1. This is a reference made by the Madras Bench of the Income-tax Appellate Tribunal under Section 26(1) of the Gift-tax Act, 1958 (hereinafter referred to as the Act) on the application of one Smt. R. Valsala Amma, who was assessed under the Act, along with her sister Smt. R. Rugmani Amma alias Subhadra Amma as an association of individuals for the year 1962-63 by the Gift-tax Officer, Palghat The questions referred for decision are:
(1) Whether on the facts and in the circumstances of the case, the Gift-tax Officer, Palghat, had jurisdiction to make the assessment on the assessees?
(2) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee had made a gift of the properties in question to their brother under the gift deed dated 8-6-1961?
(3) Whether on the facts and in the circumstances of the case the assessment of the assessees in the status of an Association of persons was proper ?
2. The applicant and her sister are the daughters of one Smt. Unni Ammalu Amma, who died on 2-5-1961. Both of them got a large number of properties under their mother's last Will dated 4-12-1959. By a deed dated 7-6-1961, they effected a partition of all those properties between them, except two items of immovable properties in Palghat District, On 8-6-1961, they executed another deed, making a gift of these two properties in favour of their brother, Sri. R. Rajan Menon. The Gift-tax Officer initiated proceedings to assess these ladies in respect of the said gift. The applicant made a nil return, and also wrote to the Gift-tax Officer by a letter dated 29-2-1964 stating that she was a permanent resident of Madras, that she made her income and other returns at Madras, and that the case file may be transferred to Madras City circle, if the Gift-tax Officer so desired. Smt, Rugmini Amma made a return in respect of her one-half share of the gifted properties. The Gift-tax Officer did not transfer the case; but he assessed them on the value of the gifted properties as an association of individuals.
3. The applicant filed an appeal before the Appellate Assistant Commissioner of Gift Tax. She raised these contentions before him:--
(1) The properties were given to their brother Sri. Rajan Menon, as desired by their mother; and, therefore, there was no gift by them.
(2) Assuming there was a gift, it was by their mother; and hence the tax should be recovered from the donee; and
(3) The Gift Tax Officer should have transferred the case to the Madras city circle.
All these contentions were rejected; and the appeal was dismissed by the Appellate Assistant Commissioner, The applicant then, filed an appeal before the Income-tax Appellate Tribunal, before whom she raised the following three contentions:
(1) The Gift Tax Officer, Palghat had no jurisdiction to make the assessment;
(2) The real donor was the applicant's mother, and the assessees were not, therefore, liable for the tax; and
(3) The status of association of individuals assigned to the assessees was wrong.
These contentions were rejected by the Appellate Tribunal; and the appeal was accordingly dismissed. The same contentions have been raised before us in this reference.
4. The first question relates to the jurisdiction of the Gift Tax Officer, Palghat to make the assessment. Section 7 of the Gift Tax Act decides the jurisdiction; and it reads as follows:
'7. Gift-tax Officers: Every Income-tax Officer having jurisdiction or exercising powers as such under the Income-tax Act la respect of any person shall perform the function of a Gift-tax Officer under this Act in respect of that person.
Explanation:-- For the purposes of this section, the Income-tax Officer having jurisdiction in relation to a person who has no income assessable to income-tax under the Income-tax Act, means the Income-tax Officer of the area in which that person resides.'
The assessment year concerned is 1962-63. There is no case that either the applicant or her sister had any income assessable for the said year under the Income-tax Act. In such a case, the Explanation to Section 7 applies; and accordingly, the Gift-tax Officer having jurisdiction to make the assessment would be the Income-tax Officer of the area in which the assessee resides. There is no case for the applicant that, during the year 1962-63, she was not a resident within the area of the Income-tax Officer, Palghat. The Gift Deed dated 8-6-1961 describes her as a resident of Palghat District. Even her letter dated 29-2-1964 addressed to the Gift-tax Officer, which is appendix 'G' to the reference, gives her address as Palghat. All that she wanted in this letter was to transfer the case to Madras City circle, if the Gift-tax Officer so desired. The power of transferring cases is conferred by Section 7-A of the Gift-tax Act only on the Commissioner of gift-tax. Objection to the jurisdiction of the assessing authority was raised only by the applicant and it was done for the first time before the Appellate Tribunal. It was disposed of by the Appellate Tribunal stating that 'the Gift-tax Officer has given a finding in his order to the effect that one of the assesses who filed the gift-tax return was mostly residing at Palghat, which was within his jurisdiction.' This statement would not be fully borne out by the order of assessment, which is appendix 'D' to this reference. If one of the two persons who are assessed as an association of individuals resides within the area of one Income-tax Officer and the other person resides within the area of another Income-tax Officer, the question would arise who among the two officers is the Gift-tax Officer having jurisdiction to make the assessment. This question does not, however, fall for our decision, as the assesses have no case that any one of them was not a resident within the area of the Palghat Gift-tax Officer during the assessment year 1962-63. The question should not, therefore, have been referred to this Court. .
