2001 (10) TMI 86 - SC - Income Tax

Whether there was a deemed gift taxable under the Gift-tax Act, 1958, for the assessment year 1970-71 in respect of arrangement in pursuance of the agreement dated November 21, 1969, between the assessee and Khoday Industries Pvt. Ltd. ? Held that - In the present case, the gift was revocable/terminable with six months notice. Thus, it was not revocable for a specified period which was less than a year, namely, six months. The capitalised value has to be fixed under rule 1l(l) under which if it was revocable for a period less than one year, the value could not be worked out and, thus, it had to be nil . The Tribunal as well as the High Court were in error in rejecting the assessee s contention that in terms of rule 11(l), no gift-tax was payable. Admittedly, there is no other provision under which the capitalised value could be fixed. In the aforesaid premises, we allow the appeals and set aside the judgment and order of the High Court, in regard to the first question aforestated. Accordingly, we answer that question in the negative and in favour of the assessee.

Summary

Issues:
1. Whether the transfer of business by a partnership firm to a private limited company constitutes a deemed gift taxable under the Gift-tax Act, 1958?
2. Whether a partnership firm is an assessable entity under the provisions of the Gift-tax Act, 1958?
3. Whether the gift in the arrangement was exempt under section 5(l)(xiv) of the Act?

Analysis:
1. The case involved a partnership firm that reconstituted by including children of outgoing partners and entered into an agreement with a private limited company for licensing business operations. The Gift-tax Officer treated this transfer as a gift for inadequate consideration, imposing gift tax. The appellate authority initially exempted the gift under section 5(l)(xiv) but was reversed by the Income-tax Appellate Tribunal, which found the transaction not bona fide due to inadequate consideration, invoking section 4(l)(a) of the Act. The High Court upheld this decision against the appellant.

2. The appellant argued that the transaction was a commercial one, not a gift, as a license was granted for business operations. However, the Tribunal found the consideration inadequate, triggering section 4(l)(a). The appellant claimed the gift was not revocable for a specified period, hence no gift tax was payable under section 6(2) read with rule 11. The Tribunal and High Court erred in considering the gift as revocable for five years, disregarding the termination clause allowing revocation with six months' notice.

3. The crux of the matter was the interpretation of rule 11(l) regarding the revocability of the gift. Since the gift was terminable with six months' notice, falling below the one-year threshold, the capitalised value had to be nil as per the rule. The Tribunal and High Court wrongly rejected this argument, leading the Supreme Court to allow the appeals, setting aside the High Court's judgment, and ruling in favor of the assessee on the first question.