IN THE HIGH COURT OF GUJARAT AT AHMEDABAD GIFT TAX REFERENCE No 6 of 1988 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE K.M.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- COMMISSIONER OF GIFT TAX Versus NANDKISHORE SAKARLAL (INDL) -------------------------------------------------------------- Appearance: 1. GIFT TAX REFERENCE No. 6 of 1988 MR TANVISH BHATT FOR MR. M.R. BHATT, Standing Counsel for the Revenue MR H.M. TALATI, Advocate for the Assessee -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE K.M.MEHTA Date of decision: 03/05/2003 ORAL JUDGEMENT (Per : MR.JUSTICE R.K.ABICHANDANI for the Court) 1. The Income Tax Appellate Tribunal, Ahmedabad Bench "A" has referred the following question of law for the opinion of this Court under Section 26 of the Gift Tax Act, 1958 : "Whether in law on facts, the assessee is liable to pay tax under the Gift-tax Act, 1958 on account of the variations made on 31-12-1970 in the settlement deed of 1961?" 2. The assessee - H.U.F. filed gift tax return on 30th November 1971 showing value of taxable gift of Rs. Nil for the year relevant to the Assessment Year 1971-72. On the fresh assessment which was done pursuant to the appellate orders, the Gift Tax Officer held by his order dated 30th March 1982 that, on exercising the power of revocation under clause (15) of the trust deed dated 11-4-1961, that earlier deed ceased to exist in law and a new trust came into existence by virtue of the deed dated 31st December 1970 and therefore, the assessee was liable to pay gift tax in respect of the property transferred for which the trust was created under each of the trust deeds. The Commissioner upheld the orders of the G.T.O. 3. When the matter was carried to the Tribunal, in the Revenue Appeal Nos. 930 to 933 / AHD / 1986, from which the present reference arises, two Members of the Bench differed and their opinions were referred to a third member, who expressed the view that the assessee was not liable to pay gift tax in respect of the declaration made on 31st December 1970. 3.1 In his opinion rendered by the Judicial Member, it was held that the trust created under the deed dated 11-4-1961, which was initially irrevocable, became revocable at the end of six years and one day. On 31-12-1970, the settler did not revoke the entire trust but only substituted clause 2(b) and clause (3) thereof and revoked clause (15) under which the trust was earlier revocable at the end of the said period. The learned Judicial Member observed that the settler had parted with the property under the settlement deed dated 11-4-1961 which did not revert to him and the same trustees continued to be the legal owners of the trust property. Moreover, the subsequent deed dated 31-12-1970 was executed on a stamp paper of only Rs.100 and not on the basis of the valuation of the entire property, as was done in the earlier deed dated 11-4-1961. 3.2 The Accountant Member, in his differing opinion, held that the property transferred under the settlement deed dated 11-4-1961 and under the deed dated 31-12-1970, was different. According to him, "What was transferred originally was right to receive income for specified period for which value is to be determined under Section 6(2) and not under Section 6(1) read with Rule 11 of the Gift-tax Rules". It was held that when the deed dated 31-12-1970 was executed, the original trust had already become imperfect because of power of revocation or power to change the class of beneficiaries of income and / or corpus etc. reviving on expiry of the period of six years and one day from the date of the initial deed. Without considering the ratio of the decision of the Supreme Court in Allahabad Bank Ltd. v. C.I.T., reported in 24 ITR 519 (SC), the learned member seems to have relied on it. In the said decision, it was held that, in view of the uncertainty as regards the beneficiaries and absence of any obligation to grant any pension, no legal and effective trust could be said to have been created. That decision was rendered in context of the provisions of the Income Tax Act. The Accountant Member held that the view taken by C.G.T. (Appeals) that there was a fresh gift on the basis of transfer of property with totality of interests in shares covering successive interest was correct and that was required to be valued under Section 6(1). 3.3 After the differing opinion of the Accountant Member was rendered on 9th May 1985, somewhat surprisingly, the Judicial Member, as if making a rejoinder, made certain observations by stating; "With reference to the note dated 9th May 1985 recorded by my learned Brother, I have to state as follows". 3.4 The case was referred by the President of the Appellate Tribunal to another Member, who was a Judicial Member and who rendered his opinion on 13th March 1986, agreeing with the conclusions reached in the opinion of the Judicial Member holding that the assessee was not liable to gift tax in respect of the declaration made in December 1970. 