1985 (10) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of exemption under section 5(1)(viii) of the Gift-tax Act, 1958 to a Hindu Undivided Family (HUF).
2. Interpretation of the memorandum of gift to determine if the gift was made by an individual to his spouse or by the karta of the HUF on behalf of the family.
3. Application of the principle laid down in McDowell & Co. Ltd. v. CTO regarding tax avoidance.

Issue-wise Detailed Analysis:

1. Applicability of Exemption under Section 5(1)(viii) of the Gift-tax Act, 1958 to a Hindu Undivided Family (HUF):

The primary question was whether an HUF could claim exemption under section 5(1)(viii) of the Gift-tax Act, 1958, which provides that gift-tax shall not be charged in respect of gifts made by any person to his or her spouse, subject to a maximum of Rs. 50,000. The Tribunal examined the definition of 'person' under section 2(xviii) of the Act, which includes an HUF. However, it was argued that section 5(1)(viii) refers specifically to "his or her spouse," implying that the exemption could only apply to individuals, not HUFs. Despite this interpretation, the Tribunal noted that previous cases had allowed the benefit of this section to HUFs. Therefore, the Tribunal concluded that the relief could be permissible to the assessee-HUF if it was otherwise entitled to it.

2. Interpretation of the Memorandum of Gift:

The Tribunal had to determine whether the gift was made by Shri Ram Murti Malhotra in his individual capacity as a husband to his wife or as the karta of the HUF on behalf of the family. The memorandum of gift was scrutinized in detail. Paragraph 1 of the preamble indicated that the gift was by Shri Malhotra to his wife, but paragraph 2 clarified his capacity as the karta of the joint Hindu family. Paragraph 3 further emphasized that the gift was made with the consent of all major male members of the family and involved coparcenary property. The Tribunal concluded that the gift was made by Shri Malhotra as the karta of the family to a female member of the family, not by an individual to his spouse. Hence, section 5(1)(viii) did not apply.

3. Application of the Principle in McDowell & Co. Ltd. v. CTO:

The Tribunal also considered whether the transaction was a device to avoid tax, as discussed in the Supreme Court case of McDowell & Co. Ltd. v. CTO. The departmental representative argued that the memorandum of gift was a planned device to avoid gift-tax by showing the gift as made by a husband to his wife, whereas it was actually made by the karta of the HUF. The Tribunal agreed, stating that such avoidance of tax is not permissible. It emphasized that tax planning must be within the framework of the law and that colorable devices cannot be part of tax planning. The Tribunal held that the gift was a device to avoid tax and that the assessee was not entitled to exemption under section 5(1)(viii).

Conclusion:

The Tribunal dismissed the appeal, holding that the gift was made by the karta of the HUF on behalf of the family to a female member of the family and not by an individual to his spouse. Consequently, the exemption under section 5(1)(viii) was not applicable. Additionally, the Tribunal reinforced the principle from McDowell & Co. Ltd.'s case, stating that the transaction was a device to avoid tax and therefore not permissible.