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TMI Blog1982 (10) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... be subordinate to the authority of the Ruler. Section 2 The maintenance of two, there or four Kanwars will be fixed according to the scheduled rates. As, for instances the present income of Patiala State in twenty-one lacs. In case of a single Kanwar the maintenance will be fixed at rupees twenty one thousand while two Kanwars will obtain at the rte of five hundred per lac and in case the income exceeded this limit, a sum of rupees thirty-one thousand and five hundred per annum in all will be sanctioned which will be equally shared by them. In case of three, four or five Kanwars, approximately a sum of rupees two thousand per lac, i.e., forty-two thousand annually on the whole having been proposed and in accordance with the share of the provisions will be equally disbursed among all the Kanwars and no distinction will be observed among the Kanwars in respect of the fixation of maintenance allowance. The maintenance of the off springs of the Kanwars: An equal share will be given out of their father's entire maintenance. In the event of an issue less Kanwar, his share of maintenance will vest in the government and a sum of rupees seven daily will be fixed towards the mainte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be maternal uncles or their sons. For instance: 1. The maintenance of the family of khazan Singh and Mastab Singh in the State of Patiala will not be less than five thousand rupees or more than seven thousand rupees nor more than three thousand. 2. The maintenance of the maternal family of the crown prince, for instance, the maintenance of kakarwala in Patiala State is not less than two thousand of rupees nor more than three thousand. 3. The maintenance of the maternal family belonging to Sukhewan of the Late Maharaja Karan Singh is not less than rupees fifteen hundred nor its is more than rupees two thousand. 4. The maintenance of the maternal family of the Late Maharaja Sahib Sing sanctioned by the DARBAR (Izlas) of the Ruler which is not less than rupees seven hundred and not more than rupees one thousand. 5. Towards the maintenance of the parents of Mai sahiba, ten kilas of rent freeland will be granted, during the life time of the Mai on whose death the same land will be resumed by the Government. After this, no maintenance will be allowed on the basis of relationship. 6. The maintenance of the in-laws of the Rais for instance, the maintenance of Rais for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended to cover all the expenses of his Ruler and his family including expenses of his residence, marriage, and other ceremonies, etc., and shall subject to the provisions of paragraph (1) neither be increased nor reduced for any reason whatsoever. (3)The Raj Pramujkh shall cause the said amount to be paid to the Ruler in four equal instalments at the Ruler in four equal instalments at the beginning of each quarter in advance. (4) The said amount shall be free of all taxes, whether imposed by the Government of the Union or by the Government of India" Article XII is also important and Article XIV deserves special mention. These tow articles are abstracted from the convenant as under: "Article XII (1) The Ruler of each covenanting State shall be entitled to the full ownership, use enjoyment of all private properties (as distinct from State Properties) belonging to him on the date of his making over the administration of that State of the Raj Pramukh. (2) He shall Furnish to the Raj Pramukh before the 20th day of September, 1948, the inventory of all the immovable properties, securities, and cash balances held by him as such private property. (3) If any dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulers who have executed them. While they provide for the integration of States and for the transfer of power form the Rulers, they also guaranteed to the Rulers privy purse, succession to Gaddi and rights and privileges and full ownership, use and enjoyment of all private property belonging to them as distinct from State properties. So far as the position about the privy purses guaranteed or assured to the Rulers was concerned, it is set out in detail in Part II of this White Paper Book. As far as their private properties were concerned, the Rulers were required to furnish by a specified date inventories of immovable properties, securities and cash balances, claimed by them as private properties, and any dispute arising in respect of any property claimed by a Ruler was to be referred to an arbitrator appointed by the Government of Indian. At p. 64 ibid in cl. 158(iv) it is provided as under: "As the privy purse is intended to cover all the expenses of the Ruler and his family including expenses on account of his personal staff, maintenance of residence, marriage and other ceremonies, Rulers have not been allowed to add to this income directly or indirectly, New jagirs or grants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess that Rs. Four crores. Under the terms of the covenants and the agreements entered into by the rulers, privy purses are payable to the Rulers, out of the revenue of the States concerned and payments have so far been made accordingly. During the course of the discussions with the Indian States Finances Enquiry Committee, it was urged by most of the states that the liability for paying privy purses of Rulers "should be taken over by the Centre on the ground "that: (a) Privy purses have been fixed by the Centre; (b) privy purses are political in nature; and (c) similar payments are not made by the province "Apart from these considerations, the position has definitely changed since the execution of the covenants. In the first place, so far as the merged States are concerned, with their total