Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Chandurkar
  • Sawant, JJ.
Acts
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Chandurkar
  • Sawant, JJ.
Acts
See more information ...
Smart Summary

Summary of Opinion — Chandurkar, J.

Factual and Procedural Background

The assessee gifted ornaments and jewellery worth Rs. 83,000 to his wife on December 26, 1958, and jewellery and ornaments worth Rs. 10,779 to his daughter on December 26, 1959. Ornaments remaining with the assessee were valued at Rs. 1,10,000. For the assessment years 1964-65 and 1965-66 the Wealth-tax Officer (WTO) included the value of all these ornaments in the assessee's net wealth under section 4(1)(a) of the Wealth-tax Act, 1957 ("the Act").

The Appellate Assistant Commissioner (AAC) upheld inclusion of the Rs. 1,10,000 (the ornaments retained by the assessee) but held that the ornaments gifted to the wife and daughter were exempt under s. 5(1)(viii) as articles of personal/household use in the donees' hands, and therefore should be excluded from the assessee's net wealth. The Appellate Tribunal (relying on the proviso to s. 4(1)(a) and treating the statutory fiction created by s. 4(1)(a) as carrying to its logical end) held that the ornaments of Rs. 1,10,000 belonged to the assessee but were exempt as intended for household use, and that the gifted ornaments to wife and daughter were excludible under the proviso to s. 4(1)(a).

The revenue challenged the Tribunal's exclusions and, under s. 27(1) of the Act, referred four questions to the High Court. The referenced questions concerned (1) whether the Rs. 1,10,000 of ornaments actually belonging to the assessee were exempt under s. 5(1)(viii) as household articles; (2) whether the benefit of the proviso to s. 4(1)(a) is restricted to gifts made in the previous year relevant to the assessment year 1964-65 and thereafter; (3) whether ornaments gifted to wife and daughter were exempt under s. 5(1)(viii) as intended for household use; and (4) whether the gifted ornaments were exempt because they would have been exempt in the hands of the donees.

Legal Issues Presented

  1. Whether the ornaments and jewellery worth Rs. 1,10,000 actually belonging to the assessee were exempt from tax under s. 5(1)(viii) on the ground that they were articles intended for the household use of the assessee.
  2. Whether the benefit of the proviso to s. 4(1)(a) is restricted to those gifts which have been made in the previous year relevant to the assessment year 1964-65 and thereafter (i.e., whether the proviso applies only to gifts chargeable/not chargeable to gift-tax for assessment years commencing after 31st March, 1964).
  3. Whether the ornaments gifted by the assessee to his wife and daughter were exempt under s. 5(1)(viii) on the ground that they were articles intended for his household use.
  4. Whether the ornaments and jewellery gifted by the assessee to his wife and daughter were exempt from wealth-tax, since they would have been exempt in the hands of his wife and daughter.

Arguments of the Parties

Revenue's Arguments

  • The Tribunal misread the proviso to s. 4(1)(a). The proviso was intended to exclude from net wealth only those gifts which were chargeable to gift-tax or not chargeable under s. 5 of the Gift-tax Act for the assessment year commencing after 31st March, 1964 (i.e., assessment year 1964-65) or in subsequent assessment years.
  • The gifts in this case were made well before April 1, 1964 (in 1958 and 1959) and were not gifts chargeable to gift-tax in the assessment year 1964-65; therefore they were not entitled to exclusion under the proviso.
  • The revenue relied upon several High Court decisions (Calcutta, Madras, Kerala, Madhya Pradesh, and Punjab & Haryana) supporting the construction that the proviso refers to assessment years under the Gift-tax Act (i.e., refers to chargeability to gift-tax for assessment years after March 31, 1964) and not to wealth-tax assessment years in which the exemption is to be applied irrespective of when the gift was made.

