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Commissioner of Income-tax Vs. Smt. Suraj Bai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Gift-tax Reference No. 19 of 1967
Judge
Reported in[1972]84ITR774(Raj); 1971(4)WLN429
ActsGift Tax Act
AppellantCommissioner of Income-tax
RespondentSmt. Suraj Bai
Appellant Advocate Sumer Chand Bhandari, Adv.
Respondent Advocate D.P. Gupta, Adv.
Cases ReferredR. Subba Naidu v. Commissioner of Gift
Excerpt:
gift tax act, 1957 - shares--gift completed when beneficial interest transferred--act not applicable where gift completed on 26.11.1956.;the beneficial interest in the shares can pass from the holder to another person without complying with these provisions. when the beneficial interest in shares is transferred by the donor to the donee the gift is complete for purpose of the gift tax act. the gifts in the present case were completed on 26.11.56 and were not taxable under the gift-tax act, 1967, which came into force only on 1.4.57. - - the transfer deed in respect of 300 shares was signed by the assessee and that in respect of 700 shares by the assessee as well as by shyam sunder. the regulations in table 'a '(regulations 19 to 24) as well as sections 108, 110 and 111 deal with the..........register of the company '2. the facts are these. smt. suraj bai, assessee, executed 3 unregistered gift deeds on november 26, 1956. by the first gift deed she gifted 735 shares of the maharaja salt works co. ltd. to her minor grandson, ram swarup. the execution of the gift deed was accompanied by the actual delivery of share certificates of 735 shares and blank transfers. smt. parmeshwari devi accepted the gift on behalf of her minor son, ram swarup. by the second gift deed she similarly gifted 710 shares of the aforesaid company to her second minor grandson, ramesh. the execution of the gift deed was accompanied by the actual delivery of the share certificates and the blank transfer deed of the respective shares to the donee which was accepted by his mother, smt. parmeshwari devi, who.....
Judgment:

Jagat Narayan, C.J.

1. The following question has been referred by the Tribunal:

' Whether the gifts were completed within the meaning of the term in the Gift-tax Act on the date of the delivery of share certificates along with transfer deeds to the donees or on the dates of registration of shares in the names of the donees in the register of the company '

2. The facts are these. Smt. Suraj Bai, assessee, executed 3 unregistered gift deeds on November 26, 1956. By the first gift deed she gifted 735 shares of the Maharaja Salt Works Co. Ltd. to her minor grandson, Ram Swarup. The execution of the gift deed was accompanied by the actual delivery of share certificates of 735 shares and blank transfers. Smt. Parmeshwari Devi accepted the gift on behalf of her minor son, Ram Swarup. By the second gift deed she similarly gifted 710 shares of the aforesaid company to her second minor grandson, Ramesh. The execution of the gift deed was accompanied by the actual delivery of the share certificates and the blank transfer deed of the respective shares to the donee which was accepted by his mother, Smt. Parmeshwari Devi, who was his natural guardian. By the third gift deed she gifted 1,000 shares of the aforesaid company to her daughter-in-law, Smt. Parmeshwari Devi. The execution of the gift deed was accompanied by the actual delivery of the share certificates and blank transfer deeds in respect of these shares to the donee.

3. After execution of the aforesaid gift deeds, Smt. Parmeshwari Devi forwarded the share certificates in respect of 2,445 shares to the aforesaid company along with transfer deeds with a request to register the shares in the names of the donees.

4. On July 3, 1957, the assessee executed 3 fresh registered gift deeds confirming gifts made on November 26, 1956, in respect of the aforesaid shares in favour of the same donees. On November 4, 1957, Smt. Parmeshwari Devi forwarded these 3 registered gift deeds to the company. By its letter dated November 25, 1957', the company informed Smt. Parmeshwari Devi that the transfer deeds in favour of her two minor sons were in order. As regards the transfer deed executed by the assessee in her favour, the company pointed out that 700 shares were held in the joint names of the assessee and her son, Shy am Sunder, while the remaining 300 shares stood in her sole name and requested that separate transfer deeds in respect of these two sets of shares should be sent to the company. On April 10, 1958, Smt. Parmeshwari Devi complied with the request of the company and forwarded fresh transfer deeds in respect of two sets of shares. The transfer deed in respect of 300 shares was signed by the assessee and that in respect of 700 shares by the assessee as well as by Shyam Sunder. On February 1, 1959, 735 and 710 shares were registered in the names of Ram Swarup and Ramesh, respectively. Earlier on May 9, 1958, 1,000 shares were registered in the name of Smt. Parmeshwari Devi in the books of the company.