extinction under the new Constitution of India, as separate entities, the basis of liability for privy purse payments guaranteed to the Rulers of the states will undergo a change, in that the States, form the revenueof which privy purses are payable, would cease to exist. Secondly, the term "revenues of the States" has now to be viewed in the context of the federal financial integrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the most vital interests of this country. These guarantees form part of the historic settlements of the great ideal of geographical, political and economic unification of India as ideal which for centuries remained a distant dream and which for centuries remained a distant dream and which appeared as remote and as difficult of attainment as ever even after the advent of Indian independence. Human memory is proverbially short. Meeting in October, 1949, we are apt to forget the magnitude of the problem which confronted us in August, 1947. As the Hon'ble Members are aware, the so/called lapse of paramaountcy was a part of the plan announced on 3rd July 47, which was accepted by the Congress. We agreed to this arrangement in the same manner, as we agreed to the partition of India. We accepted it because we had no option to act otherwise. While there was recognition in the various announcements of the British Government of the fundamental fact that each State should link up its future with that Dominion with which it was geographically contiguous, the India Independence Act released the States From all their obligations to the British Crown. In their various authoritative pronounc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enormous amounts in respect of the Maharaja settlements alone. We are ourselves honouring the commitments of the British Government in respect of the pensions of those Rulers who helped them to consolidate their Empire. Need we cavil then at the small-price we have paid for the bloodless revolution which has affected the destinies of millions of our people". It was against this unpropitious background that the Government of India invited the Rulers of the States to accede on three subjects of Defence, External Affairs and communications. At the time the proposal was put forward to the Rulers, an assurance was given to them that they would retain the status quao except for accession on these subjects. It had been made clear to them that this accession did not imply any financial liability on the part of the States and that there was no intention either to encroach on the internal autonomy or the sovereignty of the States or to fetter their desecration in respect of their acceptance of the new Constitution of India. These commitments had to be borne in mind when the states Ministry approached the Rulers for the integration of their states. Any use of force identity of their States. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These terms and conditions provided that the trustees out of the income of the trust shall pay Rs. 12,000 as allowance to his son Yuvrani Preneet Knaur and Rs. 4000 to his grand daughter Princess Jai inder Kaur. This settlement was irrevocable, and was known as Yuvraj Amrinder Singh Trust. The settle transferred a sum of Rs. 25000 vide cheque dt. 5th November 1971 and promised to place the remaining amount at the disposal of the trustees in due course. 7. By another trust deed, drawn on 5th November 1971, by the said Yadvindra singh, Maharaja of Poatiala for the benefit and maintenance of his wife Her Highness Smt. Mohinder kaur of patiala and out of love and affection for her, he transferred "out of savings form privy purse" an amount of Rs. 6 lacs to the trustees upon trust. There were terms and conditions incorporated in this trust deed. Clause 7 provided that the trustees, out to the income of the trust, shall pay Rs. 36,000 annually as allowance to his wife. Clause 15 provided that in case of demise of the said wife of the maharaja, the money hereby transferred to the trustees hall be utilised in the manner indicated by his wife in her Will or any other document signed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily members to maintain them out of privy purses. Hence, gift under the "Transfer of Property Act" can be one which is without consideration. If this contention of the assessee is accepted than all the gifts made of any amount by a father to his children or by a husband to his wife will be with consideration (i.e.,in lieu of liability of maintaining them) and hence no, gift-taxs will be chargeable on such gifts definition of gift has been specifically head of the family made above specified limits to his children or his wife are brought within the taxable limits under the GT Act. The duty of late Sh. Yadvinder Singh to maintain his wife or his son was band hence there is no question why the gift tax should not be charged on the gift in question. (iv) Even in the asst. yrs. 1962-63 and 1970-71 the assessee had made gifts out of importable estate to his son Sh. Amrinder Singh and his daughter-in-law Smt. Preneet Kaur and his grand children and the same were declared as taxable under the GT Act by the assessee himself on the basis of the returns field. The duty of maintaining the members of the family was not different at that time and hence when there has been no change in Gift-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption of the gifts made as per para 3 of the impugned order, was that, the appellant was the erstwhile Ruler of Patiala State and all the properties inherited by him as Ruler of Patiala State formed an impartible estate which was created by voluntary agreement styled as "Dastur-ul-amal" by the Rulers of the States of Patiala, Nabha and Jind jointly known as 'Phulkian States' on 13th October 1860". Certain authorities were cited in respect