1968 (2) TMI 15 - HC - Income Tax

Summary

Issues Involved:

1. Legislative Competence of Parliament to Enact the Gift-tax Act.
2. Whether the Properties Obtained by the Petitioners Constitute Gifts under the Gift-tax Act.
3. Validity of the Conversion of Self-acquired Property into Joint Family Property as a Gift.
4. Liability of the Donees to Pay Gift-tax and Compliance with Section 29 of the Gift-tax Act.
5. Constitutionality of Section 29 of the Gift-tax Act.

Issue-wise Detailed Analysis:

1. Legislative Competence of Parliament to Enact the Gift-tax Act:

The petitioners contended that the Gift-tax Act, as it pertains to taxes on lands and buildings, falls within the scope of item 49 of the State List (List II) of the Constitution, and thus Parliament lacks legislative competence to enact such a law. The court rejected this contention, holding that the Gift-tax Act does not encroach upon the State Legislature's exclusive power under item 49 of List II. The court observed that the Gift-tax Act's pith and substance is to impose a tax on gifts inter vivos, which falls under Parliament's residuary powers as per Article 248 read with item 97 of List I of the Constitution. The court cited several judicial authorities, including the Supreme Court and various High Courts, which supported this view.

2. Whether the Properties Obtained by the Petitioners Constitute Gifts under the Gift-tax Act:

The petitioners argued that the properties obtained by them were not gifts within the meaning of section 2(xii) of the Gift-tax Act, as there was no transfer of property under section 2(xxiv). The court held that the definitions of "gift" and "transfer of property" in the Gift-tax Act are exhaustive and should be construed strictly. The court referred to the Madras High Court's decision in M. K. Stremans v. Commissioner of Income-tax, which held that the merger of self-acquired properties with ancestral property and subsequent partition did not constitute a transfer of assets. However, the court disagreed with this view, stating that the conversion of self-acquired property into joint family property involves a transfer of rights and falls within the ambit of section 2(xxiv)(d) and section 4(d) of the Gift-tax Act.

3. Validity of the Conversion of Self-acquired Property into Joint Family Property as a Gift:

The court examined whether the conversion of self-acquired property into joint family property by late Srinivasa Rao constituted a valid gift. The court held that such a conversion involves the diminution of the father's rights and the conferment and enlargement of rights to others, thereby constituting a transfer of property. The court referred to the decision in Commissioner of Gift-tax v. C. Satyanarayanamurty, where it was held that such a transaction falls within the ambit of clause (d) of section 2(xxiv). The court also disagreed with the Mysore High Court's decision in Smt. Laxmibai Narayana Rao Nerlekar v. Commissioner of Gift-tax, which held that such a conversion does not constitute a transfer.

4. Liability of the Donees to Pay Gift-tax and Compliance with Section 29 of the Gift-tax Act:

The petitioners contended that they were not liable to pay the gift-tax and that they were not given notice of the proceedings before the demand was raised. The court held that the petitioners had notice of the proceedings and that the demand raised on the donees was in conformity with section 29 of the Act. The court stated that section 29 allows the Gift-tax Officer to recover the tax from the donees if the tax cannot be recovered from the donor. The court noted that one of the donees had informed the respondent of the donor's death and the lack of assets to meet the tax demand, leading to the apportionment of the tax among the donees.

5. Constitutionality of Section 29 of the Gift-tax Act:

The petitioners argued that section 29, in so far as it authorizes the recovery of gift-tax from the donees, is violative of article 19(1)(f) of the Constitution. The court rejected this contention, stating that the Government has a priority in respect of arrears of tax and that section 30 of the Act provides that gift-tax payable on immovable property shall be a first charge on that property. The court disagreed with the Calcutta High Court's decision in W. Rahman Tea and Lands Company v. Gift-tax Officer, which held section 29 to be unconstitutional. The court held that the donees, being deemed assessees under the Act, have access to the remedies provided under the Act, including the right of appeal.

Conclusion:

The writ petition was dismissed with costs, and the court held that the Gift-tax Act is within the legislative competence of Parliament, the conversion of self-acquired property into joint family property constitutes a gift, and the donees are liable to pay the gift-tax. The court found no merit in the petitioners' contentions and upheld the constitutionality of section 29 of the Gift-tax Act.