1969 (8) TMI 18 - HC - Income Tax

While making gift amount was transferred to the donees without reserving any right in that amount - Whether the gift was voidable and as such the interest accruing on the aforesaid gifted amount did not accrue to the family for income-tax purposes - Held, yes

Summary

Issues:
1. Interpretation of the legality of a gift of Rs. 4 lakhs made by a Hindu undivided family.
2. Determination of whether interest accruing on the gifted amount is taxable for income-tax purposes.
3. Analysis of whether the gifted amount remains an asset of the assessee family for wealth-tax purposes.

Analysis:
1. The court addressed the legality of a gift of Rs. 4 lakhs made by a Hindu undivided family to various members. The Income-tax Officer initially rejected the gift, assessing the total income of the family by including the gifted amount and interest. The Appellate Assistant Commissioner later ruled in favor of the assessee, leading to an appeal by the department. The Tribunal, citing precedent, directed the deletion of the amount from assessments. The court examined the distinction between void and voidable transactions, emphasizing that only interested parties could challenge the legality of a gift. The court concluded that even if the gift was void, the income earned did not accrue to the assessee for income-tax purposes.

2. Regarding the interest accruing on the gifted amount, the court highlighted that the Income-tax Act taxes the person who earns the income, not the one holding title to the property. The court rejected the argument that the assessee should be taxed based on title ownership, drawing a parallel with a thief earning income from stolen money. The court emphasized that the income-tax liability is on the actual earner of income, not merely the title holder of the property. The court cited relevant legal provisions and clarified that the interest did not accrue to the assessee family for income-tax purposes, regardless of the gift's legal status.

3. The court also addressed the issue of whether the gifted amount remained an asset of the assessee family for wealth-tax purposes. The court analyzed the definition of net wealth under the Wealth-tax Act and concluded that the gifted amount had ceased to be an asset of the assessee family. Even though the family members might have a right to recover the gifted amounts, the court ruled that it did not qualify as a tangible asset attracting wealth-tax assessment. The court rejected the application of a specific provision cited by the department, emphasizing that the transfer of assets was not irrevocable. Consequently, the court determined that the gifted amount, along with estimated interest, could not be taxed under the Wealth-tax Act.

In conclusion, the court answered both references in favor of the assessee, determining that the gifted amount and interest did not accrue to the assessee family for income-tax and wealth-tax purposes, respectively.