- Bookmark
- Share
- CaseIQ
Bhupathiraju Narasimharaju v. Commissioner Of Gift-Tax, Andhra Pradesh.
Structured Summary of the Opinion (Gift-tax Act Section 26(1) Reference)
Factual and Procedural Background
The assessee, Sri Bhupatiraju Venkata Narasimharaju, executed three settlement deeds (dated 20 May 1957, 11 October 1957 and 26 January 1959) by which he purportedly transferred immovable properties to his minor children (three unmarried daughters under the first deed, three sons under the second deed, and a fourth unmarried daughter under the third deed). Possession was recited as delivered on the dates of execution. The Gift-tax Officer made assessment orders: the first two deeds were assessed in an order dated 15 March 1960 for assessment year 1958-59, and the third deed was assessed in an order dated 26 April 1960 for assessment year 1959-60.
In the assessments the Gift-tax Officer treated the first settlement as a taxable gift in full. As to the second settlement (in favour of the sons), the Officer found part self-acquired and part family property and valued the taxable portion accordingly. As to the third settlement, the Officer rejected the assessee's contentions (that the gift was limited to his one-fourth share and/or that it was for the minor daughter's maintenance and education and therefore not taxable) and valued the entire property as a taxable gift.
The assessee appealed to the Appellate Assistant Commissioner of Gift-tax. The Appellate Assistant Commissioner held that the assessee was the karta of a Hindu undivided family (HUF), that the properties were family properties and that the transactions amounted to family arrangements (partial partition for the sons; gifts that could materialise only at partition or the daughters' marriages for the daughters), and accordingly allowed the appeals (finding no taxable gift).
The Gift-tax Officer appealed to the Appellate Tribunal, which held that the Gift-tax Act does not require enquiry into the validity of a gift under personal law and that a completed gift falls within the Act unless specifically exempted. The Tribunal set aside the Appellate Assistant Commissioner's orders, remanded the cases for fresh disposal on merits and referred questions of law under section 26(1) of the Gift-tax Act to the court (the referred questions asked whether the settlements were gifts liable to tax under the Act).
The court observed that the Appellate Tribunal had not gone into certain factual matters necessary to determine the legal effect (for example, whether the assessee acted only as karta and the extent of family property and the portion he could validly gift), and that the record before the court did not include the assessee's section 26(1) applications. Because of the absence of necessary facts, the court analysed the questions in two limbs: (1) whether the transactions are “gifts” within the meaning of the Act irrespective of their legal effect; and (2) whether the assessee is liable to be taxed under the Act in respect of those transactions irrespective of their legal effect.
Legal Issues Presented
- Whether the settlements in question made by the assessee are gifts liable to tax under the Gift-tax Act (as referred by the Appellate Tribunal).
- Whether the settlements (generally) are gifts within the meaning of the Act irrespective of their legal effect (i.e., whether they fall within the Act's definitions regardless of validity under personal law).
- Whether the assessee is liable to be taxed under the Act in respect of the said transactions irrespective of their legal effect (i.e., whether liability can be imposed without determining the legal effect of the transfers).
Arguments of the Parties
Assessee's Arguments
- With respect to the second settlement (in favour of the sons), the assessee contended that the lands were ancestral family property and that the sons were entitled to shares — implying the gift, if any, could be only his one-fourth share.
- With respect to the third settlement (in favour of the fourth unmarried daughter), it was contended that each of the three sons were entitled to shares and had not joined in executing the deed, so the gift was only of the assessee's one-fourth share.
- The assessee also contended that the gift to the daughter was for her maintenance and education and therefore not liable to tax.
- The learned counsel for the assessee relied on Basaviah Gowder v. Commissioner of Gift-tax, which had expressed the view that a gift void under personal law is not a gift within the meaning of the Act.
Revenue / Gift-tax Officer's Arguments
- The Gift-tax Officer challenged the view that the deeds were family arrangements or family settlements and appealed the Appellate Assistant Commissioner's decisions to the Appellate Tribunal.
