1987 (2) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of gift-tax reimbursed by donees from the market value of gifted shares.
2. Applicability of the decisions in CGT v. K. A. Sheik Dawood and CGT v. Biswanath Paul.
3. Interpretation of "onerous gifts" and the relevance of Section 127 of the Transfer of Property Act.
4. Definition of "gift" under the Gift-tax Act and whether gift-tax paid by donees can be considered as consideration.

Detailed Analysis:

1. Deduction of Gift-Tax Reimbursed by Donees from Market Value of Gifted Shares:

The assessee filed a gift-tax return showing a taxable gift of Rs. 3,50,200, arguing that the amount of gift-tax reimbursed by the donees (Rs. 69,050) should be deducted from the market value of the shares. The Gift-tax Officer (GTO) disagreed, adding the reimbursed amount to the taxable value, resulting in a total of Rs. 4,24,250. The GTO's stance was based on the non-applicability of the decision in CGT v. K. A. Sheik Dawood, arguing that there were no debts or specific charges on the property in this case, making the gifts non-onerous.

2. Applicability of Decisions in CGT v. K. A. Sheik Dawood and CGT v. Biswanath Paul:

The CIT (A) examined the case and concluded that the gifts could not be disassociated from the donees' obligation to meet the tax liability. Citing CGT v. K. A. Sheik Dawood, the CIT (A) held that the value of the gift should be adjusted by the gift-tax liability met by the donees. However, the revenue appealed, citing CGT v. Muthukumaraswamy Mudaliar, where the Madras High Court held that the market value of gifted properties should not be reduced by the gift-tax liability, even if the donees were responsible for it.

3. Interpretation of "Onerous Gifts" and Relevance of Section 127 of the Transfer of Property Act:

The assessee argued that the gifts were conditional or onerous, referencing the letters exchanged between the donor and donees that stipulated the donees would bear the gift-tax liability. However, the Tribunal found that Section 127 of the Transfer of Property Act did not apply, as the gifts were not in the form of a single transfer of several things with mixed burdens. The Tribunal concluded that the gifts could not be labeled as onerous gifts.

4. Definition of "Gift" under the Gift-tax Act and Whether Gift-Tax Paid by Donees Can Be Considered as Consideration:

The assessee contended that the transaction should be considered a gift under Section 4 of the Gift-tax Act, where the consideration was inadequate, and thus, the gift-tax reimbursed by the donees should be deducted. However, the Tribunal, referencing the Karnataka High Court's decision in CGT v. K. Bhoomiamma, held that the gift-tax paid by the donees could not be treated as consideration. The Tribunal emphasized that the liability to pay gift-tax arises only after the completion of the gift, not contemporaneously with the transfer.

Conclusion:

The Tribunal concluded that the decision of the Madras High Court in CGT v. Muthukumaraswamy Mudaliar was binding, and the market value of the gifted shares should not be reduced by the gift-tax liability borne by the donees. Consequently, the appeal of the revenue was allowed, and the valuation made by the GTO was restored.