Assessee's Arguments

  • The phrase "for any assessment year commencing after the 31st day of March, 1964" in the proviso (and the later formulation with "but before the 1st day of April, 1972") refers to the assessment year for wealth-tax for which the exemption is being given; accordingly, it is immaterial when the gifts were made — even gifts made prior to March 31, 1964 (e.g., 1958/1959) would be exempt from inclusion in the donor's net wealth for any assessment year commencing after March 31, 1964.
  • The exemption granted by the proviso applied for assessment years 1964-65 through 1971-72 (and was removed from assessment year 1972-73 by the 1971 amendment), so the donor should benefit for those wealth-tax assessment years regardless of the date of the gift.
  • The Tribunal's approach that gifts which would have been exempt in the hands of the donees should be treated as exempt in the hands of the donor relied on the statutory fiction in s. 4(1)(a) (i.e., that assets transferred to spouse/minor child are to be treated as belonging to the transferor for computing net wealth).
  • The Tribunal also urged that ornaments, if exempt in donees' hands as personal/household articles, "acquired the quality of being exempt" and that quality should persist even if, for statutory purposes, the ornaments are treated as belonging to the donor.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Smt. Mukundkumari v. K.V.S. Namoondari, 17th ITO, [1979] 118 ITR 433 Effect of retrospective amendment to s. 5(1)(viii): jewellery excluded from the category of articles entitled to exemption from April 1, 1963. The court relied on this decision to hold that ornaments and jewellery (including the Rs. 1,10,000) were not exempt under s. 5(1)(viii) because the retrospective amendment excluded jewellery from exemption from April 1, 1963.
CWT v. Smt. Sarala Debi Birla, [1975] 101 ITR 488 (Calcutta High Court) Construction of the proviso to s. 4(1)(a): the phrase "for any assessment year commencing after 31st March, 1964" indicates that the transfer must be chargeable to gift-tax (or not chargeable under s.5 of Gift-tax Act) for such assessment year(s) under the Gift-tax Act. The court identified this decision as supporting the construction that the proviso applies with reference to gift-tax assessment years (i.e., chargeability under the Gift-tax Act for assessment years after 31-3-1964).
T. Saraswathi Achi v. CIT, [1976] 104 ITR 185 (Madras High Court) The words "for any assessment year commencing after the 31st day of March, 1964" in the proviso should be read as referring to the assessment year under the Gift-tax Act — i.e., qualifying the chargeability under the Gift-tax Act, not qualifying wealth-tax assessment years irrespective of when the gift was made. The court treated this authority as affirming that only gifts chargeable/not chargeable with reference to Gift-tax assessment years after 31-3-1964 fall within the proviso's exemption.
M.G. Kollankulam v. CIT, [1978] 115 ITR 160 (Kerala High Court) The proviso's reference to chargeability "for any assessment year commencing after the 31st day of March, 1964" indicates that the chargeability referred to is not with respect to past periods anterior to the amending Act — i.e., it relates to Gift-tax assessment years beginning after 31-3-1964. The court cited this decision as consistent with the construction that the proviso was meant to exempt transfers chargeable (or exempt) for the Gift-tax assessment years after 31-3-1964 (and that the 1971 amendment limited the temporal scope further).
Smt. Malti Harshey v. CWT, [1980] 121 ITR 676 (Madhya Pradesh High Court) The use of the present tense "is" in the proviso supports reading the phrase "any assessment year commencing after the 31st day of March, 1964" as referring to the assessment year under the Gift-tax Act. The court relied on this decision as further authority that the proviso is to be read with reference to the Gift-tax assessment years, not as a blanket exemption for any gifts whenever made.
CWT v. Seth Nand Lal Ganeriwala, [1977] 107 ITR 758 (Punjab & Haryana High Court) Agreed with the Calcutta and Madras High Courts that the proviso refers to chargeability under the Gift-tax Act for assessment years after 31-3-1964. The court noted this decision as supporting the conclusion that the proviso's benefit is limited to transfers chargeable or not chargeable to gift-tax for the specified Gift-tax assessment years.

Court's Reasoning and Analysis

The Court's analysis proceeded in two main strands: (A) effect of the retrospective amendment to s. 5(1)(viii) (exemption clause) on jewellery; and (B) construction of the proviso to s. 4(1)(a) (the temporal scope of the exclusion).

  1. Effect of amendment to s. 5(1)(viii):

    The Court observed that cl. (viii) of s. 5(1) was amended retrospectively (by the Finance Act, 1971, with retrospective operation from April 1, 1963) to add the words "but not including jewellery" so that jewellery was expressly removed from items eligible for exemption as "articles intended for the personal or household use of the assessee." The Court relied on its earlier Division Bench decision in Smt. Mukundkumari v. K.V.S. Namoondari which held that the retrospective amendment meant jewellery was excluded from exemption from April 1, 1963. As a result, the Court held that the ornaments worth Rs. 1,10,000 (and similarly the ornaments gifted to wife and daughter) were not exempt under s. 5(1)(viii). The Court therefore found Questions No. 1 and 3 to be answered in the negative.

  2. Construction of the proviso to s. 4(1)(a):

    The Tribunal had construed the proviso as giving benefit in wealth-tax assessments commencing after 31-3-1964 to gifts whenever made (including gifts made prior to 1964), thereby excluding such gifted assets from the donor's net wealth. The revenue contended (and several High Courts had held) that the proviso must be read as referring to chargeability to gift-tax for the Gift-tax Act assessment year(s) commencing after 31-3-1964 — i.e., the proviso applies only to gifts which were chargeable (or not chargeable under s.5 of the Gift-tax Act) for the Gift-tax assessment years from 1964-65 (and, as later limited by the 1971 amendment, up to 1971-72).

