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First Wealth-tax Officer Vs. S.B. Garware, Huf - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1986)15ITD711(Mum.)
AppellantFirst Wealth-tax Officer
RespondentS.B. Garware, Huf
Excerpt:
.....of the other also.3. according to garware sons' family trust, the net income from the shares ('trust fund') had to be paid by the trustees to the hufs of four sons (shashikant b. garware, chandrakant b. garware, ashok b.garware and romesh b. garware) in equal shares for a period of 25 years from the date of trust (30-3-1970) and, on the expiry of the 25th year, the corpus of the trust fund should be divided among the four sons in equal shares and delivered to them accordingly.4. shashikant b. garware, as the karta of his branch of the joint family, and also as guardian of his three minor daughters, and along with his wife, made an assignment on 26-3-1975 in favour of romesh b.garware investment co. (p.) ltd, whereby a transfer was made. in effect, it was a gift of the corpus of the.....
Judgment:
1. These appeals are by the revenue and they pertain to wealth-tax assessments for the years 1975-76 to 1977-78. The dispute is common to all the assessments and, hence, was taken up for consolidated hearing.

2. To furnish a statement of essential facts: Balchandra D. Garware and Smt. Vimlabai Balchandra Garware, husband and wife, had each 33,000 equity shares in the company Garware Nylons (P.) Ltd. The husband and wife executed separate indentures on 30-3-1970 regarding their respective shares mentioned above. These indentures created a trust and the first trustees were the authors themselves, namely, Balchandra D.Garware and Smt. Vimlabai B. Garware. The trust, founded by Balchandra D. Garware, is named 'Garware Sons' 'Family Trust' and the trust created by his wife, Smt. Vimlabai B. Garware, is called 'Aba-Inne Garware Trust'. The authors of the trust have four sons, Shashikant B.Garware, Chandrakant B. Garware, Ashok B. Garware and Romesh B.Garware. The beneficiaries, under both the trusts, were the HUFs of each one of the four sons whose names are furnished just above.

Shashikant B. Garware executed two deeds of assignment on 26-3-1975 in favour of a company called Romesh B. Garware Investment Co. (P.) Ltd. The trust deeds dated 30-3-1970, executed by Balchandra D. Garware and Smt. Vimlabai B. Garware, and the assignments made by Shashikant B.Garware on 26-3-1975, are identical in terms and, as such, we may furnish the details of one as illustrative of the other also.

3. According to Garware Sons' Family Trust, the net income from the shares ('trust fund') had to be paid by the trustees to the HUFs of four sons (Shashikant B. Garware, Chandrakant B. Garware, Ashok B.Garware and Romesh B. Garware) in equal shares for a period of 25 years from the date of trust (30-3-1970) and, on the expiry of the 25th year, the corpus of the trust fund should be divided among the four sons in equal shares and delivered to them accordingly.

4. Shashikant B. Garware, as the karta of his branch of the joint family, and also as guardian of his three minor daughters, and along with his wife, made an assignment on 26-3-1975 in favour of Romesh B.Garware Investment Co. (P.) Ltd, whereby a transfer was made. In effect, it was a gift of the corpus of the trust fund, which Shashikant B. Garware HUF should receive at the expiry of the 25th year. Till then, Shashikant B. Garware HUF was to receive one-fourth of the net income from the trust fund as specified in the trust deeds dated 30-3-1970. On 20-3-1981, the trustees (Balchandra D. Garware and Vimlabai B. Garware) affirmed, by means of separate affidavits, the assignment, made by Shashikant B. Garware HUF, in favour of Romesh B.Garware Investment Co. (P.) Ltd., and further declared that there is no bar placed on the trustees to hand over one-fourth share of the said beneficiary interest in the corpus of the fund to the assignee, Romesh B. Garware Investment Co. (P.) Ltd., after the period of 25 years elapses. We may mention here that similar is the fact-position in regard to 'Aba-Inne Garware Trust'.

5. Shashikant B. Garware offered the gifts to gift-tax and the taxing authority made what is called protective assessments, 6. In wealth-tax assessment of Shashikant B. Garware HUF, the beneficial interest in the two trusts was being shown as an asset till the assessment year 1975-76. In these three impugned assessments, the assessee offered only the right to receive one-fourth share in the net income from the trust fund as the taxable wealth (inter alia, other items of the family property with which we are not concerned) showing the value at Rs. 2,62,353 as on the relevant valuation dates, based upon actuarial valuation. The WTO did not accept this. In his view, the assignments (or gifts) made on 26-3-1975 in favour of Romesh G. Garware Investment Co. (P.) Ltd., were bad in the sight of law and the assessee continued to have the same interest as before in the trust fund and the value of such interest was taken at Rs. 12 lakhs in each of the assessments.

