2017 (3) TMI 744 - HC - Income Tax

Computation of capital gains - whether was an asset coming within the purview of Sec. 49(1)(ii) as it was acquired on the release executed by the previous life interest holder which amounted to a gift,therefore, the cost of the acquisition of asset would be deemed to be the cost of the original settlor? - Held 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 under Section 4(1)(c), (d) or (e) of the Gift Tax Act. We are unable to agree with the submissions of the Revenue as 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 the Assessing Officer is not justifiable as it seems to have been influenced by deeming provision in the definition of a Gift under the Gift Tax Act. In Neville Wadia (1972 (9) TMI 20 - BOMBAY High Court ), the revenue contended that the operative words in the release of deed constituted transfer of life interest by the assessee in favour of his daughter and son. The contention was negatived by this Court. This Court held that whatever came to the daughter and son of the assessee in that case (the son being the assessee in the present reference) was a result of provisions made in their favour as beneficiaries under the original deed of settlement dated 30th January, 1947 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 the assessee and the operative portion of the deed gave Neville Wadia complete release and discharged the trustees from all obligations against them and it was impossible to construe the deed to hold that it was deed of transfer of the life estate of the assessee in favour of his daughter and son. The Court found that the Revenue s contention was entirely unsustainable having regard to the language of the deed. 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 (supra), 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. - Decided in favour of the assessee.

Issues Involved:
1. Whether the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset under Section 49(1)(ii) of the Income Tax Act, 1961.
2. Whether the relinquishment of life interest by Neville Wadia amounted to a gift.
3. The applicability of capital gains tax on the sale of life interest by the assessee.

Detailed Analysis:

Issue 1: Life Interest as an Asset under Section 49(1)(ii)
The primary question was whether the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset under Section 49(1)(ii) of the Income Tax Act, 1961. The Tribunal concluded that the life interest was acquired as a gift, and thus, the cost of acquisition should be deemed to be the cost to the original settlor. The Tribunal restored the issue to the Assessing Officer to compute the capital gains tax based on this determination.

Issue 2: Relinquishment of Life Interest as a Gift
The argument centered on whether Neville Wadia's relinquishment of his life interest constituted a gift. The applicant's counsel contended that the relinquishment did not amount to a transfer and thus was not a gift under Section 49(1)(ii). The definition of "gift" under the Transfer of Property Act requires a transfer to a donee, which was not present in this case. The court previously held in Neville N. Wadia that such a relinquishment did not constitute a transfer of property.

The Revenue argued that the relinquishment amounted to a gift or a deemed gift under Section 4(1)(c) of the Gift Tax Act. However, the court noted that the Gift Tax Act's definition of a gift, which includes deemed gifts, does not apply to the Income Tax Act. The court also emphasized that the release deed executed by Neville Wadia was a unilateral act, not involving a transfer to another person, thus not constituting a gift.

Issue 3: Applicability of Capital Gains Tax
The assessee sold his life interest for ?21.70 lakhs, contending that no capital gains tax was payable as the cost of acquisition was nil. The Tribunal had held that the cost of acquisition should be the cost to the original settlor, but the court disagreed. The court referenced the Supreme Court's decision in B.C. Shrinivas Shetty, which held that if the cost of acquisition cannot be determined, the charging section fails, and no capital gains tax is payable.

The court found that the life interest was not an existing property in the hands of the settlor but was created for the first time in the hands of Neville Wadia. Therefore, it was not possible to attribute any cost to the life interest, and the decision in B.C. Shrinivas Shetty applied, meaning no capital gains tax was payable.

Conclusion:
The court concluded that the relinquishment of life interest by Neville Wadia did not constitute a gift, and the cost of acquisition of the life interest could not be determined. Consequently, no capital gains tax was payable by the assessee. The question raised was answered in the negative, favoring the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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