    The Court acknowledged the proviso's clumsy drafting and the ambiguity arising from the parenthetical placement of the words "for any assessment year commencing after the 31st day of March, 1964" (and, after the 1971 amendment, "but before the 1st day of April, 1972"). The Court analyzed the grammar and the context:

    • The first half of the proviso speaks of the transfer being "either chargeable to gift-tax under the Gift-tax Act, 1958, or is not chargeable under section 5 of that Act." The Court noted that the present tense "is" strongly supports reading the clause as referring to the transfer's chargeability for Gift-tax assessment years beginning after 31-3-1964.
    • The Court examined the legislative history and the Notes on Clauses for the 1971 amendment (Finance (No. 2) Bill, 1971). The explanatory note to clause 31 indicated a parliamentary intention to limit the benefit (by creating an outer limit "before the 1st day of April, 1972") so that gifts made after March 31, 1972 would not get the exemption. This supported the view that Parliament intended the proviso to identify transfers chargeable (or exempt) for Gift-tax assessment years in the period 1964-65 to 1971-72.
    • The Court also canvassed earlier High Court decisions (Calcutta, Madras, Kerala, Madhya Pradesh, Punjab & Haryana) and found their construction persuasive: the proviso's temporal phrase qualifies the transfer's chargeability for Gift-tax assessment years after 31-3-1964, not the wealth-tax assessment years for which any gift (whenever made) would be exempt regardless of its date.

    In short, the Court concluded that the proviso was meant to specify the class of transfers (those chargeable or not chargeable under specified Gift-tax assessment years) which are to be excluded from the donor's net wealth, and that the proviso, as originally enacted (and as amended in 1971 to add an outer date), was intended to operate with reference to chargeability to gift-tax for assessment years commencing after 31-3-1964 (and before 1-4-1972 after the 1971 amendment). Consequently, the Court accepted the revenue's construction and held that the Tribunal had erred in applying the proviso to gifts made long before the Gift-tax assessment years in question (i.e., gifts of 1958 and 1959 in this case).

Holding and Implications

Final Answers to the Referred Questions:

  • Question No. 1: Answered in the negative and in favour of the revenue — the ornaments worth Rs. 1,10,000 belonging to the assessee were not exempt under s. 5(1)(viii) (jewellery excluded by retrospective amendment).
  • Question No. 2: Answered in the affirmative (insofar as this case is concerned) and in favour of the revenue — the benefit of the proviso to s. 4(1)(a) is limited to transfers which were chargeable to gift-tax (or not chargeable under s.5 of the Gift-tax Act) for the Gift-tax assessment years commencing after 31-3-1964 (and, after the 1971 amendment, before 1-4-1972).
  • Question No. 3: Answered in the negative and in favour of the revenue — the ornaments gifted to wife and daughter were not exempt under s. 5(1)(viii) as household articles (jewellery excluded by amendment).
  • Question No. 4: Answered in the negative and in favour of the revenue — the gifted ornaments were not exempt on the basis that they would have been exempt in the hands of the donees, because jewellery was excluded from s.5(1)(viii) from April 1, 1963.

Consequences and immediate effects:

  • The Court held that jewellery is excluded from the exemption under s. 5(1)(viii) with retrospective effect from April 1, 1963; therefore jewellery retained by the assessee and jewellery gifted to donees were not eligible for exemption under that provision.
  • The proviso to s. 4(1)(a) was construed to apply only to transfers that were chargeable (or not chargeable under s.5) to gift-tax for the Gift-tax assessment years commencing after March 31, 1964 (and, as subsequently limited, before April 1, 1972). The Tribunal erred in applying the proviso to gifts made many years earlier that were not chargeable to gift-tax in the relevant Gift-tax assessment years.
  • Costs: because of the ambiguity of the proviso, the Court ordered that the parties should bear their own costs.

Note on precedent and broader implications:

The Court expressly relied on and followed several High Court decisions construing the proviso in the manner described above and applied the Division Bench decision in Mukundkumari to the question of jewellery being excluded from exemption under s. 5(1)(viii). The opinion does not purport to set out a novel departure from those authorities but applies them to the facts of the present reference.

This summary is based exclusively on the content of the provided opinion and does not add facts or inferences not contained in that text.

Show full summary ...

    Commissioner Of Wealth-Tax, Bombay City-I v. Rasesh N. Mafatlal.

    Chandurkar, J.:— The assessee had on December 26, 1958, gifted ornaments and jewellery worth Rs. 83,000 to his wife and in the next year on December 26, 1959, jewellery and ornaments Worth Rs. 10,779 were gifted by him to his daughter. The ornaments left with the assessee were worth Rs. 1,10,000. In the assessment years 1964-65 and 1965-66, the value of all these ornaments were included in the net wealth of the assessee by the WTO. It appears that the value of the ornaments gifted to the wife and the daughter were included in the net wealth in view of the provisions of s, 4(1)(a) of the Wealth-tax Act, 1957 (hereinafter referred to as “the Act”).

