1964 (9) TMI 4 - HC - Income Tax

Appeal against the decree of the subordinate judge - whether the deed of gift exhibit A-9 executed by the second respondent in favour of the appellants his children by the second wife is one intended to defeat and delay creditors and as such voidable at the instance of his creditors - execution of the gift deed was part of the arrangement conceived by the second respondent to facilitate his migration to Pakistan - appeal allowed

Summary

Issues Involved:
1. Validity of the deed of gift (Exhibit A-9) in favor of the appellants.
2. Whether the deed of gift was intended to defeat and delay creditors.
3. Possession and title transfer under the deed of gift.
4. The impact of subsequent income-tax assessments and liabilities on the validity of the gift deed.

Detailed Analysis:

1. Validity of the Deed of Gift (Exhibit A-9):
The primary issue in this appeal was the validity of the deed of gift executed by the second respondent in favor of his children by the second wife. The deed of gift was challenged on the grounds that it was a sham document and that no possession was delivered to the donees. The subordinate judge found that the gift deed was a real transaction and that the declaration by the donor about possession was sufficient for its validity. This finding was not contested in the appeal.

2. Intent to Defeat and Delay Creditors:
The main contention was whether the deed of gift was executed with the intent to defeat and delay creditors. The court examined the circumstances surrounding the execution of the deed. At the time of executing the gift deed, the second respondent had no substantial debts, except for a minor reassessment notice for the year 1944-45, which resulted in a small tax liability of Rs. 332.32 that was promptly paid. The court noted that the second respondent had significant assets, including a business, immovable properties, and substantial bank deposits, which were more than sufficient to cover any existing or foreseeable liabilities.

The court discussed the legal principle that a transfer intended to cheat future creditors is voidable under Section 53 of the Transfer of Property Act. However, it found no evidence that the second respondent intended to defraud future creditors, as he had no significant debts at the time and could not have anticipated future tax liabilities. The court also considered that the second respondent's intention to migrate to Pakistan could explain the execution of the gift deed, as he would not have creditors in India after his migration.

3. Possession and Title Transfer:
The second respondent declared in the deed of gift that possession of the coffee estate had been given to the donees. Subsequent actions, such as changing the patta and registering the donees as owners with the Coffee Marketing Board, supported the transfer of possession and title. The subordinate judge found that the declaration of possession was sufficient for the validity of the gift, and this finding was not challenged in the appeal.

4. Impact of Subsequent Income-Tax Assessments:
The court considered the impact of subsequent income-tax assessments on the validity of the gift deed. The substantial tax liability for the year 1948-49 arose from the sale of Kichilipalayam lands, which occurred after the execution of the gift deed. The court noted that the second respondent could not have anticipated this liability at the time of the gift. The court also observed that the second respondent had sufficient assets to cover any potential liabilities, including the large sums in his bank accounts.

The court concluded that the execution of the gift deed was not intended to defraud future creditors. The subordinate judge's finding that the gift deed was executed to defeat future creditors was not supported by the evidence. The court allowed the appeal, setting aside the subordinate judge's order, and ruled that the gift deed was valid.

Conclusion:
The appeal was allowed, and the court found that the deed of gift (Exhibit A-9) was valid and not executed with the intent to defeat or delay creditors. The court emphasized the absence of significant debts at the time of the gift and the second respondent's substantial assets, which were sufficient to cover any foreseeable liabilities. The court also considered the second respondent's intention to migrate to Pakistan as a plausible reason for executing the gift deed.