1. This is a reference arising out of proceedings under the Gift-tax Act, 1958, relating to the assessment of the respondent for the year 1958-59, the corresponding accounting period being the year ended 31st March, 1958. By a deed of trust dated 4th July, 1957, the assessee settled certain property upon the trusts specified in the document. It is necessary for me to refer only to clauses 2, 3 and 15 of that trust deed. Clause 2 of the trust deed provided that the trustees, of whom the settlor himself was one, were to pay the net income of the trust properties to the settlor during his lifetime and, after his death, to the settlor's wife, Freny, for her lifetime. Clause 3 of the trust deed provided that, after the death of the settlor and his wife, the said Freny, the trustees were to hold the trust funds in trust for such persons, objects and purposes and institutions as the 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 deeument. 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 the Tribunal, however, it was held by the Tribunal that there was 'no complete gift' because : (1) there was an unlimited power of revocation; and (2) the donor and the donee were the same person and there was, therefore, no transfer. Alternatively, it was held by the Tribunal that, even if the said trust was held to amount to a gift, it must be held that the value of the gift was zero, as the transaction was not covered by the provisions of section 6(2) of the Gift-tax Act, 1958. Thereafter, at the instance of the Commissioner, two questions of law were referred to this court under section 26 of the Gift-tax Act, 1958, and they are as follows :
'(1) Whether, on the facts and in the circumstances of the case, under the deed of revocable settlement dated 4th July, 1957, there was a gift liable to gift-tax
(2) If the answer to the above question was in the affirmative, whether on the facts and in the circumstances of the case, in the absence of a specified period for which the transfer was not revocable, in view of section 6(2) of the Gift-tax Act, the value of the gift can be taken to be zero
2. Though some authorities were cited before us, the point which we have to decide is actually what may be called 'a maiden point', and it must, therefore, be decided, primarily, on a construction of the relevant sections of the Gift-tax Act and the scheme of that Act in the light of the integrated scheme of taxation which prevailed at the material time.
3. It will, therefore, be convenient to refer, at the very outset, to the relevant sections of the Gift-tax Act, 1958. There are four definitions in section 2 of the said Act which are material for the purpose of deciding this reference. In clause (viii) of that section, the word 'donee' is defined as meaning 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. The term 'gift' is itself defined in clause (xii) of section 2 in the following terms :
''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,.....'
4. It is obvious that the words 'without consideration in money or money's worth' are only intended not to exclude a transfer for consideration by way of natural love and affection 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;....'
5. 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'.
6. Sub-section (3) of section 6 enacts 'where the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner' which, by virtue of the definition of the terms 'prescribed' contained in section 2(xix), means in the manner prescribed by rules framed under the Act. Section 29 enacts the gift-tax is payable by the donor, but when it cannot be recovered from the donor, it may be recovered from the donee. It may be mentioned that section 46(2)(a) empowers the framing of rules providing for the manner in which the value of any property is to be determined under the Act. These are all the provisions of the Gift-tax Act with which the court is concerned in the present reference.
7. There are, however, certain provisions of the Transfer of Property Act, the Indian Trusts Act and the Estate Duty Act, 1953, which may also be referred to, as they have a bearing on the questions that arise in this reference. Section 126 of the Transfer of Property Act, inter alia, lays down that a gift which is revocable wholly or in part, at the mere will of the donor, is void wholly or in part, as the case may be. Section 3 of the Indian Trusts Act gives the definition of a trust, inter alia, as being an obligation annexed to the 'ownership' of property. Section 5 lays down how a trust is to be created and section 6 lays down the essential ingredients of a trust. Sections 35 and 56 enact that the beneficiary has a right to the rents and profits of trust property, and that the beneficiary is entitled to have the intention of the author of the trust specifically executed to the extent of the beneficiary's interest. Section 78, clause (b), enacts that a trust can be created which is revocable by an express power reserved in that behalf to the author of the trust, and section 79 lays down that no trust can be revoked so as to prejudice what the trustees might already have done in the course of execution of that trust. Section 12(1) of the Estate Duty Act, 1953, inter alia, lays down that property passing under a non-testamentary trust under which a power of revocation has been reserved by the settlor is to be deemed to pass on the settlor's death. These are all the statutory provisions which have to be referred to in this reference.
8. The main contention of Mr. B. A. Palkhivala who appeared on behalf of 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.