    2. The AAC, while upholding the inclusion of ornaments of the value of Rs. 1,10,000 in the net wealth of the assessee, held that the ornaments gifted to the wife and the daughter were exempt under s. 5(1)(viii) of the Act as it then stood. The view which was taken by him was that these ornaments and jewellery would have been exempted for the purposes of assessment in the respective assessments of the wife and the daughter under s. 5(1)(viii) of the Act because they were their articles of personal use and, according to the AAC, this position could not be ignored for the purpose of deciding whether these ornaments should be excluded from the net wealth of the assessee. He thus took the view that, as these ornaments were exempt in the hands of the donees, they would also be exempt from assessment in the hands of the assessee who was the donor. The exclusion of the ornaments was put in issue by the revenue in the appeal filed before the Appellate Tribunal. The assessee filed cross objection challenging the inclusion of the jewellery worth Rs. 1,10,000 in his net wealth. The Appellate Tribunal took the view that the ornaments worth Rs. 1,10,000 belonging to the assessee were exempt under s. 5(1)(viii) of the Act as they were intended for the houshold use of the assessee. With regard to the inclusion of the value of the ornaments gifted to the wife and the daughter of the assessee, the Tribunal referred to the proviso to s. 4(1)(a) of the Act and held that in view of the provision made in the proviso, s. 4(1)(a)(i) and (ii) of the Act did not apply to the case of the assessee because the proviso “banned the inclusion of the value of the assets referred to in the sub-clauses of cl. (a) of sub-s. (1) of s. 4 in any assessment year commencing after the 31st day of March 1964, provided the transfer of such assets was either chargeable to gift-tax or was not chargeable under s. 5 of the Act”. The Tribunal took the view that the benefit of the proviso was not restricted only to those gifts which had been made in the assessment years commencing from 1964-65, but was also available in the case of all gifts which were either chargeable to gift-tax or were not chargeable under s. 5 of the G.T Act, even though made prior to the assessment year 1964-65, the only restriction being that the exemption was available in the assessment year 1964-65 and later years. The Tribunal further taking the view that s. 4(1)(a) under which the ornaments gifted to the wife and the daughter of the assessee were sought by the revenue to be included in the net wealth of the assessee, created a legal fiction, viz., that in computing the net wealth of the assessee, they were deemed to belong to him and not to his wife and children, the Tribunal further observed that “if the legal fiction was carried to its logical end, which must be done,…… there remained no difference in the position regarding the ornaments worth Rs. 1,10,000 owned by the assessee and the ornaments gifted by him to his wife and daughter”. The Tribunal thus took the view that the ornaments gifted to the wife and the daughter were deemed to belong to the assessee and there was no difficulty in holding “that the assessee intended them for the use of his wife and daughter, that is, for household use”.

    3. It was also argued before the Tribunal that as the gifted ornaments were exempt from wealth-tax, if assessment had been made against the assessee's wife and daughter, “they acquired the quality of being exempt from tax which became inseparable from them and as a result thereof they were exempt under s. 5(1)(viii) even though they were treated as belonging to the assessee under s. 4(1)(a) of the Act”. The Tribunal took the view on this contention that “though the ornaments would have been exempt in the hands of the wife and the daughter on the ground that they were intended for their personal use, they were not exempt under s. 5(1)(viii) on the ground that they were meant for personal use when they were treated as belonging to the assessee as they were not in fact intended for the personal use of the assessee”.

    4. Arising out of this order of the Tribunal, the following questions have been referred to this court under s. 27(1) of the Act, at the instance of the revenue:

    “(1) Whether, on the facts and in the circumstances of the case, the ornaments and jewellery worth Rs. 1,10,000 actually belonging to the assessee were exempt from tax u/s. 5(1)(viii) of the Act on the ground that they were articles intended for the household use of the assessee?

    (2) Whether the benefit of the proviso to section 4(1)(a) of the Act is restricted to those gifts, which have been made in the previous year relevant to the assessment year 1964-65 and thereafter?

    (3) Whether the ornaments gifted by the assessee to his wife and daughter were exempt under section 5(1)(viii) on the ground that they were articles intended for his household use?

    (4) Whether the ornaments and jewellery gifted by the assessee to his wife and daughter were exempt from wealth-tax, since they would have been exempt in the hands of his wife and daughter?”

