Commissioner of Gift-tax vs Kuppulakshmi Ammal

Srinivasan, J.—The questions which have been referred to this court at the instance of the Revenue are as follows :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the conveyance of certain lands

made by the assessee to her sister''s daughters did not amount to making of a ''gift'' taxable as such under the Gift-tax Act, 1958, and, therefore,

the assessment made on the ''gift'' was not valid in law and should, therefore, be cancelled ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the transfer made by the assessee

in favour of her two sisters of certain lands and the transfer made by the two sisters in favour of the assessee conveying certain other lands to the

assessee were not independent transactions of gift under the Gift-tax Act, 1958, but amounted to an ''exchange'' as defined u/s 118 of the Transfer

of Property Act, 1882 ?

The short facts of the case may be stated as under :

By a deed of settlement dated July 10, 1971, the assessee settled certain lands on her sister''s daughters settled certain other properties on the

assessee. The Gift-tax office took the view that the settlement deed by which the assessee settled the lands on her nieces amounted to a fig.

Coming within the purview of the Gift-tax Act and assessed her accordingly. On appeal, the Appellate Assistant Commissioner found that the

transaction was covered by section 118 of the Transfer of Property Act, 1882, and it would only be an exchange and not a fig. Within the meaning

of the Gift-tax Act. Consequently, he allowed the appeal. On further appeal by the Revenue, the Tribunal confirmed the decision of the Appellate

Assistant Commissioner. On that, the Revenue prayed for a reference to this court and, accordingly, the aforesaid two questions are referred to

this court.

It is seen from the facts of the case that the two documents, viz., the one by the assessee and the other by her nieces, were executed on the

same day, i.e., July 10, 1971. They were also registered on July 12, 1971. While the document executed by the nieces of the assessee was

registered earlier as document No. 1768, the document executed by the assessee was registered as document No. 1769. In both these document

executed by the assessee was registered as document No. 1769. In both these documents, there is a recital that the document was being executed

at the request of the respective settlers. Though the values of the properties covered under the two documents differ, the transaction satisfied the

requirements of an exchange. The facts clearly show that both the documents form part of one transaction.

Section 118 of the Transfer of Property Act defines ""exchange"" in these terms :

S. 118 : ""When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money

only, the transaction is called an ''exchange''.

A transfer of property in completion of an exchange can be made only in manner provided for the transfer of such property by sale.

The section does not require that an exchange should be brought about by one document only. There is nothing in law which prevents an

exchange being brought into existence by two documents. In Mulla''s Transfer of Property Act, Seventh Edition, at page 780, the following

passage occurs :

Mode of transfer : The mode of transfer is the same as in the case of sales. Therefore, in the case of immovable property, the rules in section 54

as to registration or delivery of possession apply. Thus, an exchange of tangible immovable property, an exchange is usually made by mutual

conveyances, but it is not necessary that there should be two separate deeds.

In Prabhu Dia v. Shadi Ram, AIR 1919 Lah 246, it was held by Broadway J. that it is for the courts to decide, not only on the document itself,

but on all the materials on the record, whether the transaction was a sale or an exchange. In that case, two deeds of sale were drawn up on the

same day and it was held that the transactions were proved to be an exchange and not a sale. This principle was reaffirmed by a Division Bench of

the Allahabad High Court in Kishen Lal Vs. Ram Lal and Others, , wherein it was laid down that extrinsic evidence is admissible for the purpose of

showing that two documents, though purporting to be separate sale deeds, are in reality part and parcel of the same transaction which was one of

exchange. On the evidence in that case, it was held that the transaction amounted to an exchange.

In Ram Badan Lal and Others Vs. Kunwar Singh and Others , another Division Bench of the court held that no hard and fast rule can be laid

down as to when two transactions amount to a sale or to an exchange. It was pointed out that if the consideration for a transfer is not paid in cash

but is paid by the transfer of ownership of some property, it would only be an exchange and not a sale. It was also held that the mere fact that the

values of the properties transferred had been fixed does not convert the transaction into one of sale. The following passage in the judgment would

be relevant (Page 231) :

It is not the name or form of the transaction but the nature of the consideration paid for the transfer which determines the nature of the transfer

itself. If the consideration for the transfer is not paid in cash, but is paid by transfer of the ownership of some property, it would be only an

exchange and not a sale.

Learned counsel for the Revenue places strong reliance on the decision of this court in Commissioner of Income Tax, Tamil Nadu-II Vs. S.

Ramal Ammal, . In that case, the assessee purchased from certain villagers, lands which contained gypsum under registered sale deeds. Under

separate agreements entered into on the same date, the villagers were given the option to repurchased the lands. The assessee thereafter entered

into an agreement with her husband under which the husband had to do the mining operations in those lands after obtaining the requisite mining

licence. The assessee''s husband had to pay Rs. 2 per ton of gypsum mined and Re. 1 per ton towards the cost of the land, compensation for

damages caused to the land, etc. The dues payable to the Government on account of the mining operations had to be paid by the husband. For the

assessment year 1966-67 to 1969-70, the assessee adjusted the sum of Re. 1 per ton received towards the cost of the land against the price paid

by her for those lands by applying some formula to distribute the price paid by her for those lands by applying some formula to distribute the price

over the several years and claimed certain sums, being portions of the purchased price, as deductible in computing her income for each of those

years. The Income Tax Officer rejected the claim for deduction on the ground that the amount received by her was towards a capital outlay. The