5. The second question in this reference has no substance. Under the last will of applicant's mother, the gifted properties along with others devolved on the applicant and her sister; and it is they who transferred these properties in favour of their brother Sri Rajan Menon by executing the deed of gift The donee got the properties only from his sisters; and their mother has not conveyed or created any interest in respect of the said properties in favour of the donee. The contention that the gift was made in obedience to the last wish expressed by their mother, and that therefore, the mother is the donor is hardly statable,
6. The third question raised in this reference is an interesting one. The learned counsel for the applicant contended that the interests of the applicant and her sister in the gifted properties were separate and distinct, that they did not form an association of individuals, and that the mere fact that each of them made a gift of their properties to the same person by one document did not make them an association of persons. The learned counsel for the Revenue on the other hand contended that the charge under the Gift-tax Act was on the transaction of the gift, that the applicant and her sister joined together in that transaction, and It was, therefore, chargeable as one made by an association of individuals. The term 'association of individuals' is not defined in the Gift-tax Act. Section 2 (xviii) contains an inclusive definition of 'person'; and it reads:
' 'person' includes a Hindu undivided family or a company or an association or a body of individuals or persons, whether incorporated or not.'
Section 2(31) of the Income-tax Act, 1961 contains a somewhat similar definition of 'person.' The term 'association of individuals' came up for consideration in the Supreme Court in Commissioner of Income-tax v. Indira Balakrishna, : AIR1960SC1172 . The Court said;
'It is enough for our purpose to refer to three decisions: ' In re, B. N. Elias, : 3ITR408(Cal) Commissioner of Income-tax, Bombay v. Laxmidas Devidas, : 5ITR584(Bom) and In re, Dwarkanath Harishchandra, : 5ITR716(Bom) . In : 3ITR408(Cal) Derbyshire, C. J. rightly pointed out that the words 'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action.' Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C. J. in : 5ITR584(Bom) and also in : 5ITR716(Bom) . In : 3ITR408(Cal) Costello, J., put the test in mere forceful language. He said;
'It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnership ............ When we find............that there is a combination of persons formed for the promotion of a joint enterprise ............ then I think no difficulty arises in the way of saying that these persons did constitute an association..................'
'We think that the aforesaid decisions correctly lay down the crucial test fop determining what is an association of persons within the meaning of Section 3 of the Income-tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not,'
In Commissioner of Agricultural Income-tax, Hyderabad v Raja Ratan Gopal, : 59ITR728(SC) , the Supreme Court said:
'the collection of the entire income from the estate by one of the sharers or even by a common employee will not make the income an income from a joint venture. Each of the sharers gets his income as an individual and not as an association of Individuals.'
7. There can be no doubt on the authority of the above decisions that, if it were an assessment under the Income-tax Act of the income derived by the applicant and her sister from the properties which they got under their mother's last will, they cannot be assessed as an association of Individuals. But it was contended that the position was different under the Gift-tax Act The learned counsel for the Revenue submitted that, as an association of persons for the purpose of income-tax is one in which two or more persons join with the object of producing or earning income, an association of individuals for the purpose of gift-tax is one in which two or more persons join in making a gift. The argument is attractive; but it cannot be sustained on a close scrutiny of the relevant provisions of the Act Section 3 is the charging section; and the schedule to the Act specifies the rates of tax. A reading of that section and the schedule shows that the tax is charged for every assessment year in respect of the gifts made by a person during the previous year at the rates specified in the schedule on the value of all taxable Rifts. As held by the High Court of Punjab in Mst. Gaindi v. Union of India, gift tax is not a tax on property; but it is a tax on the transaction of gift. American Jurisprudence Vol. 28, Para 315 states that
'It is an excise upon the use made of property, upon the exertion of the privilege of transmitting title by gift.' What is important to be noticed in the context of the present controversy is that the tax is charged on a person on the value of the taxable gifts. It is the conveyance of the title that attracts the tax. For a conveyance to be one by an association of individuals, the title they convey must belong to that association. In other words, the individuals who make the gift must be associated in respect of the title or ownership of the property which is transferred. To put it differently, a gift must be one made by two or more individuals who own the property as an association of individuals. In our view, if two or more persons execute one deed of gift in favour of the same person in respect of properties which belong to them individually, or in which they have separate and distinct rights, it cannot make them an association of individuals. It would be a joint gift by different individuals, between whom there is no association of interest in respect of the gifted properties.
