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Gift-tax Officer Vs. N. Mahalingam - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)6ITD704(Mad.)
AppellantGift-tax Officer
RespondentN. Mahalingam
Excerpt:
.....the partnership firm to his minor son. it is for this reason that he included not only the market value of lands but also the current account balance of rs. 2,623 which stood in the assessee's name. the first appellate authority pointed out that current account balance was not the subject-matter of gift. as for lands, he took the view that the lands were subject to partnership rights. to get absolute right, the assessee would have had to reimburse the value of improvements. if due allowance is made for this limitation, the value returned by the assessee in his opinion is not low. he further found that the value reported by approved valuer as on 9-11-1969 on the date of death of the assessee's mother, was only rs. 22,916. value of rs. 1 lakh on 28-2-1972, therefore, was not unreasonable......
Judgment:
1. This is a departmental appeal arising out of the order of the Commissioner (Appeals), Coimba-tore, in the case of Shri N. Mahalingam of Pollachi in respect of a gift-tax assessment for the assessment year 1973-74.

2. Assessee's mother, Smt. Rukmani Ammal, had purchased about 100 acres of land inAnamallai Hills by a registered document dated 10-11-1960.

Six others had purchased contiguous lands and a partnership in the name of Sakthi Estate was formed on 6-3-1961 between the six persons as the lands being contiguous lent themselves for 'joint and common cultivation. Partnership was formed with a view 'to develop and exploit lands jointly'. Clause 4 stipulated as under : The firm will carry on the development and exploitation of the lands belonging to the partners and situate at Anamallai Hills village, bearing Survey No. 1/1 and/or such other business or businesses as the partners may from time to time decide.

The lands themselves, which did not form part of the assets of the firm, were placed at the disposal of the firm. Clause 18 of the deed placed the following restriction on alienation of these lands which continued to belong to the partners : No partner shall sell, mortgage, lease any charge or in any way alienate or encumber his lands placed at the disposal of the partnership for the purpose of joint development and exploitation except to the other partners to this deed and in case there is any difference of opinion regarding the valuation to be put in the event of such a sale by a partner, the opinion of the majority of the partners shall prevail in regard to the fixation of such value.

However, if all the other partners so agree, a partner may with their written consent sell, mortgage, lease any charge or in any way alienate or encumber his lands placed at the disposal of this partnership.

Death or retirement of a partner, vide clause 20 of the deed, did not dissolve the partnership. The legal heir or one of them as agreed between themselves was entitled to become a partner in the place of the deceased. A coffee plantation came into existence and there was considerable outlay on these lands by the firm. Smt. Rukmani Ammal died on 29-11-1969leaving behind Shri N. Mahalingam, the assessee, her only son as her sole heir. He inherited, inter alia, her lands in possession of the partnership, viz., Sakthi Estates. The assessee did not exercise his right to be taken as a partner. The lands continued in possession of the partnership firm. On 28-8-1972, he settled these very lands by way of gift on his minor son, M. Srinivasan. The lands were valued for purposes of settlement at Rs. 1 lakh. The donee thereafter was admitted to benefits of partnership which was in continuous possession of the gifted lands on 1-4-1973 and the lands were brought into common stock as assets of the firm with effect from 1-4-1976. We are, in the present order, concerned with valuation of the gift as per settlement made on 28-8-1972.

3. The GTO has stated in the order that the assessee had gifted his share of interest in the partnership firm to his minor son. It is for this reason that he included not only the market value of lands but also the current account balance of Rs. 2,623 which stood in the assessee's name. The first appellate authority pointed out that current account balance was not the subject-matter of gift. As for lands, he took the view that the lands were subject to partnership rights. To get absolute right, the assessee would have had to reimburse the value of improvements. If due allowance is made for this limitation, the value returned by the assessee in his opinion is not low. He further found that the value reported by approved valuer as on 9-11-1969 on the date of death of the assessee's mother, was only Rs. 22,916. Value of Rs. 1 lakh on 28-2-1972, therefore, was not unreasonable. It is in this view, he allowed the appeal. The learned departmental representative claimed that the lands belonged to the assessee's mother and after her to the assessee. It was never partnership property. This is actually conceded by the first appellate authority. If it were so, market value, he claimed, was rightly adopted. He claimed that the improvements cannot be severed from the land and that assessee gifted the lands along with the improvements. The learned counsel for the assessee took us over the provision of the partnership deed and relied upon the provisions of the Transfer of Property Act for the proposition that the land improved by the firm was subject to firm's right to be reimbursed for its expenditure. He also relied upon the order of first appellate authority.

