1973 (12) TMI 7 - HC - Income Tax

Gift-tax Act 1958 - This is a reference arising out of proceedings under the Gift-tax Act 1958 relating to the assessment of the respondent - Whether creation of trust with power to revocation at any time amounts to a gift

Summary

Issues Involved:

1. Whether the deed of revocable settlement dated 4th July, 1957, constitutes a gift liable to gift-tax.
2. If affirmative, whether the value of the gift can be taken to be zero in the absence of a specified period for which the transfer was not revocable under section 6(2) of the Gift-tax Act.

Issue-wise Detailed Analysis:

Issue 1: Whether the deed of revocable settlement dated 4th July, 1957, constitutes a gift liable to gift-tax.

The court examined the provisions of the Gift-tax Act, 1958, particularly the definitions of "donee," "gift," "property," and "transfer of property" under section 2. The term "gift" is defined as a transfer of property made voluntarily and without consideration. Section 6(2) deals with the valuation of gifts that are not revocable for a specified period.

The court also referred to relevant provisions from the Transfer of Property Act, the Indian Trusts Act, and the Estate Duty Act, 1953. Section 126 of the Transfer of Property Act states that a gift revocable at the mere will of the donor is void. Section 78(b) of the Indian Trusts Act allows for the creation of a revocable trust, and Section 12(1) of the Estate Duty Act considers property under a revocable trust to pass on the settlor's death.

The main contention was that the trust property should not be liable to gift-tax because the trust was revocable at any time at the will of the settlor. The court agreed, stating that the donor cannot be said to have transferred property if he retains an unrestricted power to revoke the trust. This view aligns with the essential meaning of a gift, which must be irrevocable, as indicated by section 126 of the Transfer of Property Act and section 6(2) of the Gift-tax Act. The court concluded that a trust with an unlimited power of revocation does not amount to a gift under the Gift-tax Act.

Issue 2: If affirmative, whether the value of the gift can be taken to be zero in the absence of a specified period for which the transfer was not revocable under section 6(2) of the Gift-tax Act.

Since the court decided that the trust in question does not constitute a gift liable to gift-tax, this issue did not arise. However, the court noted that even if the trust were considered a gift, section 6(2) would not apply because it deals only with gifts that are not revocable for a specified period. Therefore, the value of the property in such a trust cannot be taken to be zero under section 6(2).

Conclusion:

The court answered the first question in the negative, stating that the deed of revocable settlement does not constitute a gift liable to gift-tax. Consequently, the second question did not arise. If necessary, the court would have stated that section 6(2) has no application to the trust in question, and the value of the property cannot be taken to be zero under that section. The Commissioner was ordered to pay the assessee's costs of the reference.