1987 (12) TMI 83 - AT - Income Tax

Summary

Issues Involved:

1. Validity of illatom adoption agreement and its implications on the gift-tax.
2. Validity of gifts made to daughters in fulfillment of promises made at their marriages.
3. Taxability of gifts made to the wife.
4. Taxability of gifts made to the second son-in-law.

Detailed Analysis:

1. Validity of Illatom Adoption Agreement and Its Implications on the Gift-Tax:

The primary issue revolves around the illatom adoption agreement dated 25-5-1970, where Sri M. Adinarayana Reddy brought Sri Y. Dayakar Reddy into his family as an illatom son-in-law. The Department challenged the validity of this agreement, arguing that it was executed on plain paper, not registered, and did not confer any actionable right under Hindu Law. The GTO referred to N.R. Raghavachari's Hindu Law Commentary, which stated that an illatom son does not have the right to interdict the adopter's alienation of property.

The AAC, however, relied on Mayne's treatise on Hindu Law and Usage and the AP High Court's decision in Peechu Ramaiah v. Government of Andhra Pradesh, which recognized the custom of illatom adoption among Reddy and Kamma castes. The AAC concluded that Sri Dayakar Reddy was entitled to half the property of Sri Adinarayana Reddy even during his lifetime, based on the illatom adoption agreement.

The Tribunal upheld the AAC's decision, citing the AP High Court's judgment in CRP No. 1630 and 631 of 1982, which confirmed the validity of the illatom adoption agreement and entitled Sri Dayakar Reddy to half the property. The Tribunal dismissed the Department's contention that the Hindu Adoptions and Maintenance Act invalidated illatom adoptions, noting that the AP High Court's decision had become final.

2. Validity of Gifts Made to Daughters in Fulfillment of Promises Made at Their Marriages:

The AAC held that the gifts made to the daughters, Smt. Ramasubbamma and Smt. Suharlata, were in fulfillment of promises made at their marriages and were exempt from gift-tax under section 5(1)(vii) of the GT Act. The AAC reasoned that a Hindu father is under a legal obligation to maintain his unmarried daughter, which includes meeting marriage expenses. Therefore, any amount given as 'Pasupukunkuma' on the occasion of marriage falls outside the scope of gift.

The Tribunal referred to the AP High Court's decision in CGT v. Bandi Subba Rao, which held that giving property to a daughter at or after marriage in discharge of a pre-existing legal obligation is not a voluntary gift but a family settlement. Consequently, the gifts made to the daughters were deemed reasonable and exempt from gift-tax.

3. Taxability of Gifts Made to the Wife:

The GTO had already exempted the gift made to the wife, Smt. M. Hymavathamma, under section 5(1)(viii) of the GT Act. The AAC and the Tribunal did not dispute this exemption, and it remained uncontested.

4. Taxability of Gifts Made to the Second Son-in-Law:

The GTO and the AAC both held that the gift made to the second son-in-law, Sri Y. Adisesha Reddy, was taxable. The Tribunal confirmed this decision, noting that no appeal was preferred against this portion of the order. Therefore, the gift to the second son-in-law was subject to gift-tax.

Conclusion:

The Tribunal dismissed the Department's appeal, affirming the AAC's decision that the gifts made to the illatom son-in-law and the daughters were exempt from gift-tax. The gift to the wife was already exempted, and the gift to the second son-in-law was held taxable.