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Smt. Anarkali Sarabhai Vs. Gift-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1986)15ITD151(Ahd.)
AppellantSmt. Anarkali Sarabhai
RespondentGift-tax Officer
Excerpt:
1. all these appeals involve the same questions arising out of substantially the same facts. they are, therefore, dealt with by this common order. the assessees are aggrieved by the imposition of gift-tax regarding exercise of a certain power of appointment. there are number of grounds but they are all arguments to show how wrong the commissioner (appeals) was in partially confirming the imposition of the tax.2. we will first take up gt appeal no. 51 (ahd.) of 1983. smt. anarkali sarabhai, whatever is stated regarding her case will apply to the other cases except minor factual details which are not material. that is how the matter was argued before us and that is how we will deal with it.3. the facts briefly are that in the year 1960 the assessee's mother, bharatidevi, created a trust of.....
Judgment:
1. All these appeals involve the same questions arising out of substantially the same facts. They are, therefore, dealt with by this common order. The assessees are aggrieved by the imposition of gift-tax regarding exercise of a certain power of appointment. There are number of grounds but they are all arguments to show how wrong the Commissioner (Appeals) was in partially confirming the imposition of the tax.

2. We will first take up GT Appeal No. 51 (Ahd.) of 1983. Smt. Anarkali Sarabhai, whatever is stated regarding her case will apply to the other cases except minor factual details which are not material. That is how the matter was argued before us and that is how we will deal with it.

3. The facts briefly are that in the year 1960 the assessee's mother, Bharatidevi, created a trust of certain properties, giving the trustees discretion to accumulate or distribute the income and corpus among the beneficiaries which included the assessee. On 24-1-1976, the trustees by a resolution gave a power of appointment in respect of a portion (Slice A) of the properties to the assessee that they would hold it with effect from 1-4-2001 or to the death of the last survivors of some other beneficiaries under the trust for such person including the assessee as she may appoint. By the same resolution, the trustees also reserved authority to direct that the power of appointment exercised by her shall come into force on a date earlier than 31-3-2001 and thereupon the interest of the assessee and another beneficiary in the income shall cease and the trustees shall act accordingly. On 31-3-1976 the assessee exercised the power of appointment irrevocably in favour of certain new trusts. On 1-12-1977 the trustees of the original Bharatidevi Trust resolved that the said power of appointment exercised by the assessee shall come into operation with effect from 1-12-1977 and the interest of the assessee and another beneficiary in the net income of the said portion of the property shall cease with effect from that date and that the trustees shall transfer the said portion of the properties to the new trusts as directed by the assessee in exercise of power of appointment. The GTO held that the exercise of power of appointment amounted to transfer of a property under the Gift-tax Act, 1958 ('the Act') and was, therefore, gift under that Act. He valued the gift at the fair market value of the entire corpus of the properties which were the subject-matter of the exercise of power of appointment.

4. The Commissioner (Appeals) held the same view that the exercise of the powers amounted to gift but so far as the value of the gift was concerned, he held that only the interest of the assessee in the property can be said to have been gifted and that was to be valued and, therefore, restored the matter to the GTO to make a fresh assessment in accordance with law after evaluating the interest of the appointed trust as on 31-3-1976 and assess only the value of such interest in the assessment year in respect of each of this trust.

5. In order to appreciate the controversy the material parts of the above instruments are reproduced below: (i) From and after the date hereof and during the periods mentioned in this clause, the trustees may either accumulate the net income of the trust funds or at their discretion pay the same to the persons as hereinafter mentioned or to any one or more of them to the exclusion of others or other of them for their, his or her absolute use and benefit, in such proportions and in such manner as the trustees may in their absolute discretion think fit, provided, however, that the whole or any part of the net income of the trust funds as may not have been distributed by the trustees in any year shall at the end of the year be added to and held as accretion to capital and form part of the corpus of the trust funds and shall be dealt with accordingly.

