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Attorney(S)
  • For the Appellant: D.S. Meenakshisundaram, J. Jayaraman, K.C. Rajappa, K.Srinivasan, V. Balasubramanian, Advocates.
Judges
  • Veeraswami
  • Alagiriswami, JJ.
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Attorney(S)
  • For the Appellant: D.S. Meenakshisundaram, J. Jayaraman, K.C. Rajappa, K.Srinivasan, V. Balasubramanian, Advocates.
Judges
  • Veeraswami
  • Alagiriswami, JJ.
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Smart Summary

Structured Summary of the Opinion — Veeraswami, J. (Reference under Section 26(1), Gift Tax Act, 1958)

Factual and Procedural Background

The assessee and his minor son, Karuppah (also referenced as Karuppan) Chettiar, constituted a Hindu undivided family. As of 2-9-1958 the family assets (including shares in house properties, business assets, outstandings in India, and partnership shares in Burma and Penang) were valued at Rs. 9,08,000. On that date the family executed a partition deed. Under the partition the assessee retained Rs. 70,000 in cash and undertook to discharge a registered mortgage of Rs. 20,000; the balance of the family assets was allotted to the minor son. The minor son was made responsible for bringing up the assessee's four daughters and performing their marriages according to community custom and family status. The partition was recognised for income-tax purposes under Section 25-A of the Income-tax Act, 1922.

For the assessment year 1959–1960 the assessee filed a "nil return" under the Gift Tax Act. The Gift Tax Officer assessed that the father's half share (after deducting Rs. 70,000 retained) had been transferred to the minor son without consideration and brought the residue (a sum noted as Rs. 3,84,000) to tax as a gift. On appeal, the Appellate Assistant Commissioner agreed a gift had taken place but held that immovable properties worth Rs. 3,61,300 situated outside India were exempt under Section 5(1) of the Gift Tax Act and directed amendment of the assessment to allow that exemption. The Gift Tax Officer (revenue) appealed that allowance; contending, inter alia, that the share gifted in the foreign firms did not itself constitute immovable property for Section 5(1). The Tribunal rejected the revenue contention on the nature-of-property point, and on the facts additionally observed that it could not be said the transfer was without consideration because the minor had assumed responsibility for the daughters' maintenance and marriages. The Commissioner referred questions under Section 26(1) to this court.

Legal Issues Presented

  1. Whether on the facts and in the circumstances of the case the assessee was liable to gift tax?
  2. If the answer to the first question is in the affirmative, whether the sum of Rs. 3,61,300 representing the value of the immovable properties in Malaya is exempt from taxation under Section 5(1) of the Gift Tax Act?

Arguments of the Parties

Revenue's Arguments (Gift Tax Officer / Commissioner)

  • The share of the family as a partner in the foreign firms could not be regarded, by itself, as immovable property within the meaning of Section 5(1) of the Gift Tax Act; hence the exemption claimed for immovable properties outside India was not tenable.
  • Relying on the terms of the partition deed, the revenue argued that there had been a division in status first and thereafter an outright transfer of the father's share (after retaining Rs. 70,000) — i.e., this was not a mere unequal partition but an effective transfer of the father's half share.

Appellate Assistant Commissioner / Tribunal Positions

  • The Appellate Assistant Commissioner: agreed the transaction amounted to a gift, but held that immovable properties worth Rs. 3,61,300 located outside India fell within the exemption of Section 5(1) and directed amendment accordingly.
  • The Tribunal: declined the revenue's contention that the partner's share should be treated as immovable property for Section 5(1). On the merits the Tribunal further held that, on the facts, it could not be concluded the transaction was entirely without consideration because the minor's assumption of responsibility for the daughters and their marriages constituted consideration.