5. On the above facts the Gift-tax Officer held that the gift of 1,000 shares in respect of Smt. Parmeshwari Devi took place in the assessment year 1959-60 while the gift of 1,445 shares in favour of Ram Swarup andRamesh took place in the year 1960-61, and taxed both the gifts to gift-tax in the respective years. The Gift-tax Act, 1958, came into force with effect from April 1, 1958.

6. The assessee preferred appeals before the Appellate Assistant Commissioner on the ground that the gifts were completed on November 26, 1956, and were not liable to gift-tax. The Appellate Assistant Commissioner accepted the contention of the assessee and allowed the appeals.

7. The revenue preferred appeals before the Tribunal and it was contended before it that the gifts were completed only when the transfers in favour of the donees were registerd in the books of the company. This contention was not accepted by the Tribunal and the appeals were dismissed. On an application made by the revenue the above question was referred to this court.

8. There is overwhelming authority in support of the view taken by the Tribunal that the gifts in favour of the donees were completed on November 26, 1956, when they became equitable owners of the shares. In Maneckji v. Wadilal & Co., A.I.R. 1926 P.C. 38., it was held that, as soon as the seller hands over share certificates and blank transfers and the buyer accepts them and gives the seller the cheque, the sale is complete and the property passes to the buyer. From that time onwards the seller can only sue the buyer on the cheque or the price of the shares unpaid in respect that the cheque had not been honoured and he cannot sue any transferee from the buyer.

9. The above decision was followed by the Bombay High Court in E. D. Sassoon & Co. Ltd. v. K. A. Patch, [1943] 45 Bom. L.R. 46.. It was held that a share in a joint stock company is capable of equitable assignment and can be the subject of a trust. It was further held that a shareholder who sells his shares in a joint stock company and hands over the share certificates and transfer forms to the purchaser but the company refuses to transfer them, occupies the position of a constructive trustee of the shares for the purchaser. The legal title to the shares still remains in the vendor although the beneficial interest is transferred to the purchaser ; and the vendor must comply with all reasonable directions that the purchaser may give. The purchaser in such a case has the right to control the exercise by the vendor of the right to vote. As trustee of the shares, the vendor is also trustee of all property rights annexed to the shares. He is a trustee not only of the corpus but also of the income. He is a trustee of dividends that he may receive and he must pay them to the purchaser. As he is a trustee of the dividends, he is also a trustee of the right to vote, which is a right to property annexed to the shares.

10. The above decision was relied upon by their Lordships of the Supreme Court in R. Mathalone v. Bombay Life Assurance Co. Ltd., [1954] 24 Comp. Cas. 1; [1954] S.C.R. 117; A.I.R. 1953 S.C. 385. It was held as follows :

' On the transfer of shares, the transferee becomes the sole beneficial owner of those shares sold by the transferor, the legal title to which is vested in him. Thus, the relation of trustee and cestui que trust is thereby established between them. The transferor holds the shares for the benefit of the transferee to the extent necessary to satisfy the demands of Section 94, Trusts Act, 18,82. As the transferee holds the whole beneficial interest and transferor has none, the transferor must comply with all reasonable directions that the transferee may give. In this situation if he becomes a trustee of dividends he is also a trustee of the right to vote because the right to vote is a right to property annexed to the shares and as such the beneficiary has a right to control the exercise by the trustee of the right to vote.

The relationship arises by reason of the circumstance that till the name of the transferee is brought on the register of shareholders in order to bring about a fair dealing between the transferred and the transferee, equity clothes the transferor with the status of a constructive trustee and this obliges him to transfer all the benefits of property rights annexed to the sold shares of the cestui que trust.'

11. In Howrah Trading Co, v. Commissioner of Income-tax, [1959] 36 I.T.R. 215; 29 Comp. cAS. 282; [1959] Supp. 2 S.C.R. 448 (S.C.). it was held that it is the right of a transferee of a share to call upon the company to register his name and the entering of the name of the transferee in the register of members relates back to the time when the transfer was first made.

12. In R. Subba Naidu v. Commissioner of Gift-tax, [1969] 73 I.T.R. 794; 39 Comp. Cas. 766 (Mad.). it was held as follows :

' The transfer of the interest in the shares from the transferor to the transferee is independent of the requirement of its registration for purposes of the Companies Act as, without an anterior transfer, there can be no question of applying for registration of it. There should first be a transfer properly made of the shares which should then be presented along with the share certificates to the board of directors either by the transferor or transferee for change of registration in respect of them and until such a change is effected in the books of the company, the transferor will continue to be the holder of the shares.'