7. On appeal by the assessee, the Commissioner (Appeals) held that the gifts were valid in law and that the department has no right to challenge it. In view of that conclusion, he directed that the beneficial interest of Shashikant B. Garware in the two trust funds be taken at Rs. 2,63,353, as declared by the assessee. In sum, the assessee succeeded.

8. Revenue is objecting to the deletion of the substituted figure of Rs. 12 lakhs, in place of the declared valuation of Rs. 2,63,353 by the first appellate authority as the value of the beneficial asset held by the assessee in the two trusts on the material valuation dates.

9. The argument of Shri Jetly, the learned standing counsel, was that the legal ownership in the trust fund lies only with the trustees and that the assessee could not have made an effective transfer of the right to receive one-fourth share of the corpus in the trust fund after the term of 25 years to a third person without even the concurrence of the trustees and that neither the provisions in the Indian Trusts Act, 1882, nor the terms in the trust deeds dated 30-3-1970 countenance such a thing. Elaborating his argument, he stated that the assignments of 26-3-1975, in favour of the company, is nothing but an attempt at evasion of tax and that such tax planning should not be recognised by judicial forums in view of the nice distinction between tax planning and avoidance of tax as recently explained by the Supreme Court in the case of Me Dowell & Co. Ltd. v. CTO [1985] 22 Taxman 11 (SC) Shri Dastur mainly based his argument upon the competence of the beneficiary to transfer his interest in the trust property without even reference to the trustees as recognised in Section 58 of the Indian Trusts Act.

It was also stressed that Shashikant B. Garware, as the karta of the HUF, could validly dispose of the family property without even the existence of legal necessity or family benefit as this was a case of sole surviving coparcener--Shashikant B. Garware has no sons--and that his powers are not clamped in any way either in Hindu law or the provisions in the trust deeds dated 30-3-1970. The submissions made by either side indicate the following questions for consideration: 1. Whether the beneficiary of trust can transfer and dispose of his interest in the trust property without consent of the trustee, and, if 'yes', whether it amounts to tax evasion 2. Whether Shashikant B. Garware, as the karta, could have made a valid gift of the interest of the HUF in the corpus of the trust fund We proceed to consider these questions and in reference to case-laws cited.

10. We were taken through the provisions in the trust deeds dated 30-3-1970. Shashikant B. Garware HUF has to receive one-fourth share in the net income of the trust fund for a term of 25 years and, thereafter, the said HUF should get, absolutely one-fourth share in the corpus of the trust fund. The first trustees are the authors themselves. The other terms in the two deeds are those usually found in documents creating trusts, making provisions for appointment of the trustees, management of the trust property, discharge from the office of the trustees, etc., and no special reference is needed for any fund therein as none has any special significance. But, we may, however, note that there is no prohibition as such for the transfer of the beneficial interest in the trust fund by the beneficiary. The argument of Shri Jetly was that the trustee is found to fulfil the purpose of the trust and obey the directions of the author, given at the time of creation of the trust, and any modification of the terms of the trust can only be with the consent of the beneficiaries vide Section 11 of the Indian Trusts Act. Elaborating his argument, he stated that, in this case, the first trustees were bound to distribute the net income equally among the four beneficiaries till the anniversary of the 25th year from the time of creation when the corpus of the trust fund has to be divided in the same proportion and delivered to the four beneficiaries. It was canvassed that the trustees had not even been consulted when gifts were made on 26-3-1975 by Shashikant B. Garware and that the ratification or affirmance of the trustees was long after the assignments and this was violative of the provisions in Section 11.

