or such lesser period of complete years in which such property was in existence, preceding the previous year for the year of assessment after discounting it at the rate of 4 per cent per annum. In this particular case, the gift is not revocable for a period of 6 years. It does not mean that immediately on the expiry of the period of 6 years, the gift will be revoked. In fact it may or it may never be revoked even after the period of 6 years. Taking into consideration this fact I am of the opinion that the rate of capitalisation of 4 per cent must have been fixed by the rule-framing authorities. Therefore, I am of the opinion that the Gift-tax Officer was correct in adopting the discounting rate of 4 per cent per annum instead of the rate of 15 per cent as desired by the learned representative of the appellant. In any case, the Gift-tax Rules prescribe the rate of discounting at 4 per cent per annum for the purpose of arriving at the capitalised value of the income from the property gifted for the purpose of valuing the gift according to Gift-tax Rules, 1958. The valuation made by the Gift-tax Officer of the gifted shares is, therefore, upheld and the appeal is dismissed.
8. Being aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal before the Tribunal. Apart from reiterating the submissions which were made before the gift-tax authorities, the learned counsel for the assessee invited the attention of the Tribunal to Section 6, which reads as under :
(1) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of Sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift-tax Officer it would fetch if sold in the open market on the date on which the gift was made.
(2) 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 the property gifted during the period for which the gift is not revocable.
(3) Where the value of any property cannot be estimated under Sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner.
and submitted that since there is no reference to the 'prescribed manner' in Sub-section (2), there is no need to go to Rule 11. In this connection, he submitted that since under Sub-section (2), the method of valuing the property gifted is stipulated, viz., 'capitalised value of the income from the property gifted during the period from which the gift is not revocable', we have to value such property as per the recognized principles of valuation. According to the learned counsel for the assessee if under Sub-section (2), the value was to be done according to the prescribed manner, the Parliament would have spelt so as is done in Sub-section (3). He also invited the attention of the Tribunal to Section 7 of the Wealth-tax Act, 1957 with a view to stress his point that whenever the Parliament want to bring the provisions of the rule into play, it invariably and specifically mentions so in the statute. According to the learned counsel for the assessee, the role of the rule is to further the cause of the statute and not to limit its ambit or scope. Therefore, if there is a conflict between the rule and the section, the former has to give way to the latter. He was very emphatic that Rule 11 is redundant in view of the clear provisions contained in Sub-section (2). In fact, according to the learned counsel for the assessee, Rule 11 is 'intruder', 'trespasser', 'uninvited' inasmuch as it amends the provisions of Sub-section (2).
9. Even assuming for the sake of argument that one has to harmonise the provisions of Sub-section (2) and Rule 11, the learned counsel for the assessee went on to argue that in the instant case, one need not go to the rule with a view to finding out the value of the shares gifted by the assessee. In support of his submissions, the learned counsel for the assessee referred to the decisions in the cases of CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387 (J. & K.), Second ITO v. M.C.T. Trust [1976] 102 ITR 138 (Mad.) and CIT v. Shree Padmanabhaswami Temple Trust [1979] 120 ITR 42 (Ker.).
10. The learned counsel for the assessee further stated that Rule 11 was introduced by Notification No. GSR 491, dated 16-3-1963. Since at that time the rate of interest prevalent was 4 per cent discounting rate of 4 per cent per annum was quite in order. However, in 1982, the rate of interest of advance tax under the 1961 Act, was raised from 4 per cent to 12 per cent and in 1984, it was further raised to 15 per cent. Similarly, the bank rate which was 4 per cent in 1963 was raised to 10 per cent in 1982 and further raised to 11 per cent in 1984. However, in the said rule, the discounting rate remained at 4 per cent per annum all through even till today. He, therefore, urged that keeping in mind this position under the 1961 Act, and the bank rate, the assessee's contention of discounting rate between 12 per cent to 15 per cent per annum should have been accepted by the gift-tax authorities. Relying on the decision in the case of CIT v. Smt. Vimlaben Bhagwandas Patel [1979] 118 ITR 134 (Guj.), it was urged that in capitalising the income of a revocable trust, the rate of discounting should be the commercial rate of return ruling in the market, say between 15 per cent to 20 per cent per annum. He, therefore, urged that the GTO should be directed to accept the value of the shares gifted by the assessee at Rs. 1,15,084 as declared in its return.
11. The learned representative for the department, on the other hand, strongly supported the orders of the gift-tax authorities. In this connection, he stated that the provisions of Section 6 as well as Rule 11 have to be read along with the provisions of Section 46(1) and 46(2)(a) of the Act. Inviting the attention of the Tribunal to Section 46(2)(a) he stressed the point that under the said section, the Board is empowered to make rules for 'the manner in which the market value of any asset may be determined'. He, therefore, submitted that in order to value the shares gifted, one cannot ignore the provisions of Rule 11, as Sub-rule (1) clearly states that 'property referred to in Sub-section (2) of Section 6 of the Act'. He, therefore, urged that the learned counsel for the assessee was not correct in stating that the provisions of the said rule are redundant. Further, he submitted that once it is accepted that the provisions of the rule are attracted in the instant case, it would not be possible to substitute the rate of discounting at 15 per cent per annum in place of 4 per cent per annum mentioned in the said rule for any body except the rule-making authority with the sanction of the Parliament. He, however, was fair enough to state that the rate of interest both under the 1961 Act, for the purpose of advance tax and the bank rate have been increased from time to time. But that fact, by itself, would not entitle the assessee to urge that rate of discounting mentioned in the said rule should be varied. On the contrary, according to the learned representative for the department, this aspect supports the stand of the revenue inasmuch as the rule-making authority with the sanction of the Parliament, has not deemed it fit to raise the rate of discounting under the 1958 Act even though the rates were increased under the 1961 Act, and there was increase in the bank rate also. According to him, we should presume that the Parliament was aware of the different rates mentioned in different direct taxes statutes and in fact, the Parliament wanted so. He also pointed out that whenever an assessee gets benefit under the prescribed rules, he urges that the rules are of mandatory nature. As for example in case of Rule 1BB of the Wealth-tax Rules, 1957. However, when the provisions of the rules are adversely affecting him, he invariably urges that rules are of directory in nature and not mandatory. This attitude of blowing hot and cold has to be avoided in construing the provisions of a statute and the rules made thereunder. He, therefore, urged that on the harmonious construction of the provisions of Section 6, read with Rule 11, the only conclusion one can arrive at is that while valuing the shares in question, the rate of discounting of 4 per cent as prescribed under the rule is the only rate which can be applied. In this view of the matter, he contended that we should uphold the action of the gift-tax authorities.
