1977 (10) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the adoption of Rajendra Prasad under the Hindu Adoptions and Maintenance Act.
2. Validity of the ante-adoption agreement.
3. Whether the properties covered by the settlement deed dated July 20, 1963, are to be included in the principal value of the estate of the deceased.
4. Whether the properties under the settlement deed are liable to gift-tax under the provisions of the G.T. Act.

Issue-wise Detailed Analysis:

1. Validity of the Adoption:
The adoption of Rajendra Prasad was challenged on the grounds that it did not comply with Section 10(iv) of the Hindu Adoptions and Maintenance Act, which stipulates that a person must not have completed the age of fifteen years unless there is a custom or usage permitting the adoption of older persons. Rajendra Prasad was 22 years old at the time of adoption. However, it was established that the Vysya community, to which the parties belong, permits the adoption of a major boy if his upanayanam (sacred thread ceremony) has not been performed. Evidence was provided through various adoption deeds showing that the custom of adopting boys above the age of fifteen exists in the community. The Tribunal found that the ceremony of giving and taking had taken place, and thus, the adoption was deemed valid under the prevailing custom.

2. Validity of the Ante-Adoption Agreement:
The Tribunal initially found that there was an oral ante-adoption agreement between Rajendra Prasad and the deceased, and it upheld its validity. However, Section 17 of the Hindu Adoptions and Maintenance Act prohibits any person from receiving or agreeing to receive any payment or reward in consideration of adoption. The court highlighted that the settlement deed mentioned an arrangement between the natural parents and the adoptive father, indicating that the ante-adoption agreement involved parties other than the adopted son and adoptive father. Consequently, the ante-adoption agreement was found to be void as it contravened the public policy underlying Section 17, which aims to prevent trafficking in children.

3. Inclusion of Properties in the Estate of the Deceased:
The court examined whether the properties covered by the settlement deed dated July 20, 1963, should be included in the principal value of the deceased's estate for estate duty purposes. It was determined that the properties, being self-acquired by the deceased, passed on to the adopted son upon the deceased's death. The properties were thus chargeable to estate duty at the applicable rates. The court concluded that the properties should be included in the principal value of the estate of the deceased.

4. Liability to Gift-Tax:
The Tribunal had allowed the assessee's claim for exemption from gift-tax on the properties covered by the settlement deed. The court upheld this decision, noting that the settlement of properties on the adopted son was not a gift but rather a family arrangement or settlement pursuant to the prior oral agreement. Therefore, the properties were not liable to gift-tax under the provisions of the G.T. Act.

Conclusion:
The court held that the adoption of Rajendra Prasad was valid under Section 10(iv) of the Hindu Adoptions and Maintenance Act. The ante-adoption agreement was deemed invalid as it violated Section 17 of the same Act. The properties covered by the settlement deed dated July 20, 1963, were to be included in the principal value of the estate of the deceased for estate duty purposes but were not liable to gift-tax under the G.T. Act. The questions referred in E.D.C. No. 5 of 1975 were answered in favor of the revenue, while the questions in R.C. No. 34 of 1976 were answered against the revenue. There was no order as to costs in both references, and an advocate's fee of Rs. 250 was set for each.