1985 (6) TMI 39 - AT - Income Tax

Summary

Issues Involved:
1. Whether the exercise of a power of appointment constitutes a gift under the Gift-tax Act, 1958.
2. The valuation of the property subject to the power of appointment for gift-tax purposes.
3. The relevant assessment year for the taxable event of the gift.

Detailed Analysis:

Issue 1: Whether the exercise of a power of appointment constitutes a gift under the Gift-tax Act, 1958.

The primary question was whether the assessee, by exercising the power of appointment, made any gift and if so, of what property. The definition of "transfer of property" under section 2(xxiv) of the Gift-tax Act includes "the exercise of a power of appointment of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power." The argument from the assessee's counsel was that the scope of the power, which could be exercised in favor of the donee, means no transfer occurred. However, the Tribunal rejected this interpretation, stating that it is the exercise of the power, not its scope, that is material. The Tribunal emphasized that the legislative intent was to tax the gift made in exercise of any power, whether general or special, provided it is made to a person other than the donee of the power. Consequently, the exercise of the power of appointment in favor of new trusts constituted a transfer under the Act.

Issue 2: The valuation of the property subject to the power of appointment for gift-tax purposes.

The Tribunal held that the valuation should consider only the interest of the assessee in the property at the time of the exercise of the power of appointment. The entire corpus's fair market value could not be taken because the assessee did not own the corpus at that time. The assessee had an expectation of receiving the corpus in the future, subject to certain conditions. The valuation should reflect this interest and consider the trustees' power to advance the date of the power of appointment's effect. The Tribunal clarified that the total valuation must equal the corpus's entire value, but for the assessment year in question, only the assessee's interest should be valued.

Issue 3: The relevant assessment year for the taxable event of the gift.

The Tribunal determined that the taxable event occurred in the assessment year 1976-77, the year in which the power of appointment was exercised. The Commissioner (Appeals) had held that the actual transfer took place on 1-12-1977, when the trustees made the power effective. However, the Tribunal disagreed, stating that the exercise of the power of appointment itself constituted the transfer, making the date of exercise the relevant date for valuation and taxation purposes. Therefore, the valuation should be done as of the date of the exercise of the power of appointment, not the date when the trustees' resolution made it effective.

Conclusion:

The Tribunal concluded that the exercise of the power of appointment constituted a gift under the Gift-tax Act, 1958. The valuation of the gift should reflect the assessee's interest in the property at the time of the exercise of the power, and the relevant assessment year for the taxable event is the year in which the power of appointment was exercised. The appeals were partly allowed, with directions for the Gift-tax Officer to reassess the valuation accordingly.