4. We have carefully considered the facts as well as the arguments. The assessee could gift only his rights in the land. If he had no absolute property in the land, the GTO is not justified in estimating the market value as though he had such absolute rights. Smt. Rukmani Ammal, assessee's mother, had pooled the property along with others for 'joint and common cultivation'. It is, no doubt, correct to say that the lands continued to belong to her and did not form part of the assets of the firm. But they were placed at the disposal of the firm for the purposes of the firm. In other words, the lady had given up her right to exclusive possession in favour of a joint and several rights to possession along with her co-partners though she continued to be the owner. It was not possible for her to revert to exclusive possession unilaterally. Clause 18 ensured it by providing that the ownership could not be alienated either by way of sale, mortgage, lease, or in any other manner except with the consent of other partners. There was also a right of pre-emption in favour of co-partners in the event of sale. Clause 17 empowered the co-partners to place the value in case of sale of interest in the firm and such sale could not be made to a stranger (i.e., other than co-partners), without their permission in writing. Clause 20, while providing that death of a partner did not dissolve the firm, entitled the legal heir or one of them to step into the shoes of the deceased. All these provisions, in our view, clearly indicated the right of the co-partners against the firm being dispossessed of the lands. These limit the rights of absolute ownership and depress the market value of these lands. No intending buyer would offer the normal market value under these circumstances when he has to subject himself to the chance of the co-partners' consent. On this ground alone, one has to accept the proposition that the GTO is not justified in adopting the full market value. The learned first appellate authority has allowed the assessee's appeal on a slightly different reasoning. According to him, the firm is entitled to reimbursement of the outlay on these lands on the basis of Section 51 of the Transfer of Property Act, 1882, which entitled a bona fide holder under defective titles to compensation for improvement or under other provisions of property law. The learned first appellate authority had quoted a passage from a decision of Privy Council in Narayan Das Khettry v. Jatindra Nath Roy Chowdhry AIR 1927 PC 135. The argument of revenue is based on Broom's Legal Maxim 262 "Quiquid plantatur solo, solo cedit" which means that whatever is affixed to soil belongs to the soil. In other words, land and improvements are not severable. But this is not a maxim of general jurisprudence and it has been held not universally applicable to India. Shri S.M. Lahiri's commentary on Transfer of Property Act (8th edition, Eastern Law House) has this to say on the subject : Quiquid plantatur solo, solo cedit - Whatever is affixed to the soil belongs to the soil. Under the maxim, 'whatever is affixed to the soil becomes, in contemplation of law, a part of it and is subjected to the same rights of property as the soil itself. (Broom's Legal Maxim 262) But this is not a maxim of general jurisprudence and it has been held that it does not represent the law of India. In Thakoor Chunder Poramanick v. Ramdhone Buttacharjee [1866] 6 Suth WR 228 (FB) Sir Barnes Peacock said : 'We have not been able to find in the laws or customs of this country any traces of the existence of an absolute rule of law that whatever is affixed or built on the soil becomes a part of it, and is subjected to the same rights of property as the soil itself. The Privy Council cited the statement with approval in Narayan Das v. Jatindra Nath 54 C 669 : 1927 PC 135 : 54 IA 218 and added that 'it seem to have been accepted for many years as a correct pronouncement'.