4. The learned counsel for the Revenue contended before us that, for all intent and purposes, a new trust was created under the deed dated 31st December 1970. He submitted that the increase in beneficiaries in some of the deeds, as also making the shares of the beneficiaries definite in all the deeds, amounted to creation of new trusts. He submitted that the original trust was revocable while and under the new trust, the property was ultimately to be vested in the beneficiaries after a period of fifteen years, and the trust was now made irrevocable. Such drastic changes in the settlement brought about a totally new set up. 4.1 In support of his contention, the learned counsel relied upon the decision of this Court in Anarkali Sarabhai v. Commissioner of Gift-Tax, reported in 259 ITR 97, in which, in context of the fact that, by exercising the power of appointment, no corpus of the trust fund was transferred but only the right of Anarkali Sarabhai to receive the trust funds came to be transferred by her in favour of the four trusts of which she was the settler, it was held that there was no question of any gift having been made by Anarkali of the corpus of trust and therefore, the Tribunal was right in holding that the Gift-Tax Officer was not justified in levying gift-tax on the value of the entire corpus since it was actually the assessee's interest in the property which was transferred. 4.2 The learned counsel also relied upon the decision of the Madhya Pradesh High Court in Princess Usha Trust v. Commissioner of Income Tax, M.P., reported in 144 ITR 808, in which it was held that, under Section 77 of the Indian Trusts Act, a trust is extinguished when the fulfillment of its purpose became impossible by destruction of the trust property or otherwise, and that the expression "otherwise" would cover a case where the trust property is not available for fulfillment of its purpose, because, all the beneficiaries under a trust have validly transferred their interest. According to him, the interest of the beneficiaries under the trust deed of 11-4-1961 stood transferred by virtue of the subsequent deed dated 31-12-1970 in favour of the beneficiaries in whom the property was to vest after a period of fifteen years and by virtue of the trust having now been made irrevocable. 4.3 The learned counsel also referred to the decision of the Supreme Court in Thakur Raghunath Ji Maharaj v. Ramesh Chandra, reported in AIR 2001 SC 2340, in which, from the terms contained in the deed, it was held that the gift was not absolute and / or unconditional. The Court held that the gift deed and the agreement forming one transaction were to be read together and given effect to accordingly, and since the defendants did not construct a college building on the suit land, the gift did not come in to effect. 5. The learned counsel appearing for the assessee argued that the property vested in the trustees under the deed dated 11-4-1961 and it continued to vest in the trustees even after the expiry of the period of six years and one day, during which the trust was irrevocable. Even when changes were effected by substituting clause 2(b) and clause (3) of the original trust deed on 31st December 1970, the legal ownership of the property continued with the same trustees. It was submitted that gift tax was paid on the basis of valuation of the entire property when the property was transferred in the names of the trustees under the settlement deed dated 11-4-1961. According to him, mere change in the manner in which the trustees were to manage the property in context of the beneficiaries and specifications of the shares of the beneficiaries did not have the effect of divesting the ownership of the property which had continued to vest in the trustees. He submitted that change in the beneficiaries in some of these settlements did not create any transfer of property, because, the transfer was by virtue of creating a trust itself which was already created under the deed dated 11-4-1961. It was also submitted that, by making the trust irrevocable also, no transfer took place and no new trust was created. 6. The learned counsel for both the sides have referred, from the original record transmitted to this Court, the settlement deed dated 11-4-1961 (N.Sakarlal Settlement) and the Deed dated 31-12-1970 in respect of the same settlement (N. Sakarlal Settlement) by which the changes were effected. It is submitted that the other deeds and changes are similar in cases of all the settlements. 6.1 In the N. Sakarlal Settlement, the settlement deed dated 11-4-1961, it has been mentioned in the initial recital, after naming the five trustees, that the trustees had agreed to be the first trustees, all being parties to and executing the said deed. It is also mentioned therein that "for purposes of stamp duty, the said property is taken to be of the present market value of Rs.1,80,400-00 only". 6.2 By clause (1) of the settlement deed dated 11-4-1961, the property described in Schedule "A" of the deed was transferred by the settler to the trustee with all his rights, title and interest and handed over and delivered to the trustees in the following terms: "NOW THIS INDENTURE WITNESSETH as follows :- 1. In consideration of the premises and of the natural love and affection the Settlor bears towards the members of his family and for diverse other good causes and considerations him thereunto moving, he the Settlor doth hereby transfer and assign unto the Trustees of those property described in the Schedule `A' hereto AND all his right title and interest thereto and hereby hands over and delivers to the Trustees the Certificates of Shares with Transfer Deeds duly executed TO HAVE, HOLD, RECEIVE AND TAKE the same into the Trustees upon the trusts and with and subject to powers, provisions agreement and declarations hereinafter appearing and contained of and concerning the same." (emphasis added). 