of the contentions made before the Ld. CIT (A). The Ld. CIT(A) examined the evidence before him as to the source of the cash of Rs. 10,00,000 to find out whether it came out of the savings from privy purse, in view of GTO's claim that there was no evidence in proof thereof. In this regard, bank account No. 956 in the State Bank of India, Patiala, where the deposits of privy purses were made from the receipts of the privy purses against which various cheques were issued in favour of the two members in questions were produced before the Commr. After scrutiny thereof, he has given a finding of fact as under: "Hence after going through the details furnished by the A. R. there does not remain any doubt about the fact that the gifts were made out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs was held as exempt and the entire gifts of land were also held as exempt completely. 13. Now, the assessee has filed an appeal against his various findings and the decision that Rs. 6 lacs is taxable gift as it is not exempt under the provisions of s. (5)(1)(xvi) of the GT Act. The revenue has filed cross appeal to the effect that the CIT (A) erred in holding that the transfer of agricultural lands to the other members of the assessee family did not constitute a gift. The revenue has also objected to his holding that a cash gift of Rs 4 lacs out of Rs. 10 lacs was exempt within the meaning of s. 5 (1)(xvi) of the GT Act. Hence these cross appeals before us. 14. Insofar as the appeal of the assessee is concerned, the issue involved is whether on the facts and in the circumstances of the case, the CIT (A) was justified on the reasons assigned by him, in holding that the entire impugned sums of cash were not exempt and that the sum of Rs. 6 lacs as worked out by him, was not covered as exempt, inter alia by the provisions of s. 5 (1) (xvi) of the GT Act. It was contend on behalf of the assessee before us that the exemption granted under the provisions of s. 5 (1) (xvi) had th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider whether the transfers have been made to the members of that family and what follows therefrom. He invited our attention to the judgment of the Supreme Court in the case of C. Krishna Prasad vs. CIT 1975 CTR (SC) 7 : (1974) 97 ITR 493 (SC) 496, where their Lordships have, after considering the dictionary meaning, observed that "the word 'family' means the group consisting of parents and their children, whether living together or not; in a wider sense, all those who are nearly connected by blood or affinity; a person's children regarded collectively; those descended or claiming descent from a common ancestor'. He further emphasised that the Hon'ble Court has pointed out that it is well-settled that a Hindu joint family consists of all persons linearly descended from a common ancestor and includes their wives and unmarried daughters. He contended that the privy purse was intended to cover all the expenses of the Ruler and his family and, therefore, it was apparent that the intention was to cover all the members of the family of erstwhile Rulers to whom privy purses were assured. He went further to point out that as a matter of fact, even the collaterals of the late His Highne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d if it exceeded Rs. 10 lacs, the amount was to be modified for his successor. However, this provision does not in any manner, connote that the privy purse itself is personal to the Ruler and not meant for his family. He reiterated that the succession in terms of Article XIV given at p. 35 of the paper book was guaranteed according to law and custom, prevailing in each covenanting State and this assurance having been reconfirmed in the Parliament in the aforesaid White Paper at p. 129 part 241(3), the privy purse could not be treated anything else but a property of the family. 18. He reffered to the judgement of the Hon'ble Rajasthan High Court in the case of Thakur Gopal Singh vs. CWT (1975) 99 ITR 354 (Raj) where compensation obtained by the assessee in lieu of a Jagir was accepted as being owned by the HUF and held as impartible in character and governed by the rule of primogeniture and compensation received as belonging to the family and subsequent partition not liable to the provisions of GT Act. He contended that the compensation received may be received in lump sum or over a period of years but its nature and characteristics would remain the same. He made a point that pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to an erroneous situation because in the case of Maharani Mohinder Kaur the balance amount concerned cannot be taxed since there would be no donee and insofar as Amrinder Singh Trust is concerned, it is apparent that the transfers to his wife and daughter were also exempt and if a contrary view is held, the evaluation would have to be done on a similar and consistent basis between taxable any non-taxable gift though this argument is only in the alternative and without and concession. In this regard for this evaluation of the gifts, he referred to the judgment of this Bench of the Tribunal in WTA Nos. 33 to 36 of 1978-79 dt. 30th August 1980 The Ld. counsel for the assessee summed up that the privy purse was by way of quid pro quo for surrendering the ruling powers of the family which at a particular point of time were represented by a person coming in succession on the rule of primogeniture and in fact the amounts put in trust emanated from the privy purse belonging to the HUF and any gift-tax because such a transfer was not transfer within the meaning of GT Act. As such the authorities below erred in taxing the assessee as they did. 21. In reply, the revenue opposed these sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable. According to the revenue, Dastur-ul-Amal signed in 1860 does not establish