Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that there was a transfer of the assets from which the income arose and, therefore, the provisions of s. 60 of the IT Act, 1961, would not apply ?

Counsel Appeared

M. Suryanarayana Murthy & A.V. Krishna Koundinya, for the Revenue : N. Srirama Murthy (amcus curiae), for the Respondent

Y.V. ANJANEYULU, J.:

This reference arising under the IT Act (hereinafter referred to as the ” Act “) is made by the Tribunal at the instance of the CIT. It relates to the asst. yr. 1977-78. The following three questions are referred for the consideration of this Court :

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that there was a transfer of the assets from which the income arose and, therefore, the provisions of s. 60 of the IT Act, 1961, would not apply ?

Whether, on the facts and in the circumstances of the case and in view of the contents of the deed of declaration dated February 12, 1977, wherein the donee, who is a minor, had been made liable to share the losses also, the contract for the gift of 1/4th of the holding of the assessee in the firm of Grandhi Butchi Raju & Co. is valid and, consequently, whether there is a valid gift of such portion of the share by the assessee ?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that 1/4th of the share of profits derived from the firm of Grandhi Butchi Raju & co. cannot be included in the hands of the assessee ? “

The assessee was holding a share in a partnership firm known as Grandhi Butchi Raju & Co., Tuni. By a declaration dated February 12, 1977, 1/4th of the share held by the assessee in the aforesaid partnership firm was gifted in favour of Venkatalakshmi. The declaration states that the gift was made to cover the marriage and educational expenses of the donee. It is also stated that the gift of 1/4th share extends to the corpus of the share also. There is a categorical declaration that to the extent of the share gifted in favour of Venkatalakshmi, the assessee ceased to be the owner of the share. Before we conclude the reference to the declaration, we have to point out one significant averment in the declaration to the effect that Grandhi Narayana Rao who made the gift was assessed to income-tax in the status of an individual. In the declaration, he stated that he was wrongly assessed in the status of an individual and the correct status was that of a joint family consisting of himself, his wife and daughter. It is stated in the declaration that be had developed the present estate with the nucleus of gifts given by his father, Sri Buchiraju, to the family. The declaration of gift, therefore, proceeds on the basis that the share in the partnership firm belonged to the joint family and it was the joint family which gifted a moiety of that share to the daughter of the Karta. That is how the foundation for the gift was laid.

In connection with the income-tax assessment for the year 1977-78, the assessee claimed that the income corresponding to the moiety of share gifted in favour of Venkatalakshmi should be excluded from the assessment of the assessee. A perusal of the assessment order would show that the ITO went into the question regarding the status and was satisfied with the averments contained in the declaration of gift that the correct status of the assessee was that of an HUF. This was so, because the ITO describes the assessee as an ” HUF (non-specified) “. It is not, therefore, necessary to go into the question whether the gift is referable to the individual as it is admitted on all sides that the gift is made by the joint family in favour of Venkatalakshmi. The ITO rejected the assessee’s request without much discussion, but by referring to the decision of the Supreme Court in K. A. Ramachar vs. CIT (1961) 42 ITR 25 (SC).

The assessee appealed to the AAC against the inclusion of the share income corresponding to the extent gifted in favour of Venkatalakshmi in the assessment of the joint family for the year 1977-78. The AAC dismissed the appeal affirming the ITO’s view that the ratio of the decision of the Supreme Court in Ramachar’s case applies.

The assessee filed a second appeal before the Tribunal and the Tribunal accepted the assessee’s contention and directed exclusion of the share of income corresponding to the moiety of share gifted in favour of Venkatalakshmi. The CIT applied for and obtained the present reference under s. 256(1) of the Act.

Learned standing counsel for the Revenue, Sri Mr. Suryanarayana Murthy, contends that the declaration of gift in favour of Venkatalakshmi contained a recital that if in any year there was a loss in the partnership firm, that would be recovered from the donee. Learned counsel submits that a minor cannot be made liable for the loss and, therefore, the transaction is illegal. This is obviously a misapprehension. The declaration of gift would clearly show that the share in the partnership firm continued to be in the name of the assessee, the Karta of the joint family, and the minor daughter, Venkatalakshmi, was not made a partner in the partnership firm. Thus, the question of burdening the minor with losses does not arise. Learned standing counsel fairly concedes that as far as the gift is concerned, its validity is not open to question because an onerous gift can always be made and if there is an averment in the gift deed that if in any year loss arises to the minor child, the same shall be recovered from the child, it does not have the effect of making the gift invalid. So, learned standing counsel reiterated the ratio of Ramachar’s case (supra) and stated that that decision would apply.

As the assessee is unrepresented in this case, we have requested Sri. N. Srirama Murthy, Advocate, to assist the Court as amicus curiae. Learned counsel pointed out that the Revenue’s contention that there was no transfer of interest in the corpus is not borne out by the documents. On the contrary, our attention is invited to the declaration of gift which contained a categorical averment that the gift is not merely of the profit corresponding to the moiety of share gifted but also of the corpus itself. Learned counsel, Sri Srirama Murthy, therefore, contended that there was no foundation for the submission of the Revenue that what was gifted in favour of the minor was only the profit arising in respect of the extent of share gifted in her favour and not the corpus corresponding to the same. Once the corpus is transferred, learned counsel submits, the provisions of s. 60 of the Act have no application whatsoever. We think that Sri Srirama Murthy is correct in his submission. The document categorically states that the gift is not merely of the profits but also of the corpus of the share itself. There is a clear indication in the declaration of gift that the corpus together with the accumulated profits would be delivered to the donee as and when called upon to do so. In view of this, it is clear that the plea raised by the Revenue that what was transferred is merely a right to secure the profits and not the corpus itself is not borne out by the facts on record. The provisions of s. 60 can have no application in a case where the corpus itself is transferred.

Having regard to the above, question No. 1 is answered in the negative to the effect that the provisions of s. 60 of the IT Act, 1961, have no application. Question No. 2 is answered in the affirmative to the effect that there as a valid gift by the assessee in favour of Venkatalakshmi. Finally, question No. 3 is answered in the affirmative to the effect that the share of profits corresponding to the extent of share gifted in favour of Venkatalakshmi cannot be included in the hands of the assessee.

In the result, all the three questions are answered in favour of the assessee and against the Revenue. As the assessee succeeds in the reference fully, we direct the CIT to pay the fee of the amicus curiae which we fix at Rs. 250. We record our appreciation of the valuable assistance rendered by Sri N. Srirama Murthy, amicus curiae.

[Citation : 173 ITR 593]