Commissioner of Gift-tax vs N. Jothi Kumar

Ramanujam, J.—The following question has been referred to this court at the instance of the Revenue as arising out of the order of the

Income Tax Appellate Tribunal :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in setting aside the order of the

Commissioner of Gift-tax and in holding that the transfer of Rs. 1,60,000 by Shri N. Jothi Kumar to his minor daughter from out of the assets of

the Hindu undivided family was to discharge his obligation to maintain the minor daughter and, therefore, there was no element of gift involved in it.

The assessee is a Hindu undivided family. It filed a return of gift on January 16, 1975, showing the total value of the gifts at Rs. 11,115.

Assessment was made accepting the said return on October 31, 1975. Later, it was found by the Commissioner that the return of gift at Rs.

11,115 did not include the value of the fixed deposits of Rs. 1,00,000 with one Gopalakrishna Mills and Rs. 60,000 with one Ramakrishna Mills

which were transferred by the karta of the Hindu undivided family to his minor daughter, Padmini. On the basis that the assessment as made was

prejudicial to the interests of the Revenue, he took recourse to the provisions of section 24(2) of the Gift-tax Act, hereinafter referred to as ""the

Act"" and passed an order on October 26,1977, directing the Gift-tax Officer to include in the assessment a sum of Rs. 1,60,000 as gift liable to

gift-tax.

Aggrieved by the order of the Commissioner of Gift-tax, the assessee went on appeal to the Appellate Tribunal. Before the Tribunal it was

contended by the assessee that the provision of a sum of Rs. 1,60,000 for Padmini could not have been considered as a gift either actual or

deemed because (1) it was the legitimate right of an unmarried daughter to be maintained out of the family property, (2) the provision made was

reasonable considering that Padmini was the only daughter of the karta, and (3) the sum of Rs. 1,60.000 is a provision made to Padmini for giving

her proper education, both in India and abroad, and therefore, it was exempt from gift-tax u/s 5(1)(xii) of the Act. The assessee also relied on a

partial partition deed dated March 30, 1978, in support of his case that a sum of Rs. 1,60,000 has been provided for to the minor at a partition

arrangement.

The Revenue, however, contended that there could be no partial or total partition in the Hindu undivided family when the family consisted of

only one coparcener. It was also contended that even if the transfer was considered to be for the maintenance of the minor daughter, still it could

be a gift in view of the decision of this court in M.S.M. Ratnaswami Nadar Vs. Commissioner of Income Tax, because the minor daughter could

not relieve herself of the right to be maintained by the father as any such contract would not be binding on the minor.

After considering these rival contentions, the Tribunal held that the transfer of Rs. 1,60,000 by the father to the daughter out of the joint family

assets does not amount to a gift as it is a transfer for consideration, that is, the obligation of the assessee to maintain the minor child. It further held

that the decision in M.S.M. Ratnaswami Nadar Vs. Commissioner of Income Tax, does not affect the position in the present case as by transfer of

funds to the extent of Rs. 1,60,000, the Hindu undivided family has discharged its obligation of maintaining the minor daughter. The Tribunal also

relied on the provisions of section 20 of the Hindu Adoptions and Maintenance Act, 1956, and held that the obligation of a person to maintain his

daughter who is unmarried extends only in so far as she is unable to maintain herself out of her own earnings from property and when the Hindu

undivided family makes provision for an unmarried daughter, the liability of the father to maintain her stands reduced and, therefore, it cannot be

considered to be a gift within the meaning of section 4(1)(c) of the Act. thus, the Tribunal held that the transfer from the Hindu undivided family of

Rs. 1,60,000 to the minor did not amount to a gift and, therefore, it is not liable to gift-tax Aggrieved by the order of the Tribunal, the Revenue has

come up before us by way of this reference.

