1986 (10) TMI 67 - AT - Income Tax

Summary

Issues Involved:

1. Whether the transfer of property for a stated consideration as per the trust deed constitutes a gift when its market value is higher than the stated consideration.
2. Applicability of section 4(1)(a) and 4(1)(b) of the Gift-tax Act, 1958.
3. Interpretation of the term 'gift' under section 2(xii) of the Gift-tax Act, 1958.
4. Adequacy of consideration in the context of the trust deed's terms.

Issue-wise Detailed Analysis:

1. Whether the transfer of property for a stated consideration as per the trust deed constitutes a gift when its market value is higher than the stated consideration:

The primary issue is whether the transfer of the Mount Nepean property for Rs. 8 lakhs, as per the trust deed, constitutes a gift when its market value was Rs. 76,18,143. The assessee contended that the trustees acted under a contractual obligation as per the trust deed dated 2-8-1945, which mandated the sale of the property to Shri B.K. Dubash for Rs. 8 lakhs. The trustees had no discretion to refuse the sale, and thus, no element of gift was involved. The Commissioner (Appeals) disagreed, holding that the adequacy of consideration should be judged based on the market value, and since the transfer was not for adequate consideration, it was liable to gift-tax.

2. Applicability of section 4(1)(a) and 4(1)(b) of the Gift-tax Act, 1958:

The GTO applied both section 4(1)(a) and 4(1)(b) to bring the difference of Rs. 68,18,143 to tax as a deemed gift. However, the tribunal found that section 4(1)(b) was not applicable as it pertains to cases where the stipulated consideration does not pass or is not intended to pass from the transferee to the transferor. In this case, the consideration of Rs. 8 lakhs was paid in full. Therefore, the discussion was confined to section 4(1)(a), which deals with transfers for inadequate consideration.

3. Interpretation of the term 'gift' under section 2(xii) of the Gift-tax Act, 1958:

Section 2(xii) defines 'gift' as a transfer made voluntarily and without consideration in money or money's worth, and includes transfers deemed to be gifts under section 4. The tribunal agreed that the first part of the definition requires the transfer to be voluntary. However, the second part, which includes deemed gifts under section 4, does not necessitate voluntariness. The tribunal concluded that for section 4(1)(a) to apply, there must be a transfer for inadequate consideration, without the need for the transfer to be voluntary.

4. Adequacy of consideration in the context of the trust deed's terms:

The tribunal emphasized that the adequacy of consideration should be assessed based on the terms of the trust deed. The property was sold for Rs. 8 lakhs as per the binding terms of the trust deed, which was a contractual obligation. The tribunal noted that the concept of inadequate consideration should be construed broadly and in common sense. Adequate consideration is not necessarily what is ultimately determined as the market value. The tribunal referred to judicial decisions, including the Calcutta High Court's decision in I.C.I. (India) (P.) Ltd. v. GTO, where it was held that transfers pursuant to binding arrangements do not constitute inadequate consideration.

Conclusion:

The tribunal allowed the appeal, holding that the transfer of the property for Rs. 8 lakhs as per the trust deed did not constitute a gift under section 4(1)(a) as there was no inadequate consideration. The tribunal also noted that the transaction was not intended to avoid tax, and the trust deed's terms were binding and predated the Gift-tax Act. The tribunal's decision was in consonance with the Supreme Court's ratio in Madurai Mills Co. Ltd., where the receipt of property in satisfaction of a pre-existing right was not considered a transfer amounting to a sale or gift.

Separate Judgment:

The Judicial Member concurred with the order, stating that the requirement of voluntariness should apply even to deemed gifts under section 2(xii), as it would be illogical to differentiate between transfers without consideration and those for inadequate consideration.