(b) From and after 1-1-1967 and up to and including 24-3-1978 to the settlor's sisters Geeta Mayor and Gira Sarabhai and settlor's daughter Smt. Anarkali Sarabhai or the survivors or survivor of them.

(iii) Notwithstanding anything hereinabove contained, the trustees shall have full power and absolute authority to divide, distribute, hand over and transfer absolutely the corpus of the trust funds or any part or parts thereof at any time or times after the date hereof and during the periods mentioned in this clause to and amongst the persons hereinafter mentioned or to any one or more of them to the exclusion of others or other of them in such proportions and in such manner and at such time or times as the trustees may in their absolute discretion think fit.

(b) From and after 1-1-1967 amongst Gira Sarabhai, Geeta Mayor, Vikram and settlor's daughter Smt. Anarkali Sarabhai or the survivors or survivor of them.

Resolved unanimously that in exercise of the discretion vested under Clause 1 of the trust deed, the trustees do hereby set apart a portion of the trust funds represented by the investments more particularly specified in the schedule A hereunder written held directly or through partnership (which portion of the trust funds is hereinafter referred to as the'Slice A of the trust funds') and shall deal with the said slice A of the trust funds in the following manner: (a) The trustees shall pay the net income of the slice A of the trust funds arising or accruing during the period from 1-4-1976 and up to and including 31-3-1978 to Smt. Anarkali Sarabhai for her absolute use and benefit and the trustees shall subject to the interest of the said Smt. Anarkali Sarabhai and Gira Sarabhai in the net income of the slice A of the trust funds in terms of paragraph Nos. 1 (a) and (b) hereof hold with effect from 1-4-2001 or up to the death of the last survivor of Gira Sarabhai, Geeta Mayor and Smt. Anarkali Sarabhai whichever date is earlier the corpus of the slice A of the trust funds for such person or persons including the said Smt. Anarkali Sarabhai and for such object or objects, purpose or purposes either absolutely or in trust or trusts and upon such terms and conditions including grant of further power to appoint as the said Smt. Anarkali Sarabhai may by deed or deeds appoint at any time before 1-4-2001 without transgressing the provisions of Sections 13 and 14 of the Transfer of Property Act, 1882 provided, however, that the trustees shall have full power and absolute authority to direct that the power of appointment exercised by the said Smt. Anarkali Sarabhai shall come into force at any earlier date before 31-3-2001 and thereupon the interest the said Smt.

Anarkali Sarabhai and Gira Sarabhai in the net income of the slice A of the trust funds shall cease and the trustees shall act accordingly. If the said Smt. Anarkali Sarabhai shall die before 31-3-1978 the trustees shall deal with and dispose of the net income of the slice A of the trust funds accruing or arising during the period from and after the death of the said Smt. Anarkali Sarabhai and up to and including 31-3-1978 in accordance with the provisions contained in Clause 1 of the deed of settlement. , (b) From and after 1-3-1978 and including 31-3-2001 or up to the death of the last survivor of Gira Sarabhai, Geeta Mayor and Smt.

Anarkali Sarabhai whichever date is earlier, the trustees shall pay the net income of the slice A of the trust funds accruing or arising during the aforesaid period to the said Gira Sarabhai for her absolute use and benefit. If the said Gira Sarabhai shall not then be living or shall die at any time during the aforesaid period, the trustees shall deal with the net income of the slice A of the trust funds accruing or arising during the period from and after the death of the said Gira Sarabhai in accordance with the provisions contained in Clause 2 of the said deed of settlement.

Now this appointment witnesseth that the appointer hereby irrevocably appoints and directs that from and after 1-4-2001 or the date of the death of the last survivor of Gira Sarabhai, Geeta Mayor and Smt. Anarkali Sarabhai whichever date is earlier the investments forming part of the slice A of the trust funds shall be transferred and assigned by the trustees of the said deed of settlement dated 30-3-1960 to the trustees of the following trusts.