9. It is common ground between the learned counsel on both sides that the Gift-tax Act is in integrated scheme of taxation and, in that connection, I can do no better than quote the statement of objects and reasons in connection with the Gift-tax Bill which subsequently culminated in the Act. That statement is in the following terms :
'The object of this Bill is to levy a tax on gifts made by individuals, ..... Gifts from one person to another provide a convenient means of avoiding or reducing liability to estate duty, Income-tax, wealth-tax and expenditure-tax. The only effective method of checking such attempts at evasion or reduction of tax liability is by levying a tax on gifts. With the introduction of this tax, the integrated tax structure which the Government have been aiming at will be complete.'
10. As Mr. Hajarnavis himself pointed out, the tax is primarily on the donor, the object being that the donor should be made to pay gift-tax if he indulges in the process of shedding his property by making gifts in order to lessen his liability to other taxes, like estate duty, Income-tax and wealth-tax. The tax liability on the donee under section 29 is only a secondary liability which arises if the donor cannot be got at. What the court must, therefore, see for the purpose of deciding whether a valid gift under the Act has been made is whether the donor has really divested himself of the property. In my opinion, the donor cannot be said to have transferred property if, whilst ostensibly handing it over, he holds on to it by keeping an unrestricted power to take it back the next minute. That, in my opinion, is the basis of section 6(2) of the Gift-tax Act itself, for it lays down a mode of valuation only in regard to gifts which are not revocable for a certain period and taxes the donor only to the extent to which he has shed the property. That, in effect, is what it provides when it lays down that the value of the property so gifted is to be the capitalised value of the income thereof 'during the period for which the gift is not revocable', that being the period during which the donor has really divested himself of the property. Neither section 6 of the Gift-tax Act, nor any other provision of the said Act, deals with a trust in which an unlimited power of revocation is contained, for, in my opinion, such a trust cannot be regarded as a transfer of property by the donor. It follows that it cannot, therefore, 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 to the relevant provisions of the Gift-tax Act, observed at page 25 that a consideration of those provisions does not necessarily lead to the conclusion that the 'basic idea' of transfer itself was dispensed with, or that any transaction which was not a transfer was fictionally regarded as amounting to a transfer. In the case of Barsi Light Railway Co. Ltd. v. Joglekar the question which arose was whether the termination of the services of all workmen on account of a bona fide closure of business amounted to 'retrenchment' within the meaning of the Industrial Disputes Act, 1947. In holding that it did not, the Supreme Court, after considering the relevant statutory provisions, referred (at page 247) to the 'ordinary, accepted notion' of retrenchment in an industry as being the termination of the services of workmen who were surplus in a business which was being continued. The court then went on to state (at page 248) that there must be compelling words in the statute to show that a meaning different from or in excess of the ordinary meaning was intended. It further observed that where, within the framework of the ordinary acceptation of a word, every single requirement of the definition clause was fulfilled, it would be wrong to take the definition as destroying the 'essential meaning' of that word. With respect, I agree with the approach commended in the judgments delivered in both those cases. Applying the same to the present case, in my opinion, it must be stated that irrevocability is an essential feature of a gift in ordinary parlance, as well as under the substantive law relating to gifts contained in section 126 of the Transfer of Property Act to which I have already referred. I may, however, clarity that section 126 of the Transfer of Property Act would not, in terms, be applicable to a question that arises under the Gift-tax Act. Though irrevocability is an essential feature of a gift, it is, as the provisions of clause (b) of section 78 of the Indian Trusts Act show, not an essential feature of a trust under the law of trusts. That is why, as already stated earlier, there is no provision to be found either in section 6, or in any other provision of the Gift-tax Act, for a gift with an unrestricted power of revocation; and that is also the reason why section 6(2) of that Act deals only with a situation in which there is a complete divestment at 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. 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 transaction in question in the present case is a trust containing an unfettered power of revocation. Kharwar's case cannot, therefore, help the department.