Assessee's Position

  • The assessee filed a "nil return" under the Gift Tax Act. The record shows the assessee did not appeal against the Gift Tax Officer's finding that there had been a gift, nor did he appeal against the Appellate Assistant Commissioner's order insofar as it held there was a gift.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Narayanappa v. Krishnappa, 1966-2 SCJ 490; AIR 1966 SC 1300 The principle that property brought into partnership (including immovable property) becomes a trading asset of the firm; a partner has no exclusive right to such property during the partnership and is entitled only to his share of profits or, on dissolution, to the value of his share in the firm's assets (after deductions). The court applied this principle to hold that the family's share in foreign firms (which owned immovable properties as part of their trading assets) did not equate to a transfer of immovable property per se for the purposes of Section 5(1); therefore Section 5(1) could not be invoked to exempt the immovable properties merely because they were part of the foreign firms' assets.
Commissioner of Income-tax v. Getti Chettiar, (1966) 60 ITR 454 (Mad) The proposition that allotment of a father's half share in a family partition did not necessarily amount to a transfer of property by him to his son and grandsons (i.e., such an allotment may not constitute a gift). The court treated this precedent as directly applicable: it held the partition deed in the present case did not amount to an outright transfer of the father's half share (as the revenue had argued) and therefore the reasoning in Getti Chettiar applied to weigh against treating the partition as a gift transfer.

Court's Reasoning and Analysis

The court proceeded in two main analytical steps corresponding to the two referred questions.

  1. Analysis of Section 5(1) exemption (nature of property transferred):
    • The court examined whether the share allotted to the minor son could be treated as immovable property situated outside India so as to attract the exemption in Section 5(1) of the Gift Tax Act. It observed that neither the Appellate Assistant Commissioner nor the Tribunal had critically examined whether a partner's share in a firm that owned immovable properties would, by itself, amount to immovable property for the purposes of Section 5(1).
    • Relying on Narayanappa v. Krishnappa, the court reiterated that property contributed to or acquired by a partnership becomes the firm's trading asset; partners have only a right to share in profits or, on dissolution, in the value of the firm's assets. Consequently a transfer or allotment of a partner's share in the firm is not the same as a transfer of immovable property belonging to the firm.
    • Applying that principle, the court concluded Section 5(1) did not apply and therefore the allowance made by the Appellate Assistant Commissioner in respect of immovable properties (noted in the opinion as Rs. 3,01,300) could not be sustained.
  2. Analysis whether the partition deed amounted to a transfer (gift) of the father's half share:
    • The court considered whether the partition deed, by its tenor and effect, constituted a transfer of the assessee's half share rather than an unequal partition. It regarded the precedent in Commissioner of Income-tax v. Getti Chettiar as directly applicable, where a similar allotment did not amount to a gift.
    • The revenue attempted to distinguish Getti Chettiar by asserting the partition here involved a sequence: first division in status, then an outright transfer of the remaining assets after retaining Rs. 70,000. The court found this construction unwarranted by the partition deed's language.
    • The court quoted the partition deed: “Having valued my share and obtained in cash and having partitioned the entire assets to my minor son Karuppan Chettiar, myself and my minor son Karappan Chettiar have become divided in status.” The court read this as showing the division in status was contemporaneous with the division of assets, not a two-stage transaction where status division preceded an independent transfer.
    • On that basis, the court held there was little room to treat the present partition as outside the reasoning of Getti Chettiar and thus concluded the allotment did not amount to a transfer that would impose gift tax liability on the father.
  3. Observations on earlier proceedings:
    • The court noted that the Appellate Assistant Commissioner had not set aside the Gift Tax Officer's view that there was a gift; the assessee did not appeal that finding. The court expressly limited its consideration of the first question only insofar as it bore upon the second question (the Section 5(1) point) and declined to express a separate tax calculation or effect beyond answering the referred questions.

Holding and Implications

Holding: Question 1: Answered against the Revenue (i.e., the court concluded the assessee was not liable to gift tax on the facts before it).

Question 2: Answered in favour of the Revenue (i.e., the court held that Section 5(1) did not apply to exempt the immovable properties merely because they formed part of the trading assets of foreign firms; the allowance in respect of immovable properties to the value stated in the opinion — reflected as Rs. 3,01,300 in the judgment — could not be sustained).

Implications and immediate consequences:

  • The direct effect on the parties as recorded: the court concluded that, on the facts and the partition deed's terms, the transaction did not create liability for gift tax on the father (answer to Question 1 against the Revenue).
  • Separately, the court ruled that the contention that the son's share should attract exemption under Section 5(1) because immovable properties of the foreign firms existed outside India was unsustainable; the partner's share in the firm is not identical to immovable properties of the firm for Section 5(1) purposes (answer to Question 2 in favour of the Revenue and the disallowance of the Section 5(1) exemption allowance).
  • The court observed that it was not called upon to determine the exact tax effect of these findings (including any adjustments of assessments) because the assessee had not appealed the gift finding; the court therefore limited itself to answering the referred questions.
  • The court made no order as to costs.