Resolved that the trustees, in pursuance of the power vested in them under the resolution passed by them at the meeting held on 24-1-1976 do hereby unanimously direct that the power of appointment exercised by Smt. Anarkali Sarabhai shall come into force with effect from 1-12-1977 and that the interest of Smt. Anarkali Sarabhai and of Gira Sarabhai in the net income of the slice 'A' of the trust funds more particularly described in the Schedule 'A' hereunder written, shall cease with effect from the said date, i.e., 1-12-1977 and that the trustees shall divide the said slice 'A' of the trust funds and transfer and assign to each of the following trusts the portion of the slice 'A' of the trust funds allocated to each of them as per particulars given below in terms of the power of appointment exercised by the said Smt. Anarkali Sarabhai.

6. The simple question before us is whether the assessee by exercising the power of appointment has made any gift and if so of what property, This means that the first issue is whether there has been a transfer of the property as defined under the Act. The relevant provision runs as follows: 2.(xxiv) '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-- (c) the exercise of a power of appointment of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power ; and 7. In this connection the learned counsel for the assessee Shri S.P.Meh taargued that the Sub-clause (c) of Section 2 (xxiv) of the Act means that it is the scope of the power which has to be taken into account and that since in this case the power could be exercised in favour of the donee also, the clause was not applicable and so there was no transfer of the property. To clarify, the argument was that if the power was such that it could be exercised in favour of the donee it did not matter that it had not been so exercised. Thus, it is not the exercise of the power which is material but it is the nature of the power or its scope which is important. This means that the words 'to determine its disposition in favour of any person other than the donee of the power' have not to be connected with the words 'exercise of but with the words 'power of appointment'. The said Sub-clause (c) was amended by the Finance (No. 2) Act, 1980 by introduction of the words 'whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made' after the words 'power of appointment' and before the words 'of property vested in any person' in the said sub-clause. In this connection, Shri Mehta cited the decision of the Bombay High Court in the case of CGT v. Mrs. Jer Mavis Lubimoff [1978J 114 ITR 90. In that case the assessee was the donee of a special power of appointment which she exercised in favour of her daughter. The Court held that the exercise of such a power did not amount to a transfer within the meaning of the said Sub-clause (c).

It observed as follows: Clause (c) has to be interpreted as a whole and if upon proper interpretation of the language of Clause (c) it is quite evident that it is referable only to exercise of general power of appointment then the mere omission of the word 'general' before the words 'power of appointment' will not be decisive of the matter. It is quite implicit in the language of Clause (c) that the exercise of a power of appointment of property therein referred to must determine its disposition in favour of any person other than the donee of the power. The words 'any person other than the donee of the power' clearly indicate that whenever such power is exercised it should be capable of being exercised in favour of anybody except the donee of the power. Such an ingredient can only be fulfilled if the power conferred is a general power of appointment. In case of a special power of appointment it can only be exercised amongst members of a specified class. The words 'any person' will not fit in if Clause (c) contemplated a special power of appointment because, if that is so, such power is not capable of being exercised by any and every person other than the donee of the power. Thus, on a plain reading of Clause (c) it is quite evident that even though the expression 'general power of appointment' is not specifically used, it is referable to only general power of appointment because the power must be such that it should be capable of being exercised to determine the disposition of property in favour of any person other than the donee of the power.... (p. 104) He also relied upon the memorandum explaining the proposed amendment in the Finance Bill, 1980. The memorandum is fully reproduced below: 138. At present, no gift-tax is attracted in a case where a beneficiary of a trust exercises the power of appointment conferred on him under the trust deed and releases his or her life interest in the trust in favour of other persons. It is proposed to plug this lacuna in the provisions of the Gift-tax Act. Accordingly, it is proposed to provide that where a person who has an interest in property as a tenant for a term or for life or a remainderman surrenders or relinquishes his interest in the property or otherwise allows his interest to be terminated without consideration or for a consideration which is not adequate, the value of the interest or, as the case may be, the amount by which such value exceeds the consideration received will be deemed to be a gift made by such person. It is also proposed to amend the definition of 'transfer of property' contained in Clause (xxiv) of Section 2 to make it clear that the exercise of a power of appointment would amount to a transfer irrespective of whether such power is general or special or subject to any restriction as to the persons in whose favour the appointment may be made.