From the facts stated above, it will be seen that the claim put forward by the assessee was three-fold. (1) that the transfer of Rs. 1,60,000 or

the fixed deposit of the said amount was towards discharge of the obligation of the family to maintain the minor child, (2) that the transfer was for

the purpose of educating the child, and (3) that it is by way of partition. The Tribunal has upheld the claim of the assessee that the transfer has been

made with a view to discharge the obligation of the Hindu undivided family to maintain the minor child and, therefore, the transaction will not

amount to a gift. The Tribunal further observed that if the transfer is treated as a gift, the exemption u/s 5(1)(xii) will arise in which case a sum of

Rs. 75,000 alone can be taken as a reasonable sum for the education of the minor and the balance has to be assessed. But having regard to its

finding on the main question that the transfer is not a gift, the assessee''s claim was upheld without going into the further question as to whether the

transfer can be taken as and by way of partition.

The learned counsel for the Revenue brings to our notice the decision of this court in M.S.M. Ratnaswami Nadar Vs. Commissioner of Income

Tax, in support if his contention that unless the consideration is found to be a valuable and adequate consideration measurable in terms of money or

money''s worth, the transfer should be taken to be a gift. In that case, the assessee executed two settlements of certain properties in favour of his

minor children and thereafter the income from these properties were utilised for the educational expenses of the minors. Separate accounts were

maintained in respect of each property. The assessee claimed that the settlements have been executed to discharge the obligation of the father to

maintain his children and to educate them, according to his status, and, therefore, the transfer cannot be taken as a gift. This court held that the

assessee was under an obligation to maintain his children and educate them, according to his status, that it was not within the province of the

Income Tax Department to decide as to where and how the assessee had to educate his children, that what has been transferred is the property

itself and for ever, though the liability to maintain is only as long as the son is a minor and unable to maintain himself, that by executing the

document, the assessee is not relieved from his obligation if the property is lost or does not yield income, that at best the settlement amounts only to

provision for maintenance and even without such a settlement, the assessee could have appropriated the income from the properties settled for the

maintenance and education of his minor sons, that by adopting such a device, the assessee seeks to avoid liability to tax on his income which he

spends for the discharge of his own legal obligations and that it is to prevent this device to reduce tax section 16(3)(a)(iv) has been enacted and

that, therefore, the income from the said properties should be included in the income of the assessee.

Reference also has been made by the Revenue to the decision of the Bombay High Court in Shardaben Jayantilal Mulji and Others. Vs.

Commissioner of Wealth-tax, . In that case, the assessee created two trusts by entrusting certain shares to trustees, in respect of which the trustees

executed two declarations of trust under which the trustees declared that they would hold the shares upon trust to utilise the net income therefrom

for the maintenance of the settlor''s two minor daughters till each of them attains the age of 21 years and thereafter transfer the trust estate to the

said two daughters. When the question arose as to whether the creation of the two trusts was for valid and adequate consideration, the court held

that there was nothing which the minor daughters had done in return for the creation of the said trusts by the assessee, nor had they suffered any

detriment in return for the same, that there was no consideration, leave alone adequate consideration, moving from the minors in return for the

creation of the two trusts by the assessee and, therefore, the properties transferred by way of trust should be included in the net wealth of the

assessee. It was also urged before the court that the creation of the trusts was in discharge of the father''s obligation to maintain the two children

and, therefore, there is adequate consideration. Rejecting that contention, the court held that the obligation to maintain the children is personal

obligation which the law governing the party imposes upon the assessee as the father of the minor daughters and he cannot by any voluntary or

unilateral act of his own get rid of that legal obligation. In that case, the Bombay High Court referred with approval to the Full Bench decision of

the Kerala High Court in Commissioner of Income Tax Vs. P.M. Paily Pillai, , wherein it has been held that a transfer by way of trust executed by

the father in favour of his minor son in the case before them can only be in the nature of a gift, for the son has not conferred any benefit on the

father in return, and what is more important, has not suffered any detriment. The Bombay High Court has specifically approved and followed the

decision in M.S.M. Ratnaswami Nadar Vs. Commissioner of Income Tax, .