- The Tribunal (on appeal by the Officer) argued — and the Officer's position included — that the Gift-tax Act does not contemplate an enquiry into the validity of a gift under personal law; if a transaction is complete as a gift, it is taxable under the Act.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Guramma v. Mallappa | Principles concerning a father's power to make gifts and the reasonable portion of family property he may validly gift. | The court observed that necessary facts were missing to apply the principles in Guramma v. Mallappa (for example, whether the assessee acted only as karta and the extent of family property). The case was cited to show factual inquiries required to determine legal effect. |
| Commissioner of Income-tax v. Scindia Steam Navigation Ltd. | Explanation of the scope of provisions (analogy drawn between section 26 of the Gift-tax Act and section 66 of the Income-tax Act). | The court treated Scindia as explanatory of the scope of analogous statutory provisions and used that analogy in considering the scope of section 26 of the Gift-tax Act. |
| Commissioner of Gift-tax v. Satyanarayanamurthy | Construction of clauses (xii) and (xxiv) of section 2 of the Gift-tax Act: definition of "gift" and "transfer of property" is wider than under the Transfer of Property Act; acceptance by the donee not required; mode of transfer not determinative. | The court relied on this authority to conclude that the Act's definition of "gift" and "transfer of property" is broad, and that where a person voluntarily diverts value to another without consideration, it is a "gift" within the Act even if not acceptable under general transfer rules. |
| Basaviah Gowder v. Commissioner of Gift-tax | Expressed the view that a gift void under the donor's personal law is not a gift within the meaning of the Act. | The court explicitly declined to follow this view: it stated that such a construction is not warranted by the language of the Gift-tax Act and therefore did not accept Basaviah Gowder's proposition. |
| Minister of Finance v. Smith (Viscount Haldane) | Principle relating to statutory construction (in Income Tax Acts): that interpretation focuses on the words used. | The court invoked Viscount Haldane's observation to support a textual approach to the Gift-tax Act, emphasizing that the Act's language governs whether a transaction falls within its definitions. |
Court's Reasoning and Analysis
The court proceeded in two primary analytical steps because the record lacked certain factual materials necessary to determine the full legal effect of the settlement deeds.
-
Analysis of whether the transactions are "gifts" within the meaning of the Act (first limb):
- The court examined the statutory definitions in section 2 of the Gift-tax Act, particularly clause (xii) (definition of "gift") and clause (xxiv) (definition of "transfer of property").
- Relying on the construction in Commissioner of Gift-tax v. Satyanarayanamurthy, the court noted that these definitions are wider than corresponding concepts in the Transfer of Property Act: acceptance by the donee is not required and the definition extends beyond the ordinary passing of one person's interest to another.
- The court concluded that where a person voluntarily diverts value from his property to another without consideration (here, paternal affection), the transaction falls within the Act's definition of "gift" irrespective of its legal effect under personal law. The court rejected the view (expressed in Basaviah Gowder) that a gift void under personal law is thereby excluded from the Act's ambit.
- The court therefore answered the first limb by finding that the transactions under the settlement deeds were gifts within the meaning of the Act (the facts show intent to diminish the donor's property and delivery of possession).
-
Analysis of whether liability to gift-tax can be imposed irrespective of the legal effect of the gift (second limb):
- The court examined the charging provision (section 3) and the valuation provision (section 6) of the Gift-tax Act. Section 3 charges gift-tax in respect of gifts made during a previous year. Section 6(1) directs that the value of property transferred by way of gift shall, subject to subsections (2) and (3), be estimated by market price "on the date on which the gift was made."
- The court interpreted the phrase "property transferred" in section 6(1) as presuming an accomplished transfer; the valuation rule therefore depends on the legal effect of the transfer. The special provision in section 6(2) for gifts not revocable for a specified period similarly implies that the legal effect of the gift must be determined by authorities.
- On this basis the court held that the Appellate Tribunal erred in treating the legal effect of a gift as beyond the purview of the Gift-tax Act. Instead, an assessee's liability to tax under a gift within the meaning of the Act depends on the legal effect of that gift, which must be determined in order to assess and value the taxable gift.
The court accordingly answered the referred questions by: (a) holding that the transactions are gifts within the meaning of the Act; and (b) holding that the legal effect of the gifts is relevant to the assessee's liability and must be determined by the authorities (i.e., liability is not to be imposed irrespective of legal effect). The court noted that it could not go further into the legal effect on the record before it because specific facts were absent.
Holding and Implications
Holding: The court answered the referred questions as follows:
- First: The transactions under the settlement deeds are "gifts" within the meaning of the Gift-tax Act (they fall within the Act's definitions).
- Second: The assessee's liability to gift-tax in respect of such gifts depends on the legal effect of those gifts, which must be determined; it is not open to authorities or tribunals to treat legal effect as irrelevant to taxation under the Act.
Implications:
- The immediate practical consequence is that the legal effect of the settlement deeds must be determined by the appropriate authority (or on remand) before the taxable amount can be finally ascertained under section 6 and liability imposed under section 3.
- The Appellate Tribunal's position that validity under personal law is irrelevant to the operation of the Gift-tax Act was held to be incorrect in so far as it denied the need to determine legal effect for valuation and liability purposes.
- No broader declaratory change of law beyond the scope described by the court was announced; the court confined itself to answering the referred questions and observed that it could not decide the full legal effect of the settlement deeds on the record before it.
Orders: Questions answered accordingly. No order as to costs. Advocate's fee: Rs. 300 one set.