It was contended that giving effect to the gift deeds dated 26-3-1975 would amount to modification of the trust, for the trustees would be handing over the corpus to a company which had not been the intention of the authors at all. The argument of Shri Jetly, mainly, was that the Wealth-tax Act, 1957 ('the Act') recognises only the legal ownership and that such legal ownership indisputably existed in the trustees and that since these persons having not been either parties to the assignment deeds dated 26-3-1975 or assented to any modifications of the terms of the trust, the beneficiaries cannot be legally regarded as the full owners of the asset to be competent to make a transfer. In this connection, the decision of the Bombay High Court in the case of CGT v. Mrs. Jer Mavis Lubimoff [1978] 114 ITR 90 was relied upon. The decision of the Calcutta High Court in the case of CIT v. Ganga Properties Ltd. [1970] 77 ITR 637 was cited in support of the proposition that 'in Indian law beneficial ownership is unknown ; there is but one owner, namely, the legal owner, both in respect of vendor and the purchaser and trustee and cestni que trust'. It is held in this case that only the legal owner of the property can be assessed under the Income-tax Act. 1961. On that analogy, Shri Jetly argues, the legal ownership in the trust fund remains with the trustees and, as such, the transfer made by the beneficiary alone did not result in avalid gift.

11. Section 11, in our judgment, is not attracted at all. This section specifies about the obligations on the part of a trustee to fulfil and obey the directions of the author of trust and that any modification could be made with the consent of the beneficiaries. In the present case, there is no question of the trustees violating the terms of the trust. The direction to pay out of the net income to the HUFs of the four sons of the authors for a period of 25 years is not disturbed.

Remainder is to be given absolutely to the same beneficiaries in equal shares at the end of 25th anniversary. The trustees would have been bound to deliver one-fourth share in the corpus to Shashikant B.Garware HUF, but now they are to hand over to the assignee of the assessee at the instance of the assignor. The trust would have ended the moment the corpus is handed over after the end of the 25th year.

Even now the trustees would have to hand over the property as per the appointment made by Shashikant B. Garware. The beneficiary can either himself accept the benefit or appoint another of his choice and give suitable directions to the trustees in this behalf. We see no violation of the terms of the trust.

12. The present is a case entirely falling within the province of Section 58 which in clear terms recognises the competence of the beneficiary to transfer his beneficial interest and this power is only subject of the law for the time being in force and the extent to which the beneficiary can dispose of such interest. This is not a case coming under the provision of Section 58. Unless there are restraints placed upon the powers of the beneficiary by any other law, the beneficiary, who is otherwise competent to contract, has the power of making transfer of his interest. This principle has been succinctly explained by the Supreme Court in the case of CIT v. Kasturbai Walchand Trust [1967] 63 ITR 656 and we may add here that this authority has closest resemblance on facts to the gift effected by Shashikant B. Garware in favour of the Romesh B. Garware Investment Co. (P.) Ltd. 13. Mrs. Jer Mavis Lubimoff's case (supra) appears to be altogether on a different point. Certain 'J' was the beneficiary under the trust entitled to receive income from a trust fund for her life. A clause in the deed of trust specified that the trustees would hold the trust fund for the benefit of child or children or remoter issue of 'J' after her death, upon such conditions, restrictions or appointments and in accordance with new appointment she may make. The said 'J', by a deed of poll executed by her, exercised the power of appointment vested in her in favour of her daughter and simultaneously executed a deed of release surrendering her interest. The question was, whether the deed of poll amounted to a 'gift' or disposition of property according to the provisions in the Gift-tax Act, 1958, and their Lordships held that the deed of poll and the indenture of release did not amount to a gift, to be taxed under the Gift-tax Act. In this case, it was found that the appointment, by the execution of a deed of poll made by 'J', did not, in law, amount to a 'gift' and no such thing obtains in the present appeal. The assignment made on 26-3-1975 by Shashikant B. Garware, as the karta of the joint family, is a gift within the meaning of the Gift-tax Act as the document purports to transfer the beneficial interest in the corpus without money consideration. Indeed, the revenue has accepted the assignment as gift and, on that basis, gift-tax assessment has been made. It is one thing to say that indenture dated 26-3-1975 does not amount to a gift and quite another that the executants had no power to effect a transfer. The revenue does not dispute that the assignment dated 26-3-1975 does, in law, amount to a gift. We have gone through the documents and are satisfied that a valid gift of the property has been made. So far as the powers of Shashikant B. Garware, prima facie, Section 58 recognised the power and unless that power is subject to any limitation by any other law for the time being in force, the transfers must be held to be valid.

14. It was argued on behalf of the revenue that Section 58 cannot be read in isolation and the power of the beneficiary must be examined in juxtaposition with Section 11. It was also stated that, the word 'transfer' found in Section 58 does not include a gift. We do not think that the argument can succeed. Section 11 and Section 58 deal with different aspects. While Section 11 specifies the obligations on the part of the trustees to obey the directions of the author in operating the trust, Section 58 deals with the power of the beneficiary in the matter of transfer of his beneficial interest. The modification of the trust for which the consent of the beneficiary is required has nothing to do with the transfer of the beneficial interest by the beneficiary and, in this case, by the assignment, the trust is not affected.