The assessee, on the other hand, refers to the decision in Commissioner of Income Tax Vs. K.N. Shanmuga Sundaram, in support of his claim

that the transfer of a sum of Rs. 1,60,000 is a reasonable portion of the joint family properties and, therefore, it should be taken to be a transfer for

consideration. There the assessee gifted house properties valued at Rs. 90,000 to his three minor daughters by three separate documents with the

recitals that the gifts had been made on account of the affection which the assessee had for his minor daughters and also the duty which he and his

minor son owed to maintain the donees in future in conformity with their family status and dignity and also to give the minor daughters necessary

marriage presents and streedhanam at the time of their marriage. The question arose as to whether these transfers could be brought to charge

under the Gift-tax Act. When the matter reached this court, it held that under the Hindu law, a father can make a gift of a small portion of the

immovable ancestral property to his daughter at or after her marriage if the extent of the gift bears a small and reasonable proportion to the

properties owned by the family at the time of the gift, that the right conferred by the Hindu law upon a daughter to have a share in the family

property at the time of the partition had been lost by efflux of time but had become crystallised into a moral obligation and, therefore, the father can

make a valid gift by way of reasonable provision for their maintenance, regard being had to the financial and other relevant circumstances of the

family. The court also held that by custom or convenience, such gifts are made at the time of the marriage, and that the right of the father to make

such a gift is not confined to the marriage occasion alone, as marriage is only a customary occasion for such a gift being made. Ultimately, the court

concluded that having regard to the extent of the properties belonging to the family and the value of the properties gifted, the gifts were of a

reasonable portion of the joint family properties and hence were valid and accordingly the income from the gifted properties as well as their value

cannot be included in the Income Tax or wealth-tax assessments of the assessee. Reference is also made to the decision in CGT v. Radhakrishna

Gade Rao [1983] 143 ITR 260, wherein a Division Bench of this court, to which on of us was a party, had held that the settlement of property by

the karta of a Hindu undivided family on the unmarried daughter could be said to be in discharge of the legal obligation of the Hindu undivided

family and, therefore, it could not be considered to be a gift as defined in section 2(xii) of the Act. Reliance is also placed on an unreported

decision of this court in T. C. No. 667 of 1976 dated September 9, 1982, since reported as Controller of Estate Duty, Madras Vs. B.

Kamalamma, , wherein this court has held that the liability of the family to maintain the minor daughter and her right to enforce the same against the

family property is well established and that the said right is also recognised by the Hindu Adoptions and Maintenance Act, 1956. In that case, the

court held that the estimated provision of Rs. 50,000 for the marriage of the assessee''s daughter being a reasonable portion of the estate, the same

could be treated as valid.

On a due consideration of the matter, we are of the view that the facts in this case attract the decisions of this court in Commissioner of Income

Tax Vs. K.N. Shanmuga Sundaram, and CGT v. Radhakrishna Gade Rao [1983] 143 ITR 260. It has been found by the Tribunal that the assets

owned by the joint family are more than Rs. 8 lakhs and the transferee in this case being the only daughter, there being no other coparcener apart

from the father, setting apart a sum of Rs. 1,60,000 towards the discharge of the family''s obligation to maintain and educate the child can be taken

to be for an adequate consideration. As has been held by this court in Commissioner of Gift Tax Vs. Rm. S. Ramanathan Chettiar, , since such a

provision had the effect of giving quittance to the family obligation to maintain the karta''s wife, such consideration is money''s worth and hence the

payment was not a gift. In this case, there is an obligation both on the part of the Hindu undivided family as also on the karta to maintain the minor

daughter and in so far as the Hindu undivided family makes a provision for an unmarried daughter and out of such provision income is derived, the

liability of the father to maintain her stands reduced but this reduction of liability which is purely an indirect incidence would not fall to be

considered as a deemed gift since it does not fall within the provisions of section 4(1)(c) of the Act. In M.S.M. Ratnaswami Nadar Vs.

Commissioner of Income Tax, , the court was concerned with certain settlements made out of the individual property of the assessee who

constituted a Hindu undivided family with his wife, unmarried daughter and four minor children. It was in that background it was observed that by

executing the documents it was not possible to hold that the assessee was relieved of his obligation, for, if the property was lost or did not yield any

income, the assessee could not plead that he was not liable to maintain the son any longer nor could the minor relieve himself of the right to be

maintained by any contract with the father, as such a contract will not be binding on him.

On the facts and circumstances of this case, we are inclined to agree with the conclusion reached by the Tribunal and we answer the question

referred to us in the affirmative and against the Revenue. The Revenue will pay the costs of the assessee. Counsel''s fee Rs. 500.