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TMI Blog1973 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e settlor might, by deed or will, appoint and in default of such appointment, in trust for such charitable objects and purposes as the trustees might in their absolute discretion think fit for the benefit of Parsi Zoroastrians only. Clause 15 of the said trust deed empowered, the settlor, at any time during his lifetime, by deed or by will, to revoke wholly or partially the trusts declared by the said document. It may be mentioned that it is stated at more than one place in the statement of the case that the settlor was himself the sole beneficiary under the said deed of trust, but that is not a correct statement of fact, in so far as under the said deed of trust, the settlor was only the sole beneficiary during his lifetime and there were other objects of the trust entitled to benefits thereunder including, in a certain contingency, charity the Gift-tax Officer held that the assessee was liable to pay gift-tax on the value of the trust property as, by the said trust deed, the settlor had effected a transfer of property without consideration which amounted to a gift. On appeal, the Appellate Assistant Commissioner confirmed the order of the Gift-tax Officer. On further appeal to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion from the concept of a "gift" as defined in the said clause. Clause (xxii) defines the term " property " as including any interest in property, and clause (xxiv) defines the expression "transfer of property" in the following terms : " ' transfer of property ' means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes- (a) the creation of a trust in property; . . ." The rest of that definition is not material for the purpose of the present reference. Section 6 of the Gift-tax Act lays down how gifts are to be valued. Sub-section (1) lays down the basic rule that gifted property is to be valued according to the estimated price which it would fetch if sold in the open market on the date of the gift. Sub-section (2), which deals with a gift which is not revocable for a specified period, is in the following terms:-- "(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable." Sub-section (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was that the trust property in the present case is not liable to gift-tax, because the trust being revocable at any time at the mere will of the settlor, there cannot be said to be a gift at all. One of the arguments which Mr. Palkhivala advanced in support of that contention was that a construction should be placed upon the Act which is reasonable and in consonance with justice, as observed by the Supreme Court in the case of R. B. Jodha Mal Kuthiala v. Commissioner of Income-tax. He pointed out that, under section 29 of the Gift-tax Act, there was a secondary liability on the donee to pay gift-tax, and contended that a construction which would lead to the result that a donee can be made to pay gift-tax even though the settlor may choose to revoke the trust the minute after he has created it, is a construction which is unreasonable and unjust. There is substance in that argument of Mr. Palkhivala. In my opinion, this reference is, however, capable of being decided in favour of the assessee on better grounds than the mere argument of reasonableness just referred to by me, and I will now proceed to deal with the same. It is common ground between the learned counsel on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to a " gift " within the meaning of the Gift-tax Act, though as a trust it is binding as between the settlor, the trustees and the beneficiaries because the law of trusts expressly recognises such trusts as valid (vide section 78(b) of the Indian Trusts Act). Even such a transaction with an unlimited power of revocation, however, becomes a gift under the Gift-tax Act when the settlor dies without exercising his power of revocation, or during his lifetime gives up the power of revocation for, thereafter, there would be a complete divesting of the property which would be incapable of being recalled at any subsequent point of time. In that connection, Mr. Palkhivala rightly urged that the essential meaning or the basic idea of a gift must be borne in mind. In the case of Smt. Laxmibai Narayana Rao Nerlekar v. Commissioner of Gift-tax, the question which arose was whether throwing self-acquired property into the common stock or blending it with other joint family property involves a transfer and amounts to a gift within the meaning of the Gift-tax Act. In holding that it did not amount to a transfer and, therefore, did not amount to a gift, the Mysore High Court, after referring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... least for a limited period and tolerates a gratuitous transfer which is irrevocable for a limited time within the concept of a gift under the Gift-tax Act. Our attention was drawn to the decision of the Supreme Court in the case of Commissioner of Income-tax v. B. M. Kharwar in which the facts were that a firm transferred its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the firm. The Income-tax Officer sought to tax the excess realised over the written-down value of the machinery, but the Tribunal as well as the High Court held to the contrary on the ground that, in substance, the transaction was not a sale. Allowing the appeal, the Supreme Court held (at page 607) that the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. The view which I am taking is, however, not based on the substance of the transaction as distinguished from its legal effect, but has been taken by me on the ground that irrevocability is an essential incident of the legal concept of a gift. There is no dispute that, in substance as well as in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of a mere life interest in the income of the trust in favour of the wife was not a transfer of property. In so holding, instead of proceeding merely on the language of section 5(1)(viii) read with the definition of the term " donee " in section 2(viii), the learned judges proceeded to pronounce upon the general nature of a trust and, in so doing, have made certain observations which, with respect, cannot be sustained on the principle applicable to the law of trusts in India, as expounded by the highest court. It was stated in the judgment in Morarji's case (at page 512) that the right of the beneficiary in respect of the trust property was called beneficial interest and was " in law termed as equitable title to the property ", and that it was not possible to hold that a right which a beneficiary gets under the trust was not "an interest in the trust property". With respect to the learned judges, both those propositions are contrary to well-established notions of the law of trusts in India, as declared by the Privy Council many years ago in the case of Chhatra Kumari Devi v. Mohan Bikram Shah, where Sir George Lowndes, delivering the judgment of the Board observed as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, I would have that section 6(2) of the Gift-tax Act, 1958, has no application to a trust which is revocable at any time, and the value of the property in respect of which such a trust is created cannot, therefore, be taken to be zero under the provisions of section 6(2). S. K. DESAI J. I agree with the view that the transaction under the deed of trust dated 4th July, 1957, would not constitute a gift liable to gift-tax, but would like to add a few words. In my opinion, in ascertaining the correct construction of statutes taxing gifts, it would be proper to read them in the light of the closely related provisions of revenue laws taxing transfers at deaths. In a sense gift-tax is supplementary to estate duty and the main purpose of the gift-tax is to compensate for avoidance of estate duty by taxing the gift of property made during life which property, but for the gift, would be subject to the tax laid down upon a transfer at death. The construction under which the donor would be liable to pay tax upon a transfer on the basis of a gift whilst at the same time his estate remains liable to pay estate duty upon that property does not readily commend itself for acceptance. The essenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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