139. These amendments will take effect from 1st April, 1980, and will accordingly, apply in relation to the assessment year 1980-81 and subsequent years.

He further argued that since there wa s already a transfer of the property to the trustees, the exercise of power of appointment was merely a step in the process of carrying out the direction of the trust and did not amount to a fresh transfer.

8. The learned standing counsel Shri V. R. Shah for the revenue divided his arguments in two parts: He argued that first of all the assessee-beneficiary had done the transfer after the power of appointment has been granted to her, Further a very subtle argument was developed by him that under the original trust deed the corpus of the trust could be given only to certain beneficiaries and since the assessee exercised the power of appointment in favour of trust which were not the beneficiaries under the original trust deed, it must be said that the assessee had full title and right to the property in question which she in turn gave to the newly created trust. The argument was that the trustees did not have any power of delegation of their own power under the original trust deed to any of the beneficiaries and the beneficiary assessee was not exercising such power, it could not, therefore, be said that there was a transfer from the trustees of the original Bharatidevi Trust to the new trust merely under the direction of the assessee. Under that trust deed the trustees did not have any power to transfer the corpus to the new trust. Therefore, there could not be any direct transfer by these trustees to the new trust. If there was such a transfer by them that would be invalid. But the trustees are presumed to act within their powers and so the inference is that what they had done was to transfer a certain property to the assessee. The result of this argument would be that the direct connection between the trustees of the Bharatidevi Trust and the new trusts in respect of the transfer is broken.

9. Regarding the form of transaction Shri Shah pointed out that under Section 5 of the Transfer of Property Act transfer included a conveyance by a person not the owner of the property. Therefore, that was the position even before the enactment of Sub-clause (c) of Section 2(xxiv). Consequently, it was not necessary that the transfer should come within the meaning of the said Sub-clause (c).

10. Shri Shah also laid emphasis on the sentence in the aforesaid observation of the Bombay High Court that "it is quite implicit in the language of Clause (c) that the exercise of a power of appointment of property therein referred to must determine its disposition in favour of any person other than the donee of the power". Therefore, he submitted that according to that decision it was the exercise of the power which was material and not its scope.

11. Shri Mehta replied that under Clause (1)(iii) of the Bharatidevi Trust, the trustees had the power to transfer the corpus of the trust to any one of the persons mentioned in the deed in such manner as they thought fit. The words 'in such manner' enable the trustees to give a general power of appointment to the assessee beneficiary and so the exercise of power of appointment in favour of the new trust was contemplated by the original trust deed. Thus, there was a direct transfer from the trustees of the Bharatidevi Trust to the new trust, the assessee merely given a direction so to do.

12. The interpretation canvassed by Shri Mehta makes the nature or scope of the power decisive. If the nature of the power is of a certain kind then no matter how or in whose favour it has been exercised, there would be a transfer or not as the case may be. Now, what could be the purpose of such an enactment by the Legislature which is concerned only with the imposition of tax on the making of a gift It would make no difference to the Legislature as to whom the gift is made. Since it is the exercise of the power which would ultimately cause the transfer and consequently the gift, it is the exercise of that power which is material and not its mere existence. The scope of the power is material only for determining the validity of its exercise. It merely enables its exercise. Its significance is co-extensive with its exercise and no more. From the point of view of the Legislature it would make no difference what the scope of that power is. It does not stand to reason that the Legislature would tax the gift made in exercise of a general power and not tax it when made in exercise of a special power. A distinction without any purpose cannot attribute to the Legislature.

From the point of view of the Legislature it is not material to whom the gift is made or in exercise of what kind of power provided it is made to a person other than the donee of the power. The expression 'any person other than the donee of the power' has to be read as a whole and the word 'any' cannot be read in isolation. All that this expression means is that the appointee should not be the donee of the power.