Answer to the reference: The questions were answered as set out in the holding.

Show full summary ...

    Commissioner Of Income-Tax v. N.K.K.R. Muthukaruppan Chettiar

    Veeraswami, J.:— This reference arises under Section 26(1) of the Gift Tax Act, 1958. The assessee and his minor son, Karuppah Chettiar constituted a Hindu nndivided family. The family owned shares in house properties and business assets and outstandings due in this country and also shares in partnership business in Burma and Penang, the total of which was valued at Rs. 9,08,000 as on 2-9-1958. On that date, there was a partition, the terms of which are found in the partition deed. The assessee retained Rs. 70,000 in cash with him and the balance of the family assets was allotted to the share of the minor son. The responsibility for bringing up the assessee's four daughters and performing their marriages in accordance with the custom of the community and the status of the family was left with the minor son. Though the assessee retained for himself the sum of Rs. 70,000 he undertook to discharge a registered mortgage due from the family, a sum of Rs. 20,000. The partition appears to have been recognised for purposes of income-tax under Section 25-A of the Income-tax Act, 1922. For the assessment year 1959-1960, the assessee filed a “nil return’ for purposes of the Gift Tax Act But, on the view that the half share of the father, deducting Rs. 70,000 retained with him, had been transferred to the minor son without consideration in money or money's worth, the Gift Tax Officer brought the value of the residue, a sum of Rs. 3,84,000, to tax. On appeal by the assessee, the Appellate Assistant Commissioner agreed with the Gift Tax Officer that the transaction amounted to a gift, but considered that, as the immovable properties woth Rs. 3,61,300, were situated outside the territories of India, they were exempt under Section 5(1) of the Gift Tax Act from charge. On that view, he directed the Gift Tax Officer to make due allowance for it and amend the assessment accordingly. The Gift Tax Officer appealed in so far as the order of the Appellate Assistant Commissioner was against the department on his behalf the contention was that the share gifted to Muthu Karuppan Chetliar did not by itself constitute or consist of immoveable properties.

    2. This point was reiterated before the Tribunal in different ways, but in substance, the contention for the Revenue was that the share of the family as a partner in the foreign firms could not be regarded, as, by itself, immoveable property within the meaning of Section 5(1). The Tribunal declined to accept that view with the result the department's appeal failed. Though that conclusion of the Tribunal would have sufficed to dispose of the appeal before ft, it went further and said, in effect that on the facts it could not be held that the transaction was one without consideration inasmuch as the responsibility for mamtaining and performing the marriages of his sisters lay on the minor under the terms of the partition. In the circumstances, at the instance of the Commissioner, the reference comes before us, the question for our consideration being—

    “(1) Whether on the facts and in the circumstances of the case, the assessee was liable to gift tax? (2) If the answer to the first question is in the affirmative, whether the sum of Rs. 3,61,300 representing the value of the immoveable properties in Malaya is exempt from taxation under Section 5(1) of the Gift Tax Act?”

    3. On the strength of Narayanappa v. Krishnappa, 1966-2 SCJ 490 : (AIR 1966 SC 1300) the department contends that the Tribunal should have accepted the position that the exemption of the immoveable properties under Section 5(1) was not well founded. It seems to us that the department is right Neither the Appellate Assistant Commissioner nor the Tribunal examined critically whether, because a partner had a share in a firm which owned immoveable properties among other assets, therefore, when such a share was transferred, it can assume that there has been a transfer of immoveable properties which are exempt from charge under Section 5(1). They seemed to have approached the question from the factual situation of the immoveable properties outside the territories of India and applied Section 5(1), 1966-2 SCJ 490 : (AIR 1966 SC 1300) held that whatever be the character of the property brought in by the partners, or acquired in the course of the business, it became the property or trading assets of the firm and that a partner was entitled only to his share of profits, if any, accruing and upon dissolution to a share in the moneys realised which represented the value of the property.