12. The learned counsel for the assessee, in his reply, replying on the decision of the Hon'ble Supreme Court in the case of CIT v. G.H. Gotla [1985] 156 ITR 323, submitted that if a strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then that construction should be preferred to the strict literal construction. He, further submitted that where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational result. According to him, since the strict interpretation of the provisions of Section 6, read with Rule 11 would hit the taxpayers, like the assessee in the instant case, which was never intended by the Parliament, we can substitute the rate of discounting to a higher percentage than that mentioned in the said rule.
13. We have carefully considered the rival submissions of the parties and we can appreciate the hardship of the assessee. However, it is a trite law that where the provisions of a statute are clear and unambiguous, there is no scope for importing into the statute words which are not there, for such importation would amount to amending the statute and not construing it. Even if there be a casus omissus the defect can be remedied only by the Parliament and not by judicial interpretation. Further, once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind -Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC). In the instant case, we have to apply the provisions of Section 6(2) read with Rule 11. The facts mentioned above are not in dispute. It would appear from the stand taken by the assessee, right from the assessment stage, that it is not in dispute that the provisions of Section 6(2) are clearly attracted in its case. Again, it cannot be disputed that one cannot totally ignore the provisions of Rule 11 even though the learned counsel for the assessee, in the course of his argument, has stated that the provisions of the said rule are redundant. We make this observation as the learned representative for the department had very forcefully contended that in order to decide the point at issue in view of the provisions of Section 46(1) and 46(2)(a), we have to harmonise the provisions of Section 6(2) with that of Rule 11 even though the expression 'in the prescribed manner' is not mentioned in Sub-section (2) of Section 6.
14. At this stage, it would be necessary to advert to Section 46 and Rule 11. The relevant portion of Section 46 reads as under :
(1) The Board may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for-
(a) the manner in which the value of any property may be determined ;
(4) The Central Government shall cause every rule made under this Act to be laid as soon as may be after it is made before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two (or more) successive sessions, and if, before the expiry of the session (immediately following the session or the successive sessions aforesaid) both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be, so however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.
The relevant portion of Rule 11 is reproduced below :
(1) In the case of property referred to in Sub-section (2) of Section 6 of the Act, the capitalised value of the income shall be taken to be the product of the number of complete years included in the period for which the gift is not revocable and the average of the income received from the property during the three years or such lesser period of complete years in which such property was in existence, preceding the previous year for the year of assessment after discounting it at a rate of 4 per cent per annum :
[Emphasis supplied]
15. Section 6 has already been reproduced in paragraph 8 above. On the plain reading of Sub-section (2) of Section 6 and Rule 11, it would be seen that both of them talk of valuing the property gifted which is not revocable for a specific period. Again, both of them talk of 'the capitalised value of the income'. Therefore, it is not possible for us to accept the submissions made on behalf of the assessee that the provisions of the said rule are redundant for that they should be ignored. In order to carry out the purposes of the Act, under Section 46 the Board has been given power to make rules. Thus, the purpose of Rule 11 is to make the position more certain and clear so that unnecessary litigation regarding valuing the property referred to in Sub-section (2) of Section 6 could be avoided. In this view of the matter, we do not find any conflict between the provisions of Sub-section (2) of Section 6 and Rule 11,
16. In fact, right from the assessment stage the only grievance of the asses-see is that the rate of discounting of 4 per cent mentioned in Rule 11 should not be adhered to. In other words, what the assessee is urging in this appeal is that the rate of discounting mentioned in Rule 11 should be suitably substituted by a higher rate. We are unable to accept the stand taken by the assessee inasmuch as it is only for the rule-making authority, with the sanction of the Parliament, that such substitution could be made in the said rule. In fact, on the proper appreciation of the assessee's case, it gives us an impression that the assessee has a grievance of such a magnitude which could only be cured by appropriate amendment in the said rule by an authority other than an appellate authority like the Tribunal.
17. We have carefully gone through various reported decisions cited on behalf of the assessee. However, in our view, none of the decisions could be pressed into service in order to decide the point at issue. Therefore, we do not deem it fit to discuss any of these decisions in this order.
18. For the aforesaid reasons, we do not find any infirmity in the action of the gift-tax authorities. In this view of the matter, we have no hesitation in upholding the order of the Commissioner (Appeals).
19. Before we part with this order, we would like to mention that both the learned counsel for the assessee as well as the learned representative for the department have placed their respective stands very forcefully. In fact, the learned representative for the department has very ably supported the action of the gift-tax authorities by highlighting the relevant provisions of the Act and the rules made thereunder.
20. In the result, the appeal is dismissed.