Provided this requirement is satisfied it could be a person who could either fall in a specified category or not. The requirement of the word 'any' would be satisfied provided the appointee is not the donee of the power. If the appointee is the donee of the power then it would be a straight gift from the donor of the power of appointment to the donee of that power. In the said clause we are concerned with the exercise of the power by the donee of the power and not by the donor. That is why the words 'any person other than the donee of the power' have been inserted in the clause. That is the only purpose of inserting those words. Therefore, no inference can be based on these words that the clause is concerned with the scope of the power.

13. In the case of Mrs. Jer Mavis Lubimoff (supra) the assessee fully exercised the power she had. Thus, the scope of the power was the same as its exercise, i.e., the extent of its exercise. Therefore, the question did not arise there whether only the scope was to be seen and not its exercise. Such a question can arise only in this case because here the assessee had the power to exercise it in her own favour but did not exercise it, i.e., the scope of the power was wider than the extent of its exercise. Thus, the question of scope is separated from that of its exercise in this case and not in the case of Mrs. Jer Mavis Lubimoff (supra). Therefore, the Court in that case in saying that the scope was relevant did not say that the exercise was not relevant. For its purpose both were the same. It could very well have stated that since the power was exercised in favour of a person falling within a class specified therein, there was no transfer. Moreover, it is not clear whether the Court in fact considered the exercise relevant or the scope. The first part of the above quotation suggests the former while the second part indicates the latter. Therefore, this decision does not support the assessee.

14. Reliance has been placed as indicated above on the memorandum explaining the amendment to the Act. The paragraph which has been quoted above falls into two parts. Regarding the release of life interest it has been clearly mentioned that there was a lacuna in the Act but that is not so regarding the amendment of the definition of transfer. In connection with that amendment it has been stated that the amendment is introduced with a view to make it clear, etc. This means that so far as the meaning of the word 'transfer' was concerned there was no lacuna and that the meaning was that which has been clarified by the amendment. Therefore, the said memorandum implies that from the beginning it did not make any difference whether the power of appointment was general or special. For the above reasons we are of the view that it is not the scope of the power but its exercise which is relevant. Since in this case the power has been exercised in favour of persons other than the donee of the power there has been a transfer although it could have been exercised in favour of the donee herself.

15. Regarding Shri Mehta's argument based on the words 'in such manner' in the Bharatidevi Trust deed we are bound to say that that expression cannot cover authority to transfer the corpus to persons other than beneficiaries. This meaning is so plain that no further reasons are necessary. No part of the instrument can be so read as to clash with another part. Here if the trustees had such a power the naming of the beneficiaries in the trust deed would become useless. Therefore, it cannot be said that there has been a direct transfer from the trustees of the Bharatidevi Trust to the new trust.

16. The Commissioner (Appeals) has held that there has been a multilateral transaction in this case because the trustees of the Bharatidevi Trust had accelerated the date for the coming into effect of the power of appointment which had been exercised. This question would have relevance only if it was necessary to consider whether there has been a disposition of property under Section 2(xxiv). However, in view of the inclusive definition of transfer it is not necessary to consider that question. The exercise of power of appointment is itself a transfer under Sub-clause (c).

17. Further it has been argued that the gift-tax can be levied only when there is a transfer of property by the owner of the property, relying upon the decision of the Tribunal in WT Appeal No. 1245 (Ahd.) of 1961-62, dated 3-4-1963. That was a gift-tax matter and it was held that the assessee would have interest in the property only if the power of appointment was exercised in his own favour. That, however, is not issue here. Under the said Sub-clause (c) the exercise of power of appointment amounts to a transfer and for that purpose it is not necessary that it should be exercised by a person who owns the property. The assessee has argued that there would be double taxation in this case once at the time when the property was transferred to the Bharatidevi Trust and second at the time of the exercise of power of appointment. That, however, is a natural consequence of the events that have happened in this case. The property has been transferred to the new trusts who were not the beneficiaries under the Bharatidevi Trust and, therefore, the tax paid in respect of the . first transfer to that trust will not cover this transfer to the new trusts.