- These two cases, which have been referred to us under section 26(1) of the Gift-tax Act (18 of 1958), relate to three settlement deeds dated May 20, 1957, October 11, 1957, and January 26, 1959, executed by Sri Bhupatiraju Venkata Narasimharaju, hereinafter mentioned as the assessee. By the first settlement deed, he gave absolutely, out of paternal affection, 11 items of land of the total extent of Ac. 17-68 cents, stated to be his immovable property, to his first three unmarried minor daughters, Kausalya, Krishnaveni and Prabhavathi represented by their mother, Appalanarasaiah, as guardian. By the second settlement deed, he similarly gave 7 items of land of the total extent of Ac. 7-28 cents (which appears to be a mistake for Ac. 6-79 cents) described as being in his possession and enjoyment as of right, to his 3 minor sons, Venkata Appalaraju, Satyanarayanaraju and Sirharibabu, represented by their mother, Appalanarasaiah, as guardian. By the third settlement deed, he similarly gave 4 items of land of the total extent of Ac. 7-46 cent, described as belonging to him by virtue of a partition with his father and brothers, to his fourth unmarried minor daughter, Aruna Udayalakshmi, represented by her mother, Appalanarasaiah, as guardian. All the documents recite that possession of the properties concerned was delivered on the very day of execution. The first two gifts formed the subject-matter of the Gift-tax Officers assessment order dated March 15, 1960, for the assessment year 1958-59. He valued the entire property covered by the first settlement deed as a taxable gift. With regard to the second settlement deed, which was in favour of the sons, it was contended on behalf of the assessee that the lands were his ancestral property, in which the donees were entitled to shares. The Gift-tax Officer found that three items of the total extent of Ac. 1-40 cents were the assessees self-acquired property and the remaining four items of the total extent of Ac. 5-39 cents were the assessees family property. He treated and valued the gift as one of Ac. 2-75 cents of land, comprising the assessees self acquired property of Ac. 1-40 cents and the assessees one-fourth share of Ac. 1-35 cents in the family property. The third settlement deed formed the subject-matter of the Gift-tax Officers assessment order dated April 26, 1960, for the assessment year 1959-60. It was contended on behalf of the assessee, firstly, that each of his three sons were entitled to a share in the property concerned and that as they had not joined in executing the deed, the gift was only of the assessees one-fourth share; and secondly, that the gift was not liable to tax being for the minor daughters maintenance and education. The Gift-tax Officer rejected both these contentions and valued the entire property conveyed as a taxable gift.
The assessee preferred appeals to the Appellate Assistant Commissioner of Gift-tax against both these orders. The Appellate Assistant Commissioner found that the assessee had erroneously declared his status to be an individual, that he was in fact the karta of a Hindu undivided family, that all the property in his hands was the property of the undivided family in which his share could not be predicated before a partition. He held that the gift to his undivided sons amounted to a family arrangement of the nature of a partial partition. As regards the gifts to the unmarried daughters, since they continued to be members of the undivided family, he held that the properties continued to be family properties and that the gifts which could only materialise either at a partition in the family or upon the marriages of the daughters also amounted to a family arrangement. In this view, he found that there was no taxable gift and allowed both the appeals.
The Gift-tax Officer appealed to the Appellate Tribunal, challenging the view that deed were made family arrangements or family settlements. The Tribunal recognised that under the Hindu law, a fathers power to make gifts of ancestral property is restricted. But it held that the Gift-tax Act did not envisage an enquiry about the validity or otherwise of a gift and that if a transaction of gift was completed in all respects, it was taxable under the Act. It reads :
"The Gift-tax Act nowhere takes regard of the fact whether a certain gift which is made and which is complete in itself is valid or invalid in law. It is beyond its purview. Whenever a gift is made, it must attract the provisions of the Gift-tax Act unless it is exempted from its operation under any of its specific provisions. Whenever a transfer is effected which comes within the definition of the word gift as given in the Gift-tax Act, it must attract the tax. We are not concerned as to whether the donor has any right to transfer or alienate the property which is the subject-matter of a gift. It is not for the revenue authorities to go into this matter, as that would mean launching an enquiry which is beyond the scope of the Act itself. Such being the position of law, the Appellate Assistant Commissioner has erred in holding that the transactions in question were, in effect, family settlements."
In this view of the law, the Tribunal set aside the orders of the Appellate Assistant Commissioner, remanded both the cases for fresh disposal and directed the Appellate Assistant Commissioner to decide the cases on the merits of the other grounds of appeal taken by the assessee. Upon the applications of the assessee, it referred the following question of law in respect of the first two settlement deeds :
"Whether the settlements in question made by the assessee are gifts liable to tax under the Gift-tax Act ?"
Similarly in respect of the third settlement deed, it referred the question :
"Whether the settlement in question made by the assessee was a gift liable to tax under the Gift-tax Act ?"