15. Turning to Ganga Properties Ltd.'s case (supra), the question was whether a person holding possession of an immovable property under an agreement for sale was liable to be taxed for income from house property and as held by their Lordships of the Calcutta High Court such income from house property could only be from the date of actual conveyance and not earlier. The stress for abso lute ownership as an essential condition was for assessment under the Income-tax Act. The analogy sought to be applied to attack the assignments dated 26-3-1975 cannot be countenanced for the simple reason that the revenue has not sought to tax the trustees (the legal owners) under the Act and, as we see, it is the beneficial owner that is being assessed for wealth-tax in respect of the HUF assets including the interest in the trust fund.

In any event, in considering the validity of the transfer from the point of Section 58, Ganga Properties Ltd.'s case (supra) provides no answer. We are clear that the beneficiary may transfer his interest in the trust and even a notice to the trustee is not contemplated--Agarwala on the Indian Trusts Act (6th edition, page 543).

16. The decision of the Bombay Bench of the Tribunal in the case of Surajba Patel Trust [IT Appeal Nos. 2007 (Bom.) of 1982 and 22 (Bom.) of 1983] was cited on behalf of the assessee and this, as rightly pointed out by Shri Jetly, cannot be an authority to the case of the assessee, for there is a distinction on one essential fact, namely, the deed of assignment had been jointly executed by the trustees and the beneficiaries.

17. Shashikant B. Garware HUF was the remainderman insofar as one-fourth interest in the corpus of the trust fund. The remainder is transferred absolutely in favour of Romesh B. Garware Investment Co.

(P.) Ltd., and the assignee is to get possession of one-fourth share of the corpus after a period of 25 years from the date of the trust.

Having regard to the powers of the beneficiary under Section 58, such a transfer must be valid unless there are limitations placed upon the exercise of such powers by any other law. The joint family of Shashikant B. Garware, consisted of only himself, his wife and three minor daughters. He was the sole surviving coparcener at the t ime of the assignments or gifts. The property gifted or transferred was an asset of the joint family. What we have to see is, whether the transfer is invalidated mainly because an asset of the joint family is gifted away by the karta and this requires to be tested only from the point of Hindu law. We are familiar with the principle that a sole surviving coparcener is entitled to dispose of his family property as if it was his own property without legal necessity or family benefit and even a son subsequently born cannot challenge such alienation made before his birth'--Mulla's Commentary on Principles of Hindu Law, 15th edition, articles 255 and 257. The principle is also explained by the Bombay High Court in the case of CIT v. Anil J. Chinai [1984] 148 ITR 3. Shri Dastur contended that a father or other managing member can also gift, within the reasonable limits, an ancestral property, movable or immovable, under the authority of Hindu law and he invited our attention to the Article 225 in the said Mulla's Hindu Law and, in our opinion, it is unnecessary to see if the donor had overstepped the limit as undisputedly Shashikant B. Garware was the sole surviving coparcener and his power in the matter of alienation of the joint family property is the same as in regard to self-occupied property.

18. Another point raised by Shri Dastur is also relevant in this context. The transfer of the type made by Shashikant B. Garware, as the karta of the joint family, is not void ab initio, but only voidable at the instance of other members of the family whose interests are affected. A stranger cannot question the gift. In a case, like the present case, where gift is by a sole-surviving coparcener, even an after-born son cannot attack the same, and least of all by the revenue.

The decision of the Rajasthan High Court in the case of CIT v. Braham Dutt Bhargava [1962] 46 ITR 387 and that of the Allahabad High Court in the case of Jugal Kishore Jai Prakash v. CIT [1971] 79 ITR 598, cited by Shri Dastur, indicate that the validity of the gift cannot be challenged by the revenue being strangers to the family.