6.3 In clause (2) of the said deed, it has been recorded that the trustees had received and taken delivery of the said property with transfer deeds duly executed. The trustees agreed to hold and possess the property described in Schedule "A" upon trust stipulating to recover the dividends, interest and income out of the trust fund and to pay out of the same, charges for collecting including expenses of staff salaries, rent, conveyance car expenses, legal charges and all other out-going, taxes etc. pertaining to the maintenance thereof. 6.4 Thereafter, comes clause 2(b) which was later substituted. The said clause, as it stood prior to its substitution, reads as under : "2. xxx xxx xxx xxx xxx (a) xxx xxx xxx xxx xxx (b) To apply the balance of such dividends, interest and income hereinafter called "the net income" or such portion thereof as the Trustees in their absolute discretion deem proper for the maintenance, education, advancement in life and otherwise for the benefit of (1) Ben Chandravati Sakarlal (2) Ben Malvika Sakarlal and (3) Shri Harsh Navnitlal and their heirs and/or assigns in such shares and proportions and in such manner in all respects as the Trustees in their absolute discretion deem fit AND to accumulate the balance of net income and to add the same to the corpus AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED that any act bonafide done by the Trustees or any payment bonafide made by the Trustees or the decision of the Trustees in respect of the amount to be spent or applied in pursuance of the provisions of this clause shall be final and binding on all persons claiming under these presents and shall not be questioned in any Court and shall not be questioned in any Court." It will be seen from this clause that the trust was discretionary trust and the beneficiaries' shares were not specified. The deed specifies the powers and duties of the trustees in detail and thereafter reserves the power of revocation, in clause (15), which is reproduced hereunder: "15. These presents shall remain irrevocable for a period of six 15. These presents shall remain irrevocable for a period of six years and one day from the day hereof. After the expiration of the said period it shall be lawful for the Settler at any time or times by any deed or deeds for the Settler at any time or times by any deed or deeds revocable or irrevocable inter vivos or by his last will or codicil thereto to alter, vary or absolutely to revoke all or any of the uses trusts powers provisions and limitations herein declared and contained of and concerning the Trust Fund as provided and appointed herein and if he so desires in lieu of the uses, trusts and limitations so revoked to limit, declare and appoint by the same or any other deed or deeds or will or codicil, such new or other uses trusts powers provisions and limitations of and concerning the Trust Fund or the income thereof of the management thereof as he the Settler shall think proper anything hereinbefore contained to the contrary notwithstanding and upon such revocation the said Trust Fund or any part thereof or the income thereof or any part thereof in respect of which such power or revocation shall be exercised shall belong absolutely to the Settler subject to any such new limitations declarations or appointment." Under the said clause (15), the settlement was irrevocable for a period of six years and one day and admittedly, even after that period, the settlement was not revoked or altered till the deed 31-12-1970 was executed by the settler and signed by all the trustees. By that deed, sub-clause (b) of clause (2) and clause (3) of the Deed of Trust dated 11-4-1961 were substituted and clause (15) thereof came to be revoked. 6.5 In the deed dated 31-12-1970 invoking the powers reserved with the settler under clause (15) of the Trust Deed dated 11-4-1961, the settler, "desirous of altering or varying the trusts, powers and provisions contained in sub-clause (b) of clause (2) and clause (3) of the said recited Deed of Trust dated 11-4-1961 and also to revoke clause (15) of the said recited deed dated 11th day of April 1961 and to make the trust irrevocable", executed the said deed. 6.6 The settler, by the subsequent deed, revoked and made void the provisions contained in sub-clause (b) of clause (2) and the whole of clause (3) of the Deed of Trust dated 11th April 1961 and in lieu thereof, he declared and appointed trust, powers and provisions in the following sub-clause (b) of clause (2) : "2(b). From the 1st day of April 1970 upto the 31st day of March, 1985, to divide the balance of such dividends, interest and income after providing for all outgoings (hereinafter called `the net income) amongst (1) Ben Chandravali Sakarlal (2) Ben Malvika Sakarlal (3) Shri Harshbhai Navnitlal in proportion of 50%, 20% and 30% respectively, PROVIDED FURTHER that in the event of the death of any of them the said Ben Chandravali Sakarlal, Ben Malvika Sakarlal & Harsh Navnitlal before the 31st day of March 1985 the income coming to the share of such deceased person shall be divided equally amongst the legal heirs of such deceased person." 