High Court Of Telangana & Andhra Pradesh
Arjundas Vs. Commissioner Of Gift-Tax
Section : 2(xii)
Assessment year : 1987-88
L. Narasimha Reddy And Challa Kodanda Ram, JJ.
Referred Case No. 160 Of 2000
June 24, 2014
JUGMENT
L. Narasimha Reddy, J. – This reference is made under section 26(1) of the Gift-tax Act, 1958 (for short “the Act”), by the Income-tax Appellate Tribunal, Hyderabad Bench A (for short “the Tribunal”).
2. The circumstances that led to the making of the reference are as under : The applicant, his brother, Sri Arjun Das, and their mother Smt. Susheela Devi jointly owned a building at Nizamabad. In addition to that, the two brothers held an open land at Nizamabad in common. The building was leased to the State Bank of India at monthly rent of Rs. 16,230.
3. Through a deed of partnership, dated April 7, 1986, the mother and two sons constituted a partnership firm and the two properties referred to above were made the assets of the firm. However, the firm was dissolved within one year, i.e., on March 2, 1987. At the time of dissolution, the building at Nizamabad was allotted towards the share of the mother, open land to the share of one of the sons, by name Arjun Das and the applicant herein was allotted some liquid assets.
4. In the income-tax return submitted for the assessment year 1987-88, the value of the building was shown at Rs. 6,21,000. While processing the return, the Income-tax Officer, who also happens to be the authority under the Act, took the view that a transaction of gift has taken place from the applicant herein to his mother to the extent of his one-third share in the house. In addition to that, he assessed the value of the house at Rs. 20,28,750 through the method of capitalisation. Accordingly, he proposed to levy gift-tax at Rs. 1,34,77. After considering the explanation submitted by the applicant, the assessing authority confirmed the levy and demand.
5. Aggrieved by the order of the assessing authority, the applicant carried the matter to the Commissioner of Income-tax (Appeals)-IV. The appeal was dismissed on January 17, 1996. Thereafter, the applicant availed of the remedy of further appeal before the Tribunal. The further appeal was dismissed on March 4, 1999. On an application submitted under section 26(1) of the Act, the following questions are referred to this court :
“1.Whether, on the facts and in the circumstances of the case, the conclusion of the Appellate Tribunal that there are no family disputes or that there is no family settlement is based on the relevant material or reasonable or could be correct conclusion which could be arrived at based on the facts occurring in the case ?
2.Whether, on the facts and in the circumstances of the case, the assessee is entitled to plead that the formation and dissolution of the partnership Arjundas and Rajkumar and others to give effect to family settlement, is relevant for understanding whether at all, there is any transfer resulting in a deemed gift under the Gift-tax Act ?
3.Whether, on the facts and in the circumstances of the case, the Tribunal is correct in its conclusion that upon the dissolution of the firm, Arjundas and Rajkumar, there is deemed gift by the assessee in favour of his mother ignoring the family settlement altogether and in assessing the deemed gift at Rs. 4,69,250 ?
4.Whether, on the facts and in the circumstances of the case, for the purpose of assessing the deemed gift the valuation of the property at Nizamabad at Rs. 20,28,750 is correct or whether the same is exclusive ?
5.Whether, on the facts and in the circumstances of the case, while valuing the property on the rental method, is the assessee entitled to deduction of municipal taxes repairs and collection charges from the annual rent for arriving at the net rent ?
6.Whether, on the facts and in the circumstances of the case, for valuing the building is it open to the Assessing Officer to treat rent paid towards air-cooling charges as part of property income, when the rental deed itself specifies the rent of the property and the charges for providing air-cooling separately ?
7.Whether, on the facts and in the circumstances of the case, the Tribunal is justified in not adopting a combination of rental method and land and building valuation of the Nizamabad property ?”
6. Sri Y. Ratnakar, learned counsel for the applicant, submits that the assessment was made at a stage when the property was yet to become the asset of the partnership firm and at that stage, it was jointly owned by the mother and the two sons. He contends that assuming that the allotment of property either exclusively to the mother or in a manner, disproportionate to their shares held earlier, there is no element of transfer, much less an occasion to levy gift-tax. Alternatively, he submits that even if it is a case of property being allotted on dissolution of the firm, the same legal consequences ensue. He placed reliance upon the judgment of the hon’ble Supreme Court in Jagatram Ahuja v. CGT [2000] 246 ITR 609/113 Taxman 459.
7. Sri S. R. Ashok, learned senior standing counsel for the Income-tax Department, on the other hand, submits that the very formation of a partnership firm was an exercise to bring about a transfer without consideration and naturally, a transaction of gift comes into existence. He contends that though the applicant was not clear as to the manner in which the property had been passed on to the mother, he ultimately admitted that the transaction has taken place at the time of dissolution of the partnership firm and that the view taken by the Tribunal accords with law. He submits that none of the questions referred to this court have any relevance to the issue, much less to the relevant provisions of law and, accordingly, they deserve to be answered against the applicant.