    5. Before we refer to the contentions raised before us, the main contention having been advanced with regard to the controversy pertaining to question No. 2, it is necessary to set out certain provisions which become relevant for the purpose of answering the questions referred. The two main provisions on which exclusion of the value of the ornaments from the computation of net wealth has been claimed are contained in the proviso to s. 4(1) and the provisions of s. 4(1) read with s. 5(1)(viii) of the Act. The relevant provisions in s. 4(1)(a)(i) and (ii) and the proviso in force at the material time in the year of assessment were as follows:

    “4. Net wealth to include certain assets.—(1) In computing the net wealth of an individual, there shall be included, as belonging to that individual—

    (a) the value of assets which on the valuation date are held—

    (i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or (ii) by a minor child, not being a married daughter of such individual, to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration, or……

    whether the assets referred to in any of the sub-clauses aforesaid are held in the form in which they were transferred or otherwise:

    Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958), or is not chargeable under section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual.”

    6. The proviso was inserted by the W.T (Amend.) Act, 1964. There was a further amendment in the proviso by the Finance Act, 1971. The amendments were that for the words, figures and letters “after the 31st day of March, 1964”, the words, figures and letters “after the 31st day of March, 1964, but before the 1st day of April, 1972” shall be substituted. The result is that the proviso now reads as follows:

    “Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958), or is not chargeable under section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972, the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual.”

    7. section 5(1)(viii) of the Act originally provided as follows:

    “Wealth-tax shall not be payable by an assessee in respect of the following assets and such assets shall not be included in the net wealth of the assessee—

    (viii) furniture, household utensils, wearing apparel, provisions and other articles intended for the personal or household use of the assessee.”

    8. By Finance Act of 1971, cl. (viii) reproduced above was amended retrospectively from April 1, 1963, by adding the words “but not including jewellery” at the end of the clause. The earlier opening portion of s. 5(1) was also amended by the Finance Act of 1970 and with these two amendments, the relevant provision now reads as follows:

    “5. (1) Subject to the provisions of sub-section (1A), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee—

    (viii) furniture, household utensils, wearing apparel, provisions and other articles intended for the personal or household use of the assessee, but not including jewellery.”

    9. These are the legal provisions which are relevant for deciding the controversy in this reference. Now, taking question No. 1 first, it is obvious that by the amendment in s. 5(1)(viii) of the Act, an infirmity is created in the view which is taken by the Tribunal when it held that ornaments worth Rs. 1,10,000 belonging to the assessee were liable to be exempt as they were articles intended for the household use of the assessee. Having regard to the amendment made retrospectively from April 1, 1963, in cl. (viii) the controversy as to whether jewellery or ornaments were articles intended for the household use or not becomes wholly academic. The effect of the amendment is that jewellery now stands excluded specifically from articles in respect of which the provision for exemption is made in cl. (viii) of s. 5(1) of the Act. The effect of this amendment has been considered by this court in Smt. Mukundkumari v. K.V.S Namoondari, 17th ITO, [1979] 118 ITR 433. In Mukundkumari's case, the Division Bench, to which one of us was a party, has expressly taken the view that the effect of the retrospective amendment in s. 5(1)(viii) of the Act is that jewellery will stand excluded from the articles in respect of which exemption could be claimed with effect from April 1, 1963, so that right from April 1, 1963, the exemption could not be claimed in respect of jewellery, even though it was intended for the personal use of the assessee. Having regard to the amendment in s. 5(1)(viii) and the decision in Mukundkumari's case, it will have to be held that ornaments and jewellery worth Rs. 1,10,000 were not exempt from tax under s. 5(1)(viii) of the Act. The same will be the position with regard to question No. 3. The controversy put in issue in question No. 4 will also stand decided as a result of the retrospective amendment of s. 5(1)(viii). So far as question No. 4 was concerned, the Tribunal has taken the view that the fiction created by s. 4(1)(a)(i) and (ii) must be carried to its logical end and, therefore, if these ornaments were exempt from wealth-tax under s. 5(1)(viii) if they belonged to the donees, these ornaments could also be exempt in the hands of the assessee. It is difficult for us to appreciate the logic of this argument accepted by the Tribunal, but it is not necessary to consider the view taken by the Tribunal any further because even in the hands of the donee, the ornaments must be treated as not being entitled to exemption right from April 1, 1963, and consequently the further question of these ornaments being entitled to exemption in the hands of the assessee really would not arise.