11. I am conscious that this view which I am taking may lead to the anomaly that, though there is a valid trust under the Indian Trusts Act, there is no valid gift by means of a trust under the Gift-tax Act. That, however, would be the position even by reason of the provisions of section 126 of the Transfer of Property Act to which I have already referred. Such anomalies are inevitable in the case of a taxing statute like the Gift-tax Act. For instance, questions arise under the Gift-tax Act as to whether a gift by means of a trust is a transfer to the trustees, or to the beneficiaries, and with regard to the person who should be regarded as the donee under such a gift. In my opinion, even in a gift by means of a trust under the Gift-tax Act, the transfer is only to the trustee, but by an artificial definition of the terms 'donee' the latter terms is made to include both the trustees as well as the beneficiaries in order to facilitate, what were termed by the Mysore High Court in Laxmibai's case (at page 24), 'the special purposes of the Act'. It would, for instance, facilitate the recovery of gift-tax from the beneficiary under section 29, and would also make certain provisions in regard to necessary exemptions applicable, e.g., under section 5(1)(viii) of the Gift-tax Act in regard to which a question arose in the case of Commissioner of Gift-tax v. G. G. Morarji, to which I will presently refer. It is, however, important to note that not only is a trustee also included in the definition of the terms 'donee' in section 2(viii) of the Gift-tax Act, but that definition itself states that in the case of a gift by means of a trust the 'gift is made to a trustee' though, undoubtedly, 'for the benefit of another person'. As far as the case of Commissioner of Gift-tax v. G. G. Morarji, to which I have just referred is concerned, the facts were that the assessee had settled a sum of Rs. 1 lakh on trust for the benefit of his wife and sons, the wife being entitled to the income from the trust funds during her life. The assessee claimed exemption for the gift-tax under section 5(1)(viii) of the Gift-tax Act. In holding that the assessee was entitled to that exemption, the court rejected the contention that the 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 follows (at page 297) :
'The Indian law does not recognise legal and equitable estates : Tagore v. Tagore and Webb v. Macpherson. By that law, therefore, there can be but one 'owner', and where the property is vested in a trustee, the 'owner' must, their Lordships think, be the trustee. This is the view embodied in the Indian Trusts Act, 1882 : see ss. 3, 55, 56, etc'.
12. The view taken in Morarji's case that the beneficiary has an equitable title to the trust property and has an interest in the trust property is, therefore, not sustainable in view of the higher authority of the Privy Council in Chhatra Kumari Devi's case to which I have just referred. Section 58 of the Indian Trusts Act was relied upon before us as showing that the beneficiary has an interest in the trust property, but that section only provides that the beneficiary can 'transfer his interest', whatever be that interest. It cannot lead to the further inference that the beneficiary's interest is an interest in the trust property; nor, in my opinion, does the definition of the terms 'property' in section 2(xxii) of the Gift-tax Act, which is merely an inclusive definition stating that property includes any interest in property, lead to such a conclusion. In the result, I hold that a trust under which the settlor reserves to himself a power of revocation without any limit as to the time of its exercise does not amount to a gift within the meaning of the Gift-tax Act. This view which I am taking is not only in consonance with the essential meaning or the basic idea of a gift as already pointed out above, but is also in harmony with the provisions of section 126 of the Transfer of Property Act (which, in terms, do not apply), of section 6 of the Gift-tax Act, and of section 12(1) of the Estate Duty Act, 1953, and is also not inconsistent with the view which the revenue authorities have taken in respect of the assessee in the present case in the matter of his taxability to Income-tax and wealth-tax. I should not, however, be taken as holding anything more than is necessary for the purpose of deciding the question which arises in the present case under the Gift-tax Act on an interpretation thereof, or as laying down any proposition in regard to the general law of gifts or trusts. In the view which I have taken above, the second question does not arise. In the event, however, of my being wrong in that view, 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.
13. 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, if 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.
14. The essence of a transfer is the passage of control over the economic benefits of a property rather than any technical changes in title. A rational approach to the question arising in this reference would seem to be that taxation is not so much concerned with the refinement of title as it is with the actual command over the property.
15. Let us seek to apply this approach to the facts in the reference before us. We are concerned with the deed of trust dated 4th July, 1957. Under clause 2 of the said deed of trust it is provided that the net income is to go to the settlor for and during his life and down to his death. Under clause 4 thereof the trustees are bound during the lifetime of the settlor to act on any of his directions to sell and dispose of the trust funds or any of them or any part thereof. Finally, and what has rightly been regarded as the most important provision concerning the question posed before us, under clause 15 the settlor has been given unrestricted power of revocation by which he may determine or extinguish the trust which he may exercise during his lifetime and which may even be exercised by a will or codicil. Considering these provisions, it must be held that such retention of almost total control, including the power of extinction, would render the gift incomplete (for the purpose of attracting the levy of gift-tax) until the power is relinquished whether in life or at death.
By the Court
16. We answer the questions referred to us as follows :
(1) In the negative, and in favour of the assessee.
(2) Does not arise in the view which we have taken on question No. 1. If necessary, we would answer it by stating that section 6(2) has no application to the trust in the present case and the value of the property in respect of which it has been created cannot be taken to be zero under the said section. The Commissioner must pay the assessee's costs of the reference.