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Commissioner of Gift-tax Vs. Smt. Gollapudi Santhamma - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 34 of 1976 and E.D.C. No. 5 of 1975
Judge
Reported in[1979]116ITR930(AP)
ActsHindu Adoptions and Maintenance Act - Sections 10 and 17(1); Estate Duty Act, 1953 - Sections 5 and 27(1); Gift Tax Act
AppellantCommissioner of Gift-tax;controller of Estate Duty
RespondentSmt. Gollapudi Santhamma;estate of Late P. Venkatasubbarayudu
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateI.S. Gupta, Adv. for ;M.J. Swamy and ;J.V. Srinivasa Rao, Advs.
Excerpt:
.....value of estate of deceased. - - sathi raju, ilr 1971 ap 298). we fail to understand what antecedenttitle that 'oral agreement' could confer on a person who had no kind ofantecedent right or claim to the self-acquired properties of the..........was not merely a settlement deed operating as a gift but was one executed in consideration of the ante-adoption agreement entered into between the adopted son and the deceased. the appellate controller found on the material placed before him that the adoption of rajendra prasad by the deceased was not valid in view of section 10(iv) of the hindu adoptions and maintenance act and that there was no truth in the plea that there was an ante-adoption agreement. it-was also held by him that even if there was such an ante-adoption agreement in existence, that would be invalid in view of the prohibition contained in section 17 of the said act. another alternative finding recorded by the appellate controller was that even assuming that such an agreement was valid and existing, it was not.....
Judgment:

S. Obul Reddi, C.J.

1. These two cases have been referred to us, R.C. No. 34 of 1976, under Section 26(1) of the G.T. Act and E.D.C. No. 5 of 1975, under Section 64(1) of the E.D. Act. Since the two references relate gto a common subject-matter, we propose to answer the questions referred to us by a common judgment.

2. The facts leading to the two references are these 3 One Potti Venkata Subbarayudu of Kadavakuduru village, Guntur District, adopted one Rajendra Prasad on June 14, 1963. He is no other than his brother's grandson. Earlier to that on June 11, 1963, he executed a gift deed in favour of his daughter, Santhamma, whereby he gave some of his lands. On the same date, he gifted some other lands in favour of his granddaughter. On June 11, 1963, he executed three gift deeds, one in favour of his daughter, Santhamma, another in favour of his daughter's daughter and another in favour of his great grandson, who was then a minor. On June 12, 1963, he made a gift of an amount of Rs. 42,966 in favour of his wife. He died on January 20, 1965. The adoption of Rajendra Prasad was made in accordance with the custom prevailing in the Vysya community to which he and the adopted son belong. The adopted son was about 22 years old at the date of adoption. On July 20, 1963, he executed a registered deed of adoption. On the same date, he executed another deed, styled as settlement deed, in favour of his adopted son whereby the properties in question, which were self-acquired, were settled upon him. After the death of Potti Venkata Subbarayudu, hereinafter referred to as 'the deceased', the accountable person, viz., his daughter, Santhamma, filed the estate duty return. Among the various questions that cropped up was the one relating to the inclusion of the properties covered by the settlement deed dated July 20, 1963, executed in favour of the adopted son. The properties covered by the settlement deed were included for the purpose of determination of the estate duty by the Assistant Controller. Aggrieved by the decision of the Assistant Controller, the matter was carried in appeal. At the appellate stage, a new ground was taken by the accountable person that the deed, though described as settlement deed, was not merely a settlement deed operating as a gift but was one executed in consideration of the ante-adoption agreement entered into between the adopted son and the deceased. The Appellate Controller found on the material placed before him that the adoption of Rajendra Prasad by the deceased was not valid in view of Section 10(iv) of the Hindu Adoptions and Maintenance Act and that there was no truth in the plea that there was an ante-adoption agreement. It-was also held by him that even if there was such an ante-adoption agreement in existence, that would be invalid in view of the prohibition contained in Section 17 of the said Act. Another alternative finding recorded by the Appellate Controller was that even assuming that such an agreement was valid and existing, it was not supported by consideration. The Tribunal on appeal reversed the findings of the Appellate Controller and held :

(1) that the adoption of Rajendra Prasad is valid ;

(2) that there was an ante-adoption agreement entered into between Rajendra Prasad and the deceased ;

(3) that the ante-adoption agreement is valid and it is not hit by Section 17(1) of the Hindu Adoptions and Maintenance Act;

(4) that the settlement deed dated 20th July, 1963, is not a gift; and

(5) that the said settlement deed is not a disposition and, even otherwise, it is covered by the exception provided under Clause (a) of Section 27(1) of the E.D. Act.

3. At the instance of the CED, the following question was referred for our opinion:

'Whether, on the facts and in the circumstances of the case, the properties covered by the settlement deed dated July 20, 1963, are to be included or excluded from the principal value of the estate of the deceased ?'