The same principle is expressed in B.B. Mitra's commentary on the Transfer of Property Act (12th edition, eastern Law House) : The maxim of English law that quiquid plantatur solo, solo cedit has at the most a limited application in India where there exists a rule as a part of the customary law that the ownership of a superstructure may exist in one person and the ownership of the soil in anotherMritunjai v. Hinga, AIR 1933 Oudh 468, 145 IC 627, Narayan v. Jatindra AIR 1927 PC 135, 54 Cal. 669, 54 IA 218. So in order to make a house erected upon the land as well as the land itself subject to the Government's power of sale for arrears of revenue, special words indicating the intention of the Legislature to make the building subject to sale would be necessaryNarayan v. Jatindra (supra) at pp. 137-38 ; Ismail Kani v. Nazarali, 27 Mad. 211 (214) ; In re Thakoor Ch. Paramanick B.L.R. Supp. Vol. 595 (FB). In the last cited case their Lordships observed : 'We think it is clear that according to the usages and customs of the country, buildings and other such improvements made on land do not, by the mere accident of their attachment to the soil, become the property of the owner of the soil, and we think it should be laid down as a general rule that if he who makes the improvement is not a mere trespasser, but is in possession under any bona fide title or claim of title, he is entitled either to remove the materials, restoring the land to the state in which it was before the improvement was made, or to obtain compensation for the value of the building, if it is allowed to remain for the benefit of the owner of the soil, the option of taking the building or allowing the removal of the material remaining with the owner of the land in those cases in which the building is not taken down by the builder during the continuance of any estate he may possess 'per Sir Barnes cacock delivering the judgment of the Full Bench at p. 598'.

It, therefore, appears that the learned first appellate authority was right in his view that the partnership is entitled to set its price on the improvement, if any partner intends to get out of the pool created by the partnership deed, notwithstanding the separate ownership of these lands. No doubt, such a view would give rise to the further dispute as to what is the degree of 'annexation' to the land and what is left for the benefit of the tenant licensee. In fact, this dispute is precisely raised in the grounds when the decision in Ghazanfar Ali v. Muzaffar Ali AIR 1936 Lahore 511 mentioned in the order of the first appellate authority is sought to be distinguished on facts. It cannot, however, be denied that when virgin lands are developed into a coffee estate it would have improvements of all kinds some of which would undoubtedly belong to the lessee/licensee. There are also further specific facts in the assessee's case. The fact remains that the assessee's right is not the same as it would have otherwise been if such lands had not been made the subject-matter of such partnership rights. The assessee had inherited the lands but such lands were subject to contractual obligations created by the partnership deed.

Even as noticed, there is also not only the right of pre-emption in favour of co-partners in the event of a sale but even the right to determine the price at which the lands have to be sold in view of clause 18 of the deed reproduced in paragraph 2 {supra). Besides, those restrictions created by the contract of partnership are not only binding on the partners during their lifetime but also on their legal heirs vide clause 20 of the deed which stipulates that there will be no dissolution of partnership on death of partner and provides for the legal heir to be a partner. It would appear from clause 24 that retiring partner or legal heirs of deceased partners cannot opt out of pre-existing partnership obligations since "the continuing partners shall have the right to purchase the right of the deceased or outgoing partner at a valuation". In other words, the restrictions voluntarily created by every partner in respect of his lands in favour of co-partners go with the land and do not get snapped by the partner dying or otherwise getting out of the partnership. Even otherwise, whether there is a right to the firm to get reimbursed for the permanent improvements made to the land, the restrictions by themselves are bound to depress the value of these lands. No intending purchaser would pay the market value of these improved lands as though they were free and absolute holdings. In fact, the assessee did not become a partner and had only rights over these lands subject to partnership rights. It is only these rights, he gifted. No allowance has been made by the GTO for these restrictions. There is no material to suggest that the value of Rs. 1 lakh placed by the assessee is low even after making allowances for such restrictions. Hence, whatever might be the justification or otherwise for the value adopted in wealth-tax assessment for these lands, we are not in a position to say that the value confirmed for gift-tax assessment is unjustified. The learned Commissioner (Appeals) has also given some other factual material (approved valuer's report at Rs. 22,916 on 9-11-1969) for holding that the value returned by the assessee is not unfair. In any view of the matter we have to uphold the order of the first appellate authority.


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