2001 (9) TMI 11 - HC - Income Tax

Gift Tax Act 1958 - (1) Whether exercise of power of appointment by the assessee was a transfer of the assessee s interest in the property under section 2(xxiv)(c) of the Gift-tax Act making the assessee liable to tax under the Gift-tax Act? - (2) If the answer to question No. 1 is in the affirmative whether the assessee by exercising the power of appointment regarding his interest in the property and naming the persons to whom the trustees of the original trust should transfer the property at a future date became liable to gift-tax in this assessment year? - (3) Whether the expression in such manner in clause (1)(iii) of the trust deed did not empower the trustees to make a direct transfer to appointee trusts? If it did so empower whether there had been such a direct transfer for which no tax is leviable as it had already been paid at the time of the first transfer? - (4) Whether the Appellate Tribunal has been right in law in holding that the Gift-tax Officer was not justified in levying gift-tax on the value of the entire corpus on the ground that it was only the assessee s interest in the property which was transferred and it was that which was required to be considered for the purpose of the gift-tax? - we answer questions Nos. (1) and (2) in the affirmative i.e. in favour of the Revenue and against the assessee while question No. (3) is answered in the negative i.e. in favour of the Revenue and against the assessee. So far as question No. (4) is concerned we answer the same in the affirmative i.e. in favour of the assessee and against the Revenue.

Issues Involved:
1. Whether the exercise of power of appointment by the assessee constituted a transfer of interest under section 2(xxiv)(c) of the Gift-tax Act, making the assessee liable to gift-tax.
2. If affirmative, whether the assessee became liable to gift-tax in the assessment year in question by exercising the power of appointment.
3. Whether the trust deed empowered the trustees to make a direct transfer to appointee trusts, and if so, whether such a transfer was taxable.
4. Whether the Gift-tax Officer was justified in levying gift-tax on the entire corpus or only on the assessee's interest in the property.

Detailed Analysis:

Issue 1: Exercise of Power of Appointment as Transfer of Interest
The court examined whether the exercise of the power of appointment by Anarkali Sarabhai constituted a "transfer of property" under section 2(xxiv)(c) of the Gift-tax Act. The definition of "transfer of property" includes the exercise of a power of appointment to determine its disposition in favor of any person other than the donee of the power. The court concluded that Anarkali's exercise of the power of appointment in favor of trusts not covered by the original trust deed did constitute a transfer. The Tribunal's interpretation aligned with the Bombay High Court's understanding in CGT v. Mrs. Jer Mavis Lubimoff, which clarified that the exercise of such power qualifies as a transfer if it determines the disposition in favor of any person other than the donee. Therefore, the court affirmed that the exercise of the power of appointment was a transfer under section 2(xxiv)(c).

Issue 2: Liability to Gift-tax in the Assessment Year
The court addressed whether the liability to gift-tax arose in the assessment year 1976-77 based on the exercise of the power of appointment. The Tribunal held that the taxable event was the exercise of the power of appointment, not the date when its consequences would materialize. Anarkali exercised this power on March 31, 1976, resulting in the transfer of her interest in the trust property to four other trusts. Therefore, the court upheld the Tribunal's decision that the transfer occurred in the year ended March 31, 1976, making the assessee liable for gift-tax in the assessment year 1976-77.

Issue 3: Empowerment of Trustees and Taxability of Direct Transfer
The court examined whether the trust deed empowered the trustees to transfer the corpus directly to the appointee trusts and whether such a transfer was taxable. The trust deed did not authorize the trustees to transfer the corpus to any entity other than the named beneficiaries. The four trusts in favor of which the power of appointment was exercised were not beneficiaries under the original trust deed. Therefore, the court rejected the argument that the trustees had the authority to make such a transfer without tax implications. The court concluded that the transfer was taxable, and the gift-tax paid at the time of the initial trust settlement did not exempt the subsequent transfer from tax.

Issue 4: Levy of Gift-tax on Entire Corpus vs. Assessee's Interest
The court considered whether the Gift-tax Officer was justified in levying gift-tax on the entire corpus of the trust or only on the assessee's interest. The Tribunal found that Anarkali's exercise of the power of appointment transferred only her interest in the trust property, not the entire corpus. The corpus was transferred later, and Anarkali was entitled to income from the slice "A" funds. Therefore, the court agreed with the Tribunal that the Gift-tax Officer was not justified in levying gift-tax on the entire corpus but only on the assessee's interest in the property.

Conclusion:
The court answered questions (1) and (2) in the affirmative, in favor of the Revenue and against the assessee, confirming that the exercise of the power of appointment constituted a transfer liable to gift-tax in the assessment year 1976-77. Question (3) was answered in the negative, in favor of the Revenue and against the assessee, indicating that the trust deed did not empower the trustees to make a direct transfer to the appointee trusts without tax implications. Question (4) was answered in the affirmative, in favor of the assessee and against the Revenue, holding that the Gift-tax Officer was not justified in levying gift-tax on the entire corpus but only on the assessee's interest. The reference was disposed of with no order as to costs.

← Previous Next →