Appellate Assistant Commissioner held that the transaction of sale and agreement to repurchase should really be considered as a lease of the lands

to the assessee for mining gypsum and as the lands had to be reconveyed within the period of seven years, the assessee had not derived any

enduring on permanent advantage. That view was upheld by the Tribunal on appeal. On a reference, it was held by the Division Bench, on the

facts, the merely because an option to repurchase was reserved with or conferred on the vendor, it did not mean that the purchaser had obtained

something less than the full title. It was further held that what the purchaser has obtained under the document of sale was the land itself and the

entire fee in the land. On a true construction of the documents in the case, it was held that the assessee had acquired a fixed capital item, namely

gypsum-bearing land, and the price paid was for the acquisition of the fixed capital item and hence it was capital expenditure. The Division Bench

made the following observation on which learned counsel for the Revenue places reliance (Page 298) :

Another reason why the doctrine of substance is not available in discussions in revenue matters is that, given the taxable event, the tax attaches on

the event as it charges or unfolds itself. It often happens that there may be more than one way of bringing about a desired result, and while one

method may yield a tax advantage, the same result brought about by a different method might land the person concerned in tax liability or reduction

of tax advantage to a greater or a lesser degree. Courts have, therefore, been chary of introducing into the discussions of liability to tax the test of

substance in interpreting transactions with tax consequences. The fact that a particular result can be achieved by treating the transaction as of a

different kind from that which the parties have put it through, would not give jurisdiction to the Tribunal to ignore the form of the transactions which

had commended itself to the parties and which the parties had adopted for incorporating the transaction. The Tribunal cannot tax on the basis of

substance; neither can it let off an assessee from tax on the same basis.

The same decision referred to the observations made by the House of Lords in Duke of Westminister v. IRC [1935] 19 TC 490 that ""even the

doctrine of substance can only mean that a court having once ascertained the legal rights of the parties may disregard mere nomenclature and

proceed to decide the question of taxability or non-taxability in accordance with the legal rights."" This shows that it is for the court to ascertain in

the first instance the nature of the transaction from the facts and circumstances of the case. If the court finds that the transaction is of one particular

character, then the legal rights which flow from that transaction have to be upheld.

The Division Bench also referred to the decision of the Supreme Court in Commissioner of Income Tax, Hyderabad Vs. Motors and General

Stores (P.) Ltd., , wherein the Supreme Court had quoted with approval the following passage in IRC v. Wesleyan and General Assurance

Society [1948] 30 TC 11; 16 ITR (supp) 101 (at p. 66 ITR 700 :

It may be well to repeat two propositions which are well established in the application of the law relating to Income Tax. First, the name given to a

transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does

not assist the taxpayer any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true

nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction which on its true

construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another

form which would attract tax.

Thus, it is clear that the name given by the parties to a transaction is not conclusive and the facts and circumstances of each case have to be

looked into to decide the nature of the transaction.

In Thayyil Mammo and Another Vs. Kottiath Ramunni and Others, , it was held that the nomenclature of a deed and the amount of the stamp

paid on it, though relevant, are not conclusive on the question of construction. In Commissioner of Gift-tax Vs. C. Thiruvenkata Mudaliar, , a

Division Bench of this court had to consider whether a document styled as a settlement deed was a settlement or a will. While holding that the

document was only a will, the Division Bench pointed out that the nomenclature given by the parties to the transaction in question was not decisive.

Learned counsel for the Revenue drew our attention to the decision of a Division Bench of the Karnataka High Court in Commissioner of

Income Tax Vs. Maganathi Amba Devi, . In that case, the assessee and her husband settled certain immovable properties in favour of their son

and daughter under a registered settlement deed dated September 21, 1972, On the very next day, viz., September 22, 1972, the son and

daughter executed an agreement undertaking to pay annuity to the assessee and her husband. The assessee claimed that the settlement was not a

fig. within the meaning of the term occurring in section 4(1)(a) of the Gift-tax Act, 1958, and that the annuity payable under the agreement should

be considered as a consideration for the settlement if the settlement was treated as a fig. The Gift-tax Officer rejected the claim of the assessee and

assessed the gift to gift-tax. The Appellate Assistant Commissioner of Income Tax dissmissed the appeal filed by the assessee. The Tribunal

allowed the appeal of the assessee and remitted the matter to the Appellate Assistant Commissioner for determination afresh treating the agreement

and the settlement deed as one document. On a reference, the Division Bench held that in the settlement deed as finally registered, there was no

stipulation for payment of annuity by the son and daughter to the assessee and on an examination of the settlement deed, it was clear that it

constituted only of gift. It was also pointed out that any agreement entered into between the parties either contemporaneously or subsequently to

whittle down the earlier gift or the terms of the gift could not properly be relied on by the authorities under the Act. We do not see how this

decision helps the Revenue in the present case. On the facts of that case, the Division Bench of the Karnataka High Court took the view that there

was only a transaction of gift.

On the facts and circumstances of this case, the Tribunal has taken the view that the transaction is one of exchange and not a gift and that view

cannot be said to be unreasonable or perverse. Hence, we agree with the conclusion of the Tribunal and hold that the transaction in question is only

an exchange.

In the result, the two questions referred are answered in the affirmative and against the Revenue. The Revenue will pay the costs of the

assessee. Counsel''s fee Rs. 500.