8. We shall also refer to a few more provisions of the Act. Section 5 deals with exception in respect of certain gifts. This section has an explanation; and Clause (b) thereof reads as follows;
'Explanation:--- For the purposes of this section:--'
(a) x x x x x
(b) a Hindu undivided family, firm or other association of persons shall be deemed to be resident in the territories to which, this Act extends during any previous year unless, during that year, the control and management of its affairs was situated wholly outside the said territories;'
It assigns a place of residence to an association of persons as well as to a Hindu undivided family and a firm. That shows that an 'association of persons' is an existing taxable entity just like a Hindu undivided family or a firm, and not something which comes into existence by a transaction of gift made by two or more persons jointly. Section 29 of the Act deals with recovery of tax; and it provides that subject to the provisions of the Act, gift tax shall be payable by the donor. Donor is defined in Section 2(ix) as any person who makes a gift. Where A who is the owner of property X and B who is the owner of property Y, join in making a gift of properties X and Y in favour of C by executing one document A and B are not the donors of properties X and Y. A is only the donor of X; and B is the donor of Y. A can be liable to gift-tax only on the value of property X; because he is not a donor of property Y. Section 30 of the Act provides that gift-tax payable in respect of any gift comprising immovable property shall be a first charge on that property. In the illustration mentioned above, property X can be a charge only for the tax payable in respect of that property, and not in respect of both the properties. The above provisions also indicate that a joint gift by two or more persons in respect of properties separately belonging to them does not make them liable for assessment as an association of individuals. They would be so liable, only if the properties belong to them as an association of individuals.
9. The learned Counsel for the Revenue drew our attention to the following statement at page 73 under the Gift-tax Act in the 'Three New Taxes' by A. C. Sampath Iyengar--1966 Edition:
'An interesting question would arise where the property concerned is owned by a number of individuals as co-tenants. Suppose all of them join together and make a donation of the property by one transaction of transfer, namely, say, by one registered deed, the value of the sub-Sect-matter of the gift would be the value of the entire property. But, it is equally open to the co-tenants to convey their several shares by different documents, each co-tenant transferring his individuals share alone, in which case, the subject-matter of the gift would be the fraction owned by each donor. This would make a great difference in taxation. If, for instance, the property was owned by six persons as tenants-in-common with equal shares, and the value of the entire property is Rs. 30,000 if all the six persons join together in one conveyance, the 'donor' would be all these six persona put together. They would be a 'person' within the meaning of this section, by virtue of the definition Clause (xviii) which states that 'person' would include 'a body of individuals.' This 'person' would be liable to pay tax on Rs. 25,000 (i.e., after deducting the basic exemption of Rs. 5,000). The amount of tax would be Rs. 2,150. It on the other hand, each one of them separately conveyed by different transfers his or her interest, there would be no liability to tax at all since a gift up to Rs. 5,000 in value is basically exempt.'
10. The learned counsel submitted that this is a correct statement of the law. We are unable to agree. The object of the Gift-tax Act is obviously to levy a tax on a person who makes a gift of a property on the value of that property. According to the learned author if each of the six persons in the illustration given by him executes deed of gift in respect of the property of each one of them, there would be no tax; but if all of them join in executing one deed of gift in respect of the same properties, they would be liable to tax. The number of documents by which the gift was effected cannot in our view have any relevancy to the incident of taxation under the Act. We are unable to hold that the Legislature ever intended any such illogical consequence. In our opinion, the provisions of the Gift-tax Act do not yield to such a construction. We, therefore, hold that the assessment of the applicant and her sister as an association of individuals was not warranted under law.
11. In the result, we decline toanswer questions Nos. J and 2; and weanswer question No. 3 in the negative,and that is against the Commissioner ofgift-tax. The parties will bear their owncosts. A copy of this judgment will beforwarded to the Income-tax AppellateTribunal as required by Section 26(6) ofthe Gift-tax Act, 1958.