8. As mentioned earlier, the two items of property were held by the members of the same family. While the building was held by the mother and the sons in equal shares, the open space was in the name of the two sons. Both the items became the assets of the partnership firm, which was brought into existence through a deed of partnership, dated April 7, 1986. The firm was dissolved on March 2, 1987, giving rise to the distribution of the assets in a manner, different from the one in which the contributions were made.
9. The assessment of the gift-tax is only with reference to the house property. It was estimated by the applicant at Rs. 6,21,000. The assessing authority, however, determined the value at Rs. 20,28,750. There is no dispute about it. The core issue that cuts across all the questions referred to this court is as to whether the applicant herein can be said to have gifted his one-third share in the building to his mother and as a consequence, liable to pay the gift-tax.
10. Two situations need to be taken into account to analyse the matter, in a comprehensive way. The first situation is where the property was held in equal shares by the mother and the two sons, who included the applicant. If the accrual of the entire property to the mother can be said to have taken place at that stage, without reference to any constitution of the firm or dissolution thereof, it needs to be treated as a family arrangement, resembling a partition. It is not uncommon that in a family partition, distribution of the properties is not equal with mathematical precision. Much would depend upon the relevant circumstances, such as location of the property, needs of the concerned partner, etc.
11. The question as to whether any act of transfer in one of the five known methods, i.e., sale, mortgage, gift, lease and exchange can be said to have taken place in a partition within a family or between co-owners. This aspect was considered in detail by the hon’ble Supreme Court in CIT v. Keshavlal Lallubhai Patel [1965] 55 ITR 637 (SC). The Supreme Court held as under (page 641) :
“Partition is really a process in and by which a joint enjoyment is transformed into an enjoyment in severalty. Each one of the sharers had an antecedent title, and, therefore, no conveyance is involved in the process, as a conferment of a new title is not necessary.”
Support to this was drawn from the judgment of the Madras High Court in M. K. Stremann v. CIT [1961] 41 ITR 297 (Mad). Therefore, it is difficult to infer that any transaction, similar to the one of gift, has taken place when the mother of the applicant became the absolute owner as a process of adjustment of shares between herself and her sons.
12. The second situation is with reference to the partnership firm. It appears that the mother and two sons formed a partnership firm and have contributed two items of property towards their respective shares. At the time of dissolution, while the house property was allotted exclusively to the mother, the open land was given to one of the sons, i.e., the brother of the applicant. There is every possibility for the Income-tax Officer to treat that the transaction of gift has taken place at this stage, in a way, justifidely. However, the issue is no longer uncertain.
13. The Supreme Court in Jagatram Ahuja’s case (one supra), after reviewing the entire case law, took the view that even in the case of dissolution of partnership, no transfer of property takes place and the occasion to levy gift-tax does not arise. The judgment of this court, which was the subject matter of that very appeal, was reversed.
14. From a perusal of the judgment of the hon’ble Supreme Court in Jagatram Ahuja’s case (one supra) and other judgments referred to therein, what becomes clear is that a gift, as defined under section 2(xii) of the Act, which is fairly wider than the description of gift under section 122 of the Transfer of Property Act can be said to have taken place if only there is a valid and legal disposition. Section 2(xii) of the Act reads as under :
“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 or conversion of any property referred to in section 4, deemed to be a gift under that section.”
15. The word “disposition” takes in its fold, various categories of transfers. A valid transfer, particularly one of gift, can take place if only the person, who is said to have gifted the property, namely, the donor, had a valid, clear, definite and undisputed title vis-a-vis the property. When a gift is said to have been made by a member of a joint family or a partner, a close scrutiny of the nature of rights which the donor had vis-a-vis an item of property becomes essential.
16. It is too well-known that howsoever substantial the entitlement of a member of a family may be, he cannot be said to be the absolute owner of even small fraction thereof. It is only when his entitlement is translated into reality through the process of partition, that he becomes the absolute owner of the property allotted to his share. The same is the case with the partnership.
17. The Supreme Court recognised the fact that a firm is not a recognised legal personality and no partner can hold any item of the assets, exclusively for himself. To put it in positive terms, each partner can be said to have held the entire assets but to the extent of his share. Here again, the actual entitlement of the partner comes to be translated if only the dissolution takes place and the item of property is allotted to his share. The occasion for the member of a joint family or a co-owner or a partner to make a gift would arise only after his share is determined in the process of partition or dissolution, as the case may be. What has accrued as a result of partition or dissolution does not amount to any transfer at all.
18. The assessing authority proposed to treat the accrual of the property to the mother of the applicant, as a result of partition or dissolution of firm ; as a gift. This is contrary to the unequivocal law, laid down by the hon’ble Supreme Court.
19. The answer to question No. 3 would serve the purpose and rest of the questions are supplemental or ancillary.
20. We, therefore, answer question No. 3 in favour of the applicant and against the Department. The rest of the questions are treated as superfluous.
21. The reference is answered accordingly.
[Citation : 367 ITR 137]