    10. That brings us to the second question which has been exhaustively argued both on behalf of the department and on behalf of the assessee. The proviso with which we are concerned in so far as question No. 2 is concerned, is the proviso without the words “but before the 1st day of April, 1972”. The Tribunal has taken the view that even in the case of gifts made prior to the assessment year in question, the assessee would be entitled to exemption in respect of assessment to wealth-tax as the benefit of the proviso is not restricted only to those gifts which have been made in the assessment year commencing after March 31, 1964. The Tribunal held that the “proviso covers all gifts which are chargeable to gift-tax or are not chargeable under s. 5 of the G.T Act but applies in any assessment year commencing with the year 1964-65”. The learned counsel on behalf of the revenue has contended that the Tribunal has misread the proviso and according to the learned counsel the intention of enacting the proviso was to exclude from the computation of net wealth of an assessee only those gifts which were chargeable to gift-tax or not chargeable to gift-tax under s. 5 of the G.T Act, for the assessment year commencing after March 31, 1964. In other words, the contention is that under the proviso only those gifts were to be excluded from the computation of net wealth which were chargeable or were not chargeable to gift-tax in the assessment year 1964-65, i.e, commencing from April 1, 1964 to March 31, 1965, or in the following assessment years. The argument, therefore, is that the gifts in question were made much prior to even April 1, 1963, or in any case much prior to March 31, 1964, and they were not gifts which were chargeable to gift-tax in the assessment year 1964-65 and, therefore, were not entitled to be excluded for the purposes of computation of the net wealth of the assessee. The learned counsel for the revenue has invited our attention to the decisions of the Calcutta High Court, Madras High Court, Kerala High Court, Madhya Pradesh High Court and the Punjab and Haryana High Court which have accepted the view now canvassed before us that only those gifts which were chargeable to gift-tax for the assessment year commencing after March 31, 1964, were exempt under the proviso to s. 4(1)(a) of the Act. We shall refer to these decisions later.

    11. Shri Kolah on behalf of the assessee has, however, vehemently contended that the words “for any assessment year commencing after the 31st day of March, 1964” which were the material words at the relevant time, and the words “for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972” in the proviso as it now stands, refer to the assessment year with reference to assessment to wealth-tax for which the exemption was to be given in respect of gifts. According to the learned counsel, for the purpose of the proviso, it was immaterial when the gifts were made and even if the gifts were made prior to March 31, 1964, i.e, even in 1958 or 1959, as in the instant case, they would be exempt from inclusion in the net wealth of the assessee for assessment to wealth-tax for any assessment year commencing after March 31, 1964. According to the learned counsel, the exemption which was granted in respect of assessment to wealth-tax after March 31, 1964, was, by the amendment made in the proviso by the Finance Act, 1971, taken away with effect from the assessment year commencing from April 1, 1972, i.e, assessment year 1972-73. It is vehemently contended before us that the proviso has been incorporated in the W.T Act and it deals with assessment to wealth-tax and, therefore, the words “for any assessment year commencing after the 31st day of March, 1964” must be read as referring to the assessment year relevant for assessment to wealth-tax and not to gift-tax. The learned counsel contended that the decisions relied upon by the revenue do not seem to have taken a correct view of the provisions of the proviso.

    12. Normally, in the interest of uniformity in the construction of a Central Act relating to taxation, if a particular provision of law has already been construed by any High Court, unless there is any apparent infirmity in the view taken by another High Court, in our view, it would be advisable to take the same view as taken by the other court or courts and much argument would not normally have been needed in order to answer question No. 2 in this reference. However, since, as observed by almost all the courts whose decisions have been referred to before us, the proviso is rather clumsily worded, we have heard Shri Kolah on the contentions raised by him. After hearing the counsel for the revenue and the assessee at considerable length, we are satisfied that the view taken by the other courts appear to us to be the only reasonable view which could be taken on the construction of the proviso. Considering the proviso which really appears to be rather clumsily worded, some difficulty is experienced in its construction because before and after the words “for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972”, there are commas and those words appear as a parenthetical clause and the proviso is capable of two different meanings depending upon whether these words are read with the first half of the proviso or with the other half of the proviso. The first part of the proviso refers to the transfer of assets or any part thereof which is either chargeable to gift-tax or is not chargeable under s. 5 of that act. The latter part refers to the exclusion of the assets referred to in the first part for the purposes of computing the net wealth of the individual. What Shri Joshi on behalf of the revenue contends is that when the proviso refers to transfer of assets being chargeable to gift-tax or not being chargeable under s. 5 of the G.T Act, the words “for any assessment year commencing after the 31st day of March, 1964”, refer to the period in respect of which chargeability to gift-tax has to be ascertained for the purpose of excluding the value of such gifted assets from the net wealth of the assessee. That is how the proviso has to be construed according to Shri Joshi and the words “for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972”, have to be read along with the first part of the proviso. According to Shri Kolah, these words have to be read with the latter part of the proviso and refer to the assessment years for which the gifts, whenever made, were to be exempted from computation of the net wealth of the assessee. The argument is that in respect of the assessment years 1964-65 to 1971-72 all gifts whenever made prior to those assessment years will have to be exempted for the purpose of assessment to wealth-tax in the the hands of the donor.