4. The above question was referred by the Tribunal on the ground that it would be 'sufficient to cover the various questions raised by the CED'.

5. The other reference, R.C. No. 34 of 1976, arises out of gift-tax assessment proceedings. The assessee claimed exemption in respect of the value of the properties covered by the settlement deed dated July 20, 1963. Though that claim was disallowed by the GTO and the AAC of Income-tax, it was allowed by the Tribunal. Hence, the following question was referred for our opinion :

'Whether, on the facts and in the circumstances of the case, the properties under settlement deed dated July 20, 1963, are liable to gift-tax under the provisions of the G.T. Act?'

6. The contentions put forth by Mr. Rama Rao, learned counsel for the revenue, are these:

(1) the ante-adoption agreement is not valid under the Hindu Adoptions and Maintenance Act;

(2) even assuming it is valid, the Tribunal committed an error in law in holding that an oral antecedent agreement conferred antecedent rights upon the adopted son ;

(3) the adoption of Rajendra Prasad is not in accordance with therequirements of Section 10(iv) of the Act; and

(4) even otherwise, the properties covered by the settlement deed constituted gift of immovable properties to the adopted son.

7. Mr. I. S. Gupta appearing for the accountable person on the other hand contended that the prevailing custom in the Vysya community to which the parties belong permits adoption of a major boy whose upanayanam has not been performed and that the settlement deed is in the nature of a family arrangement or settlement pursuant to the prior oral agreement between the parties and, as such, the properties covered by the deed dated July 20, 1963, are not taxable gifts under the provisions of the G.T. Act.

8. We, may, therefore first advert to the question of the validity of the adoption. Section 10(iv) of the Hindu Adoptions and Maintenance Act lays down:

'Section 10:

No person shall be capable of being taken in adoption unless the following conditions are fulfilled, namely :......

(iv) he or she has not completed the age of fifteen years, unless there is a custom or usage applicable to the parties which permits persons who have completed the age of fifteen years being taken in adoption.'

9. Admittedly, Rajendra Prasad was aged 22 years at the date of adoption, but shelter is taken by the accountable person under the custom of the Vysya community to which the parties belong. It is not in dispute that Rajendra Prasad's upanayanam had not been performed prior to the date of adoption. It is permissible according to the custom prevailing in the Vysya community to adopt a major boy if by the date of adoption, he had not gone through the ceremony of upanayanam. To establish that in the Vysya community, boys above the age of fifteen are adopted, reliance was placed on certain deeds of adoption. A registered adoption deed dated March 19, 1962, shows that a Vysya boy aged 19 years was adopted by the adoptive father of the same community. Another adoption deed dated April 29, 1963, shows that 'it has been the practice since ancient times to take boys of above 16 years of age in adoption' and, therefore, the boy referred to in that deed was taken in adoption by the adoptive father. Two other adoption deeds filed by the accountable person also support her stand that in the community or sect to which the parties belong, there is such a custom, viz., adopting boys above the age of fifteen, which still exists, notwithstanding the Hindu Adoptions and Maintenance Act. The Tribunal has recorded a finding that the ceremony of giving and taking had also taken place. We, therefore, agree with the finding recorded by the Tribunal that the adoption is valid and Section 10(iv) is not a bar to the validity of the adoption of Rajendra Prasad in this case.

10. The next question to be considered is whether there was in fact an oral ante-adoption agreement between the parties. The Tribunal has recorded a finding in favour of the accountable person. The question, therefore, is whether such an agreement is valid in view of Section 17 of the Hindu Adoptions and Maintenance Act. Section 17, to the extent relevant for our discussion, reads :

'(1) No person shall receive or agree to receive any payment or other reward in consideratian of the adoption of any person, and no person shall make or give or agree to make or give to any other person any payment or reward the receipt of which is prohibited by this section.' The Tribunal relying upon a decision of this court in Sitamahalaxmi v. Ramachandra Rao [1957] 1 An WR 87 ; AIR 1957 AP 572 upheld the validity of the ante-adoption agreement. In so upholding, it also relied upon the observations of N. R. Raghavachariar in his book Hindu Law--Principles & Precedents, 6th Edn., at page 182. What is quoted from Raghavachariar's commentary is the following :

'But an adoption cannot be declared invalid by reason merely of a collateral arrangement between the natural father and the adopter. But if the adopted son is of full age and deliberately agrees to an arrangement under which he is to get no more than half of the property of his adoptive father the agreement is binding upon him.'

11. The commentator was only quoting the opinion of a Division Bench of the Madras High Court in Subbaraju v. Narayanaraju, AIR 1926 Mad 1093, and the opinion of the Bombay High Court in Pandurang Sakharam Thakur v. Narmadabai Ramkrishna Keluskar [1932] 34 Bom LR 1209 ; AIR 1932 Bom 571. Those were cases which came up for consideration prior to the passing of the Hindu Adoptions and Maintenance Act. So also was the case referred to, viz., Sitamahalaxmi v. Ramachandra Rao [1957] 1 An WR 87; AIR 1957 AP 572. The adoption in Sitamahalaxmi's case was on 7th May, 1940, and the deed of adoption was executed on 15th January, 1941.