18. Reliance has also been placed on the decision of the Tribunal in the case of Gita Mayor [WT Appeal No. 25 (Ahd.) of 1981, dated 27-8-1982]. That was a case where the assessee had a vested life interest in the property and by her relinquishment of that life interest the question of gift arose. In the present case there is no such vested life interest. Moreover what is sought to be taxed is not transfer of any life interest but the right to receive the corpus of the property in future at a particular point of time. The assessee's argument based on the memorandum regarding the amendment which has been quoted above, has no application here because it is not the relinquishrnent of life interest with which we are concerned here.

Section 4(1)(e) of the Act refers to a vested interest and not to the kind of interest as in this case. Here under the resolution the trustees were to hold the corpus from 2001 or up to the death of persons mentioned in the resolution for the benefit of the assessee or other persons as appointed by her including herself. This presumes that the assessee live up to that point of time. Therefore, she had no vested life interest in the corpus. Question has been raised as to the assessment year in which transfer is said to have been made. The simple answer is that since the exercise of power of appointment amounted to transfer as defined under Section 2(xxiv)(c) the taxable event, i.e., the gift occurred in the assessment year 1976-77.

19. The last question is regarding the valuation of the property which has been transferred. For this purpose only the interest of the assessee in the property has to be value of the entire corpus cannot be taken because as on the date of exercise of power of appointment that was not owned by the assessee. What the assessee had on that date was the expectation of receiving that corpus on a date mentioned in the first resolution of the trustees dated 24-1-1976 subject to any interest of any person in the income of the corpus. It is this which will have to be valued. While making this valuation it is important to bear in mind that the trustees had the power of advancing the date of coming into effect of the exercise of the power of appointment which, therefore, need not wait till year 2001. It could be the very next day after the exercise of the power. Since the power included the power to exercise it in her own favour there was a possibility that the assessee may become the owner of the corpus immediately after she exercised the power. What has happened in this case is that the transfer of the corpus has been divided into two parts by the instrumentality of the power of appointment. The trustees retained the legal ownership of the corpus and the power to fix the date of its transfer while the assessee had the right to order the transfer and the right to name the transferee. When both the trustees and the assessee exercise their powers and when that becomes effective the transfer of the corpus is complete but not until then. Thus, the transfer of the corpus in these cases takes place on the date named by the trustees for the exercise of the power of appointment to become effective. On that date the complete corpus is transferred but until then it is not the corpus which is transferred but the assessee's interest in it is transferred.

Therefore, for this assessment year it is that interest which has to be valued and for the balance which makes the totality of the corpus it is that assessment year relating to the date named by the trustees (for the exercise of the power to be effective) in which the value of the balance which becomes taxable. The total of valuations of both must come to the value of the entire corpus. In the case of the assessee Smt. Anarkali Sarabhai the Commissioner has directed the GTO to value the interest of the assessee which has been transferred as on 31-3-1976. However, in the case of the other assessees the Commissioner has held that actual transfer took place on 1-12-1977, i.e., the date when the power of appointment was made to come into effect by second resolution of the trustees of the original Bharatidevi Trust. According to him it was that date on which the corpus was distributed among the new trusts and vested in them. We are unable to agree with this view.

Since the taxable event is the transfer and transfer has been defined to include the exercise of power of appointment, it is the date on which the power of appointment was exercised, which is the material date. Therefore, the valuation has to be done as on that date and not on the date when the trustees by their second resolution made the power effective. Therefore, for the purpose of valuation of the interest of the assessee which has been transferred as indicated above, this matter has been rightly restored to the GTO by the Commissioner. Regarding other assessees the Commissioner's order is modified to the effect that the valuation has to be taken as on the date on which the power of appointment has been exercised by the assessees. In determining the value of the gift in the case of all the assessees, the value of shares should be decided in the light of all the relevant evidence which has been submitted so far and which may be produced by both the parties before the GTO including the aspect of discounting the value of shares.


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