    4. In that case, a Karar was executed by one of the partners, which, recorded the fact that the partnership had come to an end and he had given up his share in the assets consisting of machine eta of the business in the firm and made over the same to the other partner by way of adjustment. The Karar also contained a recital that the partner who executed the document had been given certain immoveable property that formed part of the trading assets of the business by the other partner. The document was not registered and the question before the Supreme Court pertained to the validity of the document it was held that the document did not require registration. The Court observed at page 495 (of SCJ) — (at p. 1304 of AIR)—

    “The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immoveable property. Once that is done, whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise is right even to the extent of his share in the business of the partnership. As already stated his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the not partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another, in that case what the assignee would get would be only that what is permitted by Section 29(1), that is to say, the right to receive the share of profits or the assignor and accept the account of profits agreed to by the partners.”

    5. It was on that view the Supreme Court held in that case that the document there did not involve any transfer of immoveable property and it did not, therefore, require registration. It seems to us, the principle of this decision has direct application to the facts before us. The joint family of the assessee only owned a share, and that is not in dispute, in the foreign firms, which owned immoveable properties as part of trading assets. The subject matter at the family division was, therefore, that share owned by the family in the foreign firms, and not the immoveable properties per se which constituted the business assets of those firms. We are of opinion, therefore, that S. 5(1) has no application and the allowance granted in respect of the immoveable properties to the value of Rs. 3,01,300 cannot be sustained.

    6. That, by itself, may not conclude in favour of the Revenue, which has got to get over another hurdle. The next question will be whether the partition deed, having regard to its entire tenor and effect, amounted to a transfer of the assessee's half share. A relative question was considered by Commissioner of Income-tax v. Getti Chettiar, (1966) 60 ITR 454 (Mad) to which one of us was a party. That was a case of a joint Hindu family consisting of a father his son and six grandsons by that son. There was a partition at which the father took for himself Rs. 1,78,343 and the residue out of the total assets of the family valued at Rs. 8,51,440 was allotted to the son's share. The father was charged to a gift tax on Rs. 2,36,377 on the view that allotment of the father's half share less Rs. 1,78,343, amounted to a gift without consideration in money or money's worth. This court held that the transaction did not amount to a gift. This was on the view that the allotment of the father's half share did not involve a transfer of property by him to his son and grandsons. The principle of this decision has undoubted application to this case. But Mr. Balasubramaniam for the Revenue resting himself on the terms of the deed of partition attempted to distinguish (1966) 60 ITR 454 (Mad). According to learned counsel, if regard is had to the terms of the partition, it will be clear that there was first a division in status between the assessee and his son, thereafter, after retaining with him a sum of Rs. 70,000, the father made over the residue of the family assets to his son. On this basis, it is pressed on us that this was not a case of an unequal partition simpliciter, but an outright transfer of the fathers share after a division in status had been effected. We do not think that the partition deed lends itself to the construction which learned counsel for the Revenue sought to place. There is nothing in the partition deed to show that there has been a division first, later on a kind of notional division by metes and bounds and thereafter, the fattier transferring his half share after retention of a portion. As a matter of fact, the partition deed itself says—

    “Having valued my share and obtained in cash and having partitioned the entire assets to my minor son Karuppan Chettiar, myself and my minor son Karappan Chettiar have become divided in status”.

    The division in status is, therefore, contemporaneous with the division of the family assets. It seems to us, therefore, that there is hardly any room for holding that (1966) 60 ITR 454 (Mad) is inapplicable.

    7. We answer the first question against the Revenue and the second question in its favour. Before leaving this case, we have to make one more observation.

    8. The Appellate Assistant Commissioner did not set aside the view of the Gift Tax Officer that there was a gift, but finding that the assessee would be entitled to an allowance under Section 5(1), directed him to amend the assessment accordingly. The assessee did not prefer an appeal against the Gift Tax Officer's order in so far as it held that there was a gift; nor did he prefer an appeal against the order of the Appellate Assistant Commissioner on that question. What the tax effect of this would be we are not called upon to consider in this reference. But we have considered the first question in this reference only in so far as it has a bearing upon the answer to the second question.

    9. In the circumstances, we make no order as to costs.

    10. Answered accordingly.

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    Comments

    Commissioner Of Income-Tax v. N.K.K.R. Muthukaruppan Chettiar
    (Aug 20, 1968)