12. The opening words of Section 17(1) 'no person shall receive or agree to recive any payment' are very significant. There is nothing in the section which is susceptible of a construction that it does not prohibit a prospective adopted son from entering into an agreement with the adoptive father. The settlement deed in this case is annexed, and the relevant portion reads:

'It has been already arranged between your natural parents and ourselves prior to the adoption, that you cannot exercise right over any other property except those that are specifically set out in the deed. If at any time you were to deal with them, then this settlement deed will not be operative and my properties are to be vested in my legal heirs. This was also agreed to by us before the adoption.'

13. This is all what is stated regarding the oral ante-adoption agreement between the parties. Nowhere in this deed of settlement is there any mention that there was an oral agreement between the adopted son and his adoptive father as to the manner in which the properties should be settled in the event of his being adopted. It is manifest from the above recital in the deed that the natural parents of the adopted son were parties to the agreement. The ante-adoption agreement, therefore, undoubtedly attracts the vice of Section 17 of the Act. This section lays down a public policy so that there may be no trafficking in children. What Mr. Gupta contends is that Section 17 does not preclude a major from entering into an ante-adoption agreement with his would-be adoptive father. Though the section is intended to prohibit trading in children by offering them in adoption, it does not permit a major who agrees to be adopted to enter into any ante-adoption agreement to receive any payment or reward in consideration thereof. That is obvious from the opening words of the section 'no person shall receive or agree to receive any payment'. The fact that the community to which the parties belong permitted a major to be adopted does not make any difference because that would be contrary to the public policy and object underlying the prohibition contained in Section 17.

14. Mr. Gupta next sought to contend that the settlement of properties onthe adopted son was on account of the antecedent rights. These antecedentrights, according to the learned counsel, Mr. Gupta, are traceable to theoral ante-adoption agreement. We are unable to understand how anyantecedent rights would flow under that oral agreement. The question ofthe adopted son having any antecedent rights in the properties of thewould-be adoptive father under that oral agreement does not arise. Tosustain a family settlement or arrangement, parties must proceed on theassumption that there is some kind of antecedent title in them (See Veerajuv. Sathi Raju, ILR 1971 AP 298). We fail to understand what antecedenttitle that 'oral agreement' could confer on a person who had no kind ofantecedent right or claim to the self-acquired properties of the deceased.The rights of this adopted son, if there were any ancestral properties, aretraceable only to the date of his adoption. Prior to that date, he was anabsolute stranger. We, therefore, cannot sustain the finding of the Tribunalthat' as the plaintiff had antecedent rights under the oral arrangement,the settlement deed should be regarded as a valid family arrangement andnot as a gift of immovable property'. After the date of adoption, it wouldbe open to the adoptive father and his adopted son to enter into any kindof family arrangement or settlement. But this is a settlement arrived atnotwithstanding the prohibition contained in Section 17. Therefore, we holdthat the ante-adoption agreement in the settlement deed is void, as Section 17specifically injuncts that no person shall receive or agree to receive any payment or other reward in consideration of adoption.

15. All property inherited by a male Hindu from his father would be ancestral property in his hands. Therefore, the properties covered by the settlement deed dated July 20, 1963, are impressed with the character of ancestral property after the death of the deceased. 'Estate duty' asdefined in Section 2(7) of the E.D. Act means estate duty under the Act. Section 5provides for the levy of estate duty. In this case, the property shown inthe schedule to the settlement deed passed on the death of the deceased tohis adopted son. The property covered by the settlement deed would, therefore, be chargeable to estate duty at the rates applicable. Therefore,in view of the findings recorded by us, we hold that the adoption of Rajen-dra Prasad aged 22 years at the time of adoption is valid under Section 10(iv) ofthe Hindu Adoptions and Maintenance Act. The ante-adoption agreement.is not valid and is hit by Section 17(1) of the Hindu Adoptions and MaintenanceAct. The settlement of the properties made by the deceased in favour ofhis adopted son on July 20, 1963, is not a gift so as to attract liabilityunder the G.T. Act.

16. We, therefore, hold, on the facts and circumstances of the case, that the properties covered by the settlement deed dated July 20, 1963, are to be included in the principal value of the estate of the deceased.

17. On the other question in R.C. No. 34 of 1976, we hold that the properties under the settlement deed are not liable to gift-tax under the provisions, of the G.T. Act.

18. In the result, the question referred to us in E.D.C. No. 5 of 1975 is answered in favour of the revenue and the question referred in R.C. No. 34 of 1976 is answered against the revenue. There will be no order as to costs in both the references. Advocate's fee Rs. 250 in each.


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