It will be seen that the Appellate Tribunal, which is the final court of fact, did not enter at all into the facts necessary for determining the legal effect of the settlement deeds, such as whether the assessee executed all the settlement deeds only as a karta and what was the total extent of the family properties reasonable portion of which he had the power to make gifts in accordance with the principles laid down in Guramma v. Mallappa. The provisions of section 26 of the Gift-tax Act (hereinafter referred to as the Act) are similar to those of section 66 of the Income-tax Act (XI of 1922), the scope of which was explained in Commissioner of Income-tax v. Scindia Steam Navigation Ltd. Even the assessees applications under section 26(1) have not been placed before us and we are not in a position to determine what were the questions raised by him before the Appellate Tribunal. In the absence of necessary facts, it is possible to answer the questions referred to us only without entering into the legal effect of the settlement deeds. Thus the limbs of the questions are : (1) Whether the transactions under the settlement deeds are gifts within the meaning of the Act, irrespective of their legal effect ? and (2) Whether the assessee is liable to be taxed under the Act in respect of the said transactions irrespective of their legal effect ?
The first limb of the questions presents little difficulty. The provisions of the Act, which may be usefully read, are :
"2. In this act, unless the context otherwise requires -...
(xii) gift means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or moneys worth, and includes the transfer of any property deemed to be a gift under section 4;...
(xxii) property includes any interest in property, movable or immovable;...
(xxiv) transfer of property means any disposition, conveyance, assignment, settlement, delivery, payment of other alienation of property and, without limiting the generality of the foregoing, includes - ...
(d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person."
clauses (xii) and (xxiv) of section 2 were construed by their Lordships, Chandra Reddy C.J. and Kumarayya J. in Commissioner of Gift-tax v. Satyanarayanamurthy, and it was held that the definition of "transfer of property" in the Act is of wider import than that contained in the Transfer of Property Act. Unlike the Transfer of Property Act, the definition of "gift" in section 2, clause (xii), does not require acceptance by the donee. The definition of "transfer of property" in clause (xxiv) extends the ordinary meaning of that expression, which is limited to the passing of one persons interest in property to another person. The mode of transfer is not stipulated nor the consequences of non-acceptance by the donee or non-compliance with the mode of transfer required by the general law. As observed by Viscount Haldane in connection with the construction Income Tax Acts, in Minister of Finance v. Smith, "the question is never more than one of the words used." Broadly speaking, it would appear that where a person of his own free will diverts any interest in property to another person and there is no corresponding quid pro quo for the transaction, there is a gift within the meaning of the Act.
The learned counsel for the assessee has relied on Basaviah Gowder v. Commissioner of Gift-tax, where a Division Bench of the Madras High Court expressed the view that a gift which is void under the personal law of the assessee is not a gift within the meaning of the Act. With great respect to the learned judges, we are unable to agree with that view, as such a construction in nor warranted by the language of the Act.
It is far from the case of the assessee here that the settlement deeds were not intended to take effect. Delivery of possession of the properties concerned to the transferees is also admitted. Further the assessees intention was manifestly to diminish the value of his own property and increase the value of the properties of his sons and daughters. The only consideration for his executing them was his paternal affection. There can be no doubt that irrespective of their legal effect, the transactions under the settlement deeds were gifts within the meaning of the Act.
Turning to the second limb, the assessees liability is created by the charging section 3 which is in the following terms :
"Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the 1st day of April, 1958, a tax (hereinafter referred to as gift-tax) in respect of the gifts, if any, made by a person during previous year (other than gifts made before the 1st day of April, 1957) at the rate or rates specified in the Schedule."
The Schedule specifies the rates of gift-tax on successive slabs in terms of money "of the value of all taxable gifts." Section 6 lays down how the value of gifts is determined and reads thus :
"6. Value of gifts, how determined. - (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 Office 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."
The expression "by way of" used in section 6(1) would mean "with intention of" : Oxford Concise Dictionary or "in character of" : Chambers Twentieth Century Dictionary. Thus, under sub-section (1) of section 6, where there is a gift within the meaning of the Act, the market value "of any property other than cash transferred" is the criterion for assessing the gift-tax. The expression "property transferred" looks as an accomplished fact and this must naturally depend on the legal effect of the transfer. The special provision in sub-section (2) of section 6 in respect of "a gift which is not revocable for a specified period" also necessarily implies that the legal effect of the gift has to be determined by the gift-tax authorities. In our opinion, the Appellate Tribunal erred in holding that the legal effect of a gift within the meaning of the Act is beyond the purview of the Act. An assessees liability to tax under a gift within the meaning of the Act depends on the legal effect of the gift which has to be determined. The questions are answered accordingly. No order as to costs. Advocates fee Rs. 300 one set.
Questions answered accordingly.
Alert