such practice, usage or tradition according to which maintenance and support was that of the head of the family. It was also contended that there is no evidence that gifts of huge sums of money in the neighbourhood of lacs of rupees were made in the past years to the Ruler's wife and sons. If anything was provided in the Dastur-ul-Amal, it was only day to day maintenance of certain members of the family and, therefore, the CIT(A) failed to decide the issue properly by not taking into account this background. It was also pointed out that the CIT(A) had not given any finding that the wife and the son of the Ruler were dependent upon the Ruler for support and maintenance. Since they had their own sources of income they could not be dependants. Hence the CIT (A) erred in holding that cash gifts upto Rs. 4 lacs out of total cash gifts of Rs. 10 lacs were exempt from gift-tax. His order on this point be reversed and appeal of the assessee be dismissed as no cash has been made out for exemption of entire cash gift amount of Rs. 10 lacs. 24. The revenue arguing its own appeal regarding agricultural lands g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat of the GTO restored in respect of all the matters in cross appeals. 26. We have given careful consideration to the rival submissions. We have also considered the relevant provisions of statutory law alongwith the judicial pronouncements referred to by the parties; the White Paper on Indian States published by the Government of India and all other relevant facts and circumstances of the case, for determination of the issues before us. One of the arguments made on behalf of the revenue before us was that a privy purse is not a payment by way of a quid pro quo to a Ruler for parting with his ruling powers. But when we bring into focus the speech of the Hon'ble Minister for States made before the Constituent Assembly, abstracted and incorporated in this judgment above, it becomes crystal clear therefrom that privy purses were offered and accepted as quid pro quo for parting with the ruling powers by the Rulers of the native States. In the very words of the Hon'ble Minister of States, "the minimum which we could offer to them as quid pro quo for parting with their ruling powers was to guarantee to them privy purses and certain privileges on a reasonable and defined basis. The pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to law and custom, to Gaddi of each covenanting State". In Schedule I to this covenant, the amount of privy purse was fixed at Rs. 17,00,000 in so far as Patiala is concerned. Article XI of the covenant provided that the ruler of each covenanting State shall be entitled to receive annually from the revenues of the Union of States called, PEPSU, the amount specified against that covenanting State in Schedule I. The proviso to this Article laid down that if the sum specified in the Schedule in respect of the Ruler of Patiala exceeds rupees ten lacs, it shall be payable only to the present ruler and not to his successors for whom provision will be made subsequently. But, in our considered opinion this proviso to Article XI does not make the amount of privy purse a personal property of the Ruler but was in fact, in quantum, limited to the extent till his life time due to diverse considerations. 29. The above position also becomes clear by reading Articles of the covenant carefully and Part VII with the caption "Settlement of Ruler' Private Properties" at p. 63 of the above mentioned White Paper. At p. 64 ibid para 158(iv) very clearly records that "the privy purse is inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of joint family properties in view of what is stated in the above paras. Hence, what the assessee did was a family arrangement of joint family properties. 33. In view of our above finding the position that emerges is that the joint family properties had been placed by the Manager/Karta who was handling them in trusts for the benefit of the members of the joint family as understood under Hindu Law. The question that arises, therefore, is whether there was any element of gift involved in these transfers and any gift-tax is leviable on such gifts. Gift has been defined in s. 2(xii) of the GT Act, 1958 as the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or moneys worth and includes the transfer or conversion of any porperty referred to in s. 4, deemed to be a gift under that section. Now u/s 4, certain modes of transfer have been enumerated. Sec 2 (xxiv) of the GT Act defines transfer of property as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee could be held to have a gift by a partition of his share of the properties to the other members and was liable to be taxed under the GT Act, 1958. We are thus aware that the observation sere made by the Hon'ble Supreme Court on cls. (xii) and (xxiv) of s. 2 with reference to the facts of that case. However, the observations of the Hon'ble Court are of wide application and in our considered opinion are applicable to the facts of the aces before us. As held by us earlier, the assessee was dealing with joint family properties and when he put such properties in the impugned trusts, he was only making a family arrangement. It is not material as to how the assessee understood and treated such transfers earlier or later or as to how the GTO treated them we have to determine the correct position of facts and of law with regard to the transations which are under appeal before us, and in our considered opinion, it was merely a family arrangement of the HUF properties whereby the assessee provided for the support and maintenance of his wife, son and other all constituting the members of the family as he thought fit. On such transfers, there was no gift-tax leviable. 35. There have bee ..... 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