By TIOL News Service

MUMBAI, MAR 22, 2017: THE ISSUE IS - Whether relinquishment/surrender of life interest in the properties belonging to trust, by the releaser in favour of his children, would constitute 'gift'/'deemed gift' u/ss 4(1)(c), (d) or (e) of Gift Tax Act, when the releasor was not absolutely entitled to the property. NO is the verdict.

Facts of the case:

During the subject year, by an indenture, Sir Nusserwanjee Nowrosjee Wadia created an irrevocable trust for the benefit of his son Neville Ness Wadia and his children by settling 1001 fully paid shares of Bombay Dyeing and Manufacturing Co. on trustees of Neville Ness Trust Fund No. 2. The indenture of lease provided that Neville Wadia i.e., the son of the settlor, would have life interest in respect of the dividends, interest and income of the settlor for his life. After the death of said Neville Ness Wadia, the property was to be divided into two equal shares and held by another Trust. Thereafter, Mr. Neville Wadia relinquished his life interest in the Trust and life interest in the property belonging to the Trust. When the matter reached before this court, it was held that surrendering of life interest by the assessee would not amount to transfer of property to his children so as to attract the provisions of Section 16(3)(a)(iii) of Indian Income Tax Act, 1922.

During the A.Y 1984-85, the assessee sold his life interest in the income from the property of the Trust under an Agreement to M/s. Kapadia Trading Co. Ltd. and Anr. for consideration of Rs. 21.70 lakhs. The assessee took the stand that the amounts received on transfer of life interest to M/s. Kapadia Trading Co. Pvt. Ltd. would not give rise to any capital gains as the cost of acquisition of life interest in the shares / securities held by the assessee was Nil. Thus, a stand was taken that no capital gains could be taxed upon the assessee. On appeal, the Tribunal held that the Settlement Deed by Neville Wadia in favour of Shri Nusli Wadia amounted to a Gift therefore, covered by Section 49(1)(ii) and concluded that the assessee had become the "owner" of the property under a gift. The cost of property to the previous owner was to be taken as cost of acquisition for determining the capital gains. Consequently, the cost of acquisition to the original owner was to be taken as the cost for arriving at the capital gains tax, if any, payable by the assessee. Consequently, the impugned order of the Tribunal restored the issue to the file of AO to correctly compute the capital gains payable in accordance with law.

On appeal, the HC held that,

++ it is seen that this Court in Commissioner of Gift Tax, Bombay City- I vs. Mrs. Jer Mavis Lubimoff, had an occasion to consider meaning of the expression 'Gift'. In this case, this Court also considered the fact that the expression 'transaction entered into ' used in clause (d) of Section 2(xxiv) of the Gift Tax Act had come up for consideration before the Supreme Court in the case of Goli Eswariah's case, wherein the Supreme Court took a view that the words "transaction entered into" contemplated in Section 2(xxiv)(d) of the Gift Tax Act cannot apply to a unilateral act. The act must be one to which two or more persons are parties. The Court found that in the case of Lubimoff also, the deed of release or relinquishment or surrender was executed by Mrs. Jer Mavis Lubimoff alone and nobody else was a party, much less the daughter. Such a unilateral document was not a "transfer of property" within the meaning of Section 2(xxiv) of the Gift Tax Act 1958 and not a gift within the meaning of Section 2(xii) of the said Act. The Court also considered contention of the Revenue that the transaction was a Gift under the provision of Section 4(1)(c) of the Gift Tax Act and after considering the same observed that the answer to such a question would depend as to the whether Gift Tax Officer was satisfied that the deed of release had been found not to be bonafide. Faced with this position, the Revenue's counsel submitted that execution of the release deed amounted to transfer of property by the father of the assessee who accelerated the vesting of the life interest by executing deed of release. He submitted in the alternative that the relinquishment of life interest amounted to a transfer and that the cost of acquisition of the capital asset should be computed as the cost to the original Settlor. He relied upon the provision of Section 2(xii) of the Gift Tax Act and submitted that the release in favour of the assessee was a deemed gift under the provisions of section 4(1)(d) of the Gift Tax Act, or, in the alternative submitted that the transfer in the present case would be covered by Section 4(1)(d) and / or 4(1) (e) of the Gift Tax Act;

++ it is seen that the issues stand fairly covered by the decision of Neville Wadia case and there is no reason to take a different view. The concept of a gift clearly demands of a voluntary, conscious and positive act by one person transferring property and without any consideration therefor. Having considered the various definitions of the expression "Gift" as per Act, 1958 and the judicial pronouncements, this court is of the view that the relinquishment/surrender in the instant case does not constitute a Gift in the absence of a transfer by Neville Wadia to the assessee nor does it come u/s 4(1)(c), (d) or (e) of the Gift Tax Act. This court is unable to agree with the submissions of the Revenue for more than one reason. Firstly, Neville Wadia the releasor was not absolutely entitled to the property nor has he caused the same to be vested in himself jointly with any other person. He has also not caused any appropriation to be made from and within the said property. Moreover, the effect of clause 4(1)(d) of the Gift Tax Act will be deemed to be gift made in favour of the other person by the person who caused the property to be so vested upon appropriation and the Tribunal was not correct in concluding that the assessee had acquired a capital asset by way of gift. The Tribunal's decision to restore the matter to the file of AO is not justifiable. This court in case of Neville Wadia, has held that whatever came to the daughter and son of the assessee in that case was a result of provisions made in their favour as beneficiaries under the original deed of settlement and that by use of the words in the operative clause did not create any interest in favour of the daughter and the son of assessee. In this case the person who caused appropriation by executing the release is Neville Wadia and it is not the case of the Revenue that Neville Wadia has been held liable to be taxed in relation to the release in favour of his children. As far as clause 4(1)(d) of the Gift Tax Act is concerned the same has no application at all. At best 4(1)(c) of the Gift Tax Act would be of some relevance and we find no reason, given the decision of our Court in Neville Wadia, to hold that there has been a "transfer" or "gift" in favour of the present assessee of any Capital asset, even assuming that the definition of "Gift" under the Gift Tax Act can be pressed into service by the Revenue.

(See 2017-TIOL-532-HC-MUM-IT)