    13. The language of the proviso being ambiguous, we have tried to ascertain from the Notes on Clauses attached to the W.T (Amendment) Bill No. 57 of 1964, whether any indication is available about the intention of Parliament when the proviso was sought to be incorporated in s. 4(1) of the Act. A perusal of the Bill however shows that in the original Bill, the proviso did not find a place at all and there was, therefore, nothing in the Notes on Clauses to give us any indication as to the purpose of the enactment of the proviso. There is, however, some indication as to the purpose of the proviso in the Notes on Clauses when the words “but before the 1st day of April, 1972” were added by Finance (No. 2) Bill, 1971. The text of the Finance (No. 2) Bill, 1971, is to be found in [1971] 80 ITR 105, in the Statutes Section. The amendment of the W.T Act is dealt with in Chap. IV of the Bill and cl. 31 of the Bill deals with the amendment of s. 4 of the Act. The note with regard to cl. 31 reads as follows:

    “Clause 31 seeks to make certain amendments to section 4 of the Wealth-tax Act, 1957, under which certain assets are included in the net wealth.

    Under the amendment in sub-clause (a)(i), the value of the assets transferred by an individual to his spouse or minor children after the end of the previous year relevant to the assessment year 1971-72 for purposes of gift-tax under the Gift-tax Act will be included in the net wealth of such individual for the assessment year 1972-73 or any subsequent assessment year.”

    14. Lest some confusion is caused while understanding the reference to sub-cl. (a)(i) in the note on cl. 31 reproduced above, it may be stated that sub-cl. (a)(1) refers to the sub-cl. of cl. 31 of the Finance (No. 2) Bill. One thing which is, therefore, apparent from the amendment made in 1971 is that the purpose of putting an outer limit by inserting the words “before April 1, 1972” was that any gift made after March 31, 1972, was not to be given the benefit of the exemption under the proviso. The proviso, as it stands to-day, therefore, was intended to carry out the intention of Parliament to grant exemption only in respect of certain gifts made during a certain specified period. That period is expressed with reference to chargeability to gift-tax “for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972”. This appears to us to be the only construction possible because the first part of the proviso also used the words “is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958), or is not chargeable under section 5 of that Act”. The proviso, as it was originally enacted, i.e, before it was amended by the Finance (No. 2) Act, 1971, would have to be read in the same manner. The proviso was first enacted by the Amendment Act of 1964 which came into force on December 22, 1964, that is to say, it was first intended to be operative in respect of gifts which would be chargeable to tax for the assessment year 1964-65. That is the only way by which the use of the present tense in the first part of the proviso can be held to be justified. The words “for any assessment year commencing after the 31st day of March, 1964”, were obviously intended to indicate the assessment year 1964-65, and the assessment years following it for which the gift was to be chargeable or not chargeable under the G.T Act before the exemption could be claimed in respect of any gifts. If the intention of Parliament was really to exclude all gifts made even before March, 31, 1964, and an exemption from wealth-tax was to be given for the assessment year 1964-65 and thereafter, the clause in question would have properly appeared at the end of the proviso. The effect of the proviso, as construed by us, therefore, is that any gift which was either chargeable to gift-tax or not chargeable to gift-tax during the assessment years 1964-65 to 1971-72 was alone intended to be excludible for the purposes of computation of the net wealth of the assessee who was the donor.

    15. It is important to point out that so far as this exemption is concerned there is no outer limit in so far as the assessment to wealth-tax is concerned. The proviso specified the nature of transfers which are exempt with reference to the period during which those transfers were made but it does not seem to put any limit with regard to the assessment years for which, for the purposes of assessment to wealth-tax, such exemption will operate. The obvious effect of the proviso as construed would be that transfers which were chargeable to gift-tax under the G.T Act or were not chargeable to gift-tax under s. 5 of that act for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972, cannot now be included for computing the net wealth of the assessee even for the period after April 1, 1972.

    16. We may now briefly refer to the decisions which have taken the view which we have taken. Chronologically the first decision is of the Calcutta High Court in CWT v. Smt. Sarala Debi Birla, [1975] 101 ITR 488, where the Calcutta High Court took the view that having regard to the purpose for which the proviso had been enacted and the use of the expression “is chargeable” in conjunction with the provisions of the G.T Act, 1958, the expression “for any assessment year commencing after 31st March, 1964” occurring in the proviso indicates that the transfer of asset must be chargeable to gift-tax under the provisions of the G.T Act for any assessment year commencing after the 31st of March, 1964, or, where the transfer is not chargeable under s. 5 of that act, then for any assessment year commencing after the 31st of March, 1964, the proviso would apply.