19. The last limb of the argument of Shri Jetly was that the gift in favour of an investment company is a contrivance made for the purpose of evasion of wealth-tax and the stated purpose in para 8 of the assignment deed is nothing but a specious reason and that the Courts should refuse to recognise an artificial transaction brought about to overreach the revenue in the matter of payment of tax. In support, emphasis was laid upon the statement of the Supreme Court in the recent decision in McDowell & Co.'s case (supra): The courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purpose. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it." The WTO has made critical observations on the assignment deed dated 26-3-1975 in para 4 of his order and he notices that there has been a systematic attempt at tax evasion by transferring property to investment company when it is unknown as to who are the shareholders of this company who would be benefited by the gift. We had the opportunity of reading the full judgment of the Supreme Court in McDowell & Co.'s case (supra). Their Lordships have made a review of the entire English case law and the earlier renderings of the Supreme Court on the subject to remark that the Westminster Principle has been emphatically departed from by the British Courts and they have even dissociated from the observations of Justice Shah in the case of CIT v. A. Ramon & Co.

[1968] 1 SCR 10. Shri Dastur argued that the rule enunciated should be understood in the light of facts of that case to discover the invisible line that distinguishes the tax avoidance and tax evasion. In McDowell & Co.'s case (supra), the manufacturer had incurred the liability of excise duty and, thereafter, attempted to exclude the duty from turnover (with the obvious intention of deflating the turnover for avoiding sales tax) on the reason that the purchaser had paid duty directly to the excise department. This, according to the Supreme Court, was tax evasion as payment of the duty by the purchaser was for and on behalf of the dealer. In summing up, their Lordships have said: In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai J. in Wood Polymer Ltd. v. Bengal Hotels Ltd. [1970] 40 Comp. Cases 597 where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.

Chinnappa Reddy, J. observed 'tax avoidence, it seems, is legal; tax evasion is illegal'. In the present appeals, the question of tax effect is not being decided not in the reference to the provisions in the taxing statute; but to see, whether the transfer effected by Shashikant B. Garware, as the karta, is or is not valid from the provisions of the Indian Trusts Act and the principles of Hindu law.

20. There is a silverline of distinction between tax prevention in a legal manner and evasion which, of course, is illegal. If a person has incurred the liability to tax, then anything done to prevent payment thereof is, undoubtedly, an evasion. If a person has not incurred the liability to tax and colourable transaction done involving an element of illegality and to circumvent the provisions of tax law to prevent payment of tax, then also the transaction ought not be countenanced if the motive is obvious. But if no tax liability had arisen and the transaction is free from any legal objection and secures certain relief to the assessee as a consequence then such a transaction cannot be successfully assailed merely because it has resulted in tax reduction.

The present is an instance of the last mentioned class. An owner of a property has an unrestricted right to deal with it in the manner he likes subject to recognised limitations. The department cannot compel an owner of the property to continue to hold the same and get assessed to wealth-tax and any restriction upon his power of alienation is opposed to the rule against perpetuity recognised in Section 10 of the Transfer of Property Act, 1882. As we have already pointed out the transfer made by Shashikant B. Garware, as the karta, is sound on legal basis.

21. Shashikant B. Garware HUF is not trying to avoid tax for which liability had been incurred. What he sought to prevent is only payment of wealth-tax to accrue in future years if at all the asset should continue to remain in the family. As we have already shown, the transfer does not involve any element of illegality and it is, at worst, an avoidable transfer capable of being assailed by the members of the family affected by the transfer made.

22. Para 8 in the deed of assignment reads that the continuance of the status quo of the joint family was likely to wipe out or considerably deplete the assets of the family on account of the tax incidence apart from the contingency to borrow money for the sake of payment of tax and that it was not even in the interest of the minor daughters that such a situation should continue.

23. A statement was produced to show how the joint family was saving on account of the gifts made. As we gather from the statement, the incidence of tax of the joint family was steadily on the increase from the assessment years 1970-71 to 1973-74 and in the assessment year 1974-75, it would have incurred a loss of Rs. 71,000, had these transfers not been made. The family is going to save to the tune of Rs. 80,000 or so per year. It does not appear to us that the purpose of assignment, set out in para 8 of the document, is spurious. At any rate, there is no illegality about it, for what is sought to be achieved is tax relief in future wealth-tax assessments. The joint family has many other assets also and the marginal rate of tax at the time of gift was 8 per cent and, therefore, the continuance of the interest in the corpus of trust fund would have been more burdensome and to get some relief the gifts were made in favour of an investment company belonging to the family group. Neither the assignments could be soundly attacked on moral grounds.

24. For the foregoing, we hold that the beneficiary was competent to transfer/gift the beneficial interest in the corpus of the trust fund and such a transfer made by Shashikant B. Garware, as the karta of the HUF, was valid and that the revenue has no right to challenge the same in these wealth-tax assessments. The conclusion reached by the first appellate authority is unassailable and the same is affirmed by us.


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