6.7 Similarly, the original clause (3) of the Deed of Trust was substituted by the following clause (3) : "3. On the 1st day of April 1985, to pay, transfer and hand over the Trust Fund together with the accumulation of income, if any, the Trustees shall pay transfer and hand over the Trust Fund together with accumulations of income if any to wife and children of the said Nandkishore Sakarlal in equal shares absolutely." 6.8 Furthermore, by the said subsequent deed of 31-12-1970, the settler revoked the earlier clause (15) and made the trust irrevocable. It was, in terms, stated at the end that, save as altered and varied by this document dated 31-12-1970, all other trusts, powers provisions, covenant and conditions contained in the said Deed of Trust dated the 11th day of April 1961 shall remain in full force and effect". This subsequent deed was signed by the settler in the presence of two witnesses and even the trustees had put their signatures in the presence of two witnesses. 7. There is some difference between the definition of "gift" in section 2(xii) of the Gift-tax Act, 1958 and section 122 of the Transfer of Property Act. These provisions are re-produced hereunder for a ready comparison along with definitions of "transfer of property" as appearing in section 2(xxiv) of the Gift-tax Act and section 5 of the Transfer of Property Act, again for a ready comparison because of the difference in the two definitions, which has a bearing on the meaning of the word "gift" in these two Acts : Gift-tax Act, 1958 : "2. In this Act, unless the context otherwise requires,-- xxx xxx xxx xxx xxx xxx (xii) "gift" means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section. xxx xxx xxx (xxxiv) "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; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; xxx xxx xxx Transfer of Property Act, 1882 : "5. "Transfer of property" defined.-- In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and "to transfer property" is to perform such act. In this section "living person" includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals." 122. "Gift" defined.-- "Gift" is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee and accepted by or on behalf of the donee. Acceptance when to be made.-- Such acceptance must be made during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, the gift is void." 7.1 In the Gift-tax Act, the word "donee" is defined in clause 2(viii) so as to mean any person who acquires any property under a gift, and where a gift is made to a trustee for the benefit of another person includes both the trustee and the beneficiary. Under the definition of the word "gift" in section 122 of the Transfer of Property Act, a person accepting the gift is called the donee, as mentioned therein. 8. The meaning of the word "gift" under the Gift-tax Act is significantly different from its meaning under the Transfer of Property Act. The essentials of a gift for the purposes of the Gift-tax Act are : (i) there must be a voluntary transfer of property within the meaning of section 2(xxiv) by one person to another, and, (ii) such transfer should be without consideration in money or money's worth. The essential difference that widens the scope of "gift" for the purposes of the provisions of the Gift-tax Act, is due to the enlarged meaning of the expression "transfer of property" in Section 2(xxiv). The expression "transfer of property" as defined in clause (xxiv) of section 2 of the Gift-tax Act means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, inter alia, includes "the creation of a trust in property". Thus, whenever a trust is created in the property that would be a transfer by the settler to another person of the trust property and being without consideration in money or moneys worth, it would be a gift under Section 2(xii) of the Gift-Tax Act even if it may not satisfy the narrower and traditional concept of a gift as reflected in Section 122 of the Transfer of Property Act, which means, a transfer of property without consideration to the donee and accepted by or on behalf of the donee. In that definition, the meaning of "gift" is governed by the meaning of "transfer of property", which, as defined in Section 5 of the Transfer of Property Act, inter alia, means, an act by which a living person conveys property, in present or in future, to one or more other living persons, as defined. A transfer of property is either a transfer of absolute ownership or a transfer of one or more of subordinate rights or interest in the property. 9. A gift may be made by the equitable machinery of a trust and the trust is perfected when the settler either constitutes himself as a trustee or transfers the trust property to the trustees. This is clear from the provisions of section 6 of the Indian Trusts Act, 1882 which provides that a trust is created when the author of the trust indicates with reasonable certainty by any words or act, (a) an intention on his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary, and (d) the trust property and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust property to the trustee. 9.1 The gift of a moveable property is made by effecting the transfer by delivery. In the present case, the trust property which was specified in Schedule "A" to the Deed of Trust dated 11-4-1961. Though the trust was irrevocable for six years and one day, as mentioned in that Deed, it continued to exist even thereafter and was not revoked. The Deed of 31-12-1970 had the effect of merely substituting sub-clause (b) of