    17. The next decision is of the Madras High Court in T. Saraswathi Achi v. CIT, [1976] 104 ITR 185. The Madras High Court has taken the view that the words “for any assessment year commencing after the 31st day of March, 1964” in the proviso to s. 4(1)(a) of the W.T Act, 1957, should be understood as a reference to the assessment year under the G.T Act and not the assessment year under the W.T Act and they qualify the gift made which is chargeable or not chargeable with reference to the assessment year under the G.T Act and not to any assessment year under the W.T Act. According to the Madras High Court, only gifts made in the relevant gift-tax assessment year commencing after the 31st March, 1964, or subsequent assessment years will be excluded from the net wealth of the individual under the proviso. Shri Kolah has seriously criticised the reasons which have been given by the Madras High Court for reaching the conclusions which it did. One of the reasons given by the Madras High Court is that the gift-tax which is about 8% when the value of the total assets gifted exceeded Rs. 1,45,000 was increased to 40% on and from the assessment year 1964-65. The other reason given by the Bench was that by the Finance Act, 1964, aggregation of the gifts made to the same donee during a certain period was also provided for the purpose of taxation. The Division Bench of the Madras High Court then observed (p. 187):

    “We, therefore, presume that Parliament might have intended that when the gift made suffers a tax to the extent of 40% under the Gift-tax Act, it might be exempted from wealth-tax.”

    18. We would not speculate on the reasons set out by the Madras High Court because finding out the reasons without any indication in the Notes on Clauses would be only an exercise in imagination. That, however, does not affect the ratio of the decision of the Madras High Court.

    19. The third decision is of the Kerala High Court reported in [1978] 115 ITR 160 (M.G Kollankulam v. CIT). The Kerala High Court took the view while dealing with the proviso that (headnote):

    “While introducing the proviso with effect from 1st April, 1965, the legislature in referring to the chargeability of the transfer to gift-tax has used the words ‘is either chargeable to gift-tax under the Gift-tax Act, 1958, or is not chargeable under section 5 of the Act’ thereby indicating that the chargeability to gift-tax referred-to is not in respect of any past periods anterior to the commencement of the amending Act”.

    20. The Division Bench observed as follows (p. 165):

    “The language of the proviso does no credit to its draftsman in point of clarity or precision and its unsatisfactory nature has been further aggravated by the amendment of 1971. However, it appears ‘to us to be clear that the object and purpose of the proviso, as originally enacted in 1965, was to exempt from the liability for inclusion under sub-clauses (i) to (iv) the value of such assets in respect of which the transfers effected by the assessee are either chargeable to gift-tax under the Gift-tax Act, 1958, for any assessment year commencing after the 31st day of March, 1964, or are exempt from such levy for the said period under section 5 of the Gift-tax Act. By the amending Act of 1971, the availability of the said exemption was restricted to transfers effected till March 31, 1972, by introducing the limitation that the chargeability of the transfer to gift-tax must be for an assessment year commencing before the 1st day of April, 1972. While introducing the proviso with effect from April 1, 1965, the legislature, in referring to the chargeability of the transfer to gift-tax, has used the words” is either chargeable to gift-tax under the Gift-tax, 1958, or is not chargeable under section 5 of the Act’, thereby clearly indicating that the chargeability to gift-tax referred to is not in respect of any past periods anterior to the commencement of the amending Act. Construed in this context, the succeeding words ‘for any assessment year commencing after the 31st day of March, 1964’ contained in the proviso, as originally enacted, were obviously intended to connote the assessment year relating to the charge of gift-tax.”

    21. The next decision is of the Madhya Pradesh High Court reported in [1980] 121 ITR 676 (Smt. Malti Harshey v. CWT). It was held by the Division Bench of that court that the use of the word “is” in the proviso showed that the words “any assessment year commencing after the 31st day of March, 1964” refer to the assessment year under the G.T Act, and not under the W.T Act.

    22. There is also the decision of the Punjab and Haryana High Court reported in [1977] 107 ITR 758 (CWT v. Seth Nand Lal Ganeriwala) agreeing with the decisions of the Calcutta and the Madras High Courts referred to above. Having regard to the construction which we have placed on the proviso, question No. 2 must be answered in the affirmative and in favour of the revenue. The questions referred to us are accordingly answered as follows:

    Question No. 1.—In the negative and in favour of the revenue.

    Question No. 2.—In so far as the present case is concerned, in the affirmative and in favour of the revenue.

    Question No. 3.—In the negative and in favour of the revenue.

    Question No. 4.—In the negative and in favour of the revenue.

    23. In view of the ambiguity apparent, of the proviso which fell for consideration in this case, the proper order, in our view, would be that the parties should bear their own costs.

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    Commissioner Of Wealth-Tax, Bombay City-I v. Rasesh N. Mafatlal.
    (Apr 2, 1980)