13. In that case the assessee made a gift of certain shares absolutely tohis daughter under two settlement deeds dated April 11, 1951, andMarch 31, 1959. Under the first deed he retained a life interest in theshares, but by the second deed he settled them absolutely on her. 'He had neither executed any deed of transfer nor made any request to the company to effect the transfer of the shares to her name. They continued to stand in his name right through and he was enjoying dividends therefrom and paying tax thereon.

14. On the death of the daughter oh July 24, 1960, the shares were not treated as part of her estate for estate duty purposes. The value of the shares was subjected to gift-tax for 1959-60 in the hands of the assessee rejecting his contention that there was no actual transfer of the shares to his daughter. The Tribunal agreed with this view holding that, as the assesses had done everything in his power to divest himself of title to the shares, there was a completed gift thereof to his daughter. On a reference, the High Court held that there was a completed gift of the shares to the daughter which operated with fall force between the assessee and his daughter notwithstanding that, vis-a-vis the company, he continued to be the holder of the shares in the absence of registration of the transfer.

15. It will be noticed that in the above case the gift was held to have been completed by execution of a registered deed of settlement as provided by Section 123 of the Transfer of Property Act. This deed was signed by the daughter in token of her acceptance of the gift. It was recited in the deed that possession over the shares had been delivered to 'the daughter. In fact, however, the physical custody of the shares continued to be with the assessee. Reference was made to Section 82 of the Companies Act, which lays down that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Reference was also made to Sections 108, 110 and 111 It was held that the transfer of the interest in the shares from the transferor to the transferee is independent of the requirement of its registration for purposes of the Companies Act.

16. The revenue did not get a copy of the articles of the company included in the paper book. Nor was a. copy of the articles produced before us. It cannot, thferefore, be said that the transfers made by the assessee on November 26, 1956, were not in accordance with Section 82 of the Companies Act. The regulations in Table 'A ' (regulations 19 to 24) as well as Sections 108, 110 and 111 deal with the question of getting the transfers registered in the books of the company. The beneficial interest in the shares can pass from the holder to another person without complying with these provisions. When the beneficial interest in shares is transferred by the donor to the donee the gift is complete for purposes of the Gift-tax Act. It will be appropriate to refer to the observations of the Madras High Court iu R. Subba Naidu v. Commissioner of Gift-tax, with which we agree.

17. Speaking of the regulations contained in Table ' A ' in Schedule I of the Companies Act the learned judges held :

' The effect of these provisions appears to be this. There should first be a transfer properly made of shares which should then be presented along with the share certificates to the board of directors either by the transferor or transferee for change of registration in respect of them and, until such a change is effected in the books of the company, the transferor will continue to be the holder of the shares. The transfer of the interest in the shares from the transferor to the transferee appears, therefore, to be independent of the requirement of its registration for purposes of the Companies Act. Without an anterior transfer there can be no question of applying for registration of it. It is necessary to keep in view these two aspects separately, as, otherwise, the process of arriving at a correct view as to the effect of a transfer of shares as between the transferor and the transferee is apt to be clouded. '

18. We are, accordingly, of the opinion that the Tribunal rightly held that the gifts in the present case were completed on November 26, 1956, and were not taxable under the Gift-tax Act, 1958, which came into force only on April 1, 1958.

19. The learned counsel for the revenue did not seriously contest that the gifts in favour of Ram Swarup and Ramesh and the gift of 300 shares in favour of Smt. Parmeshwari Devi were completed on November 26, 1956, and could not be taxed. He argued that 700 shares were jointly owned by the assessee and her son, Shyam Sunder, and the gift of those shares was only completed on April 10, 1958, when the transfer deed in respect of them was signed by Shyam Sunder. With regard to these 700 shares the Tribunal held that the assessee was their sole owner. This is a finding of fact which is binding on the revenue. The assessee being the sole owner of these shares she was entitled to gift them away without reference to her son. The gift of these 700 shares was also, therefore, complete as between the donor and the donee on November 26, 1956, when the donor executed an unregiStered gift deed in favour of the donee and delivered the share certificates to her. As we have already pointed out above, the articles of the company were not produced before us and it was not shown that any different manner of transfer was provided therein which was not complied with. In R. Subba Naidu's case, the gift was held to have been completed when the deed of settlement was executed even though no transfer deed was executed.

20. We are accordingly of the opinion that the decision of the Tribunal is correct. The gifts were completed within the meaning of the term in theGift-tax. Act on November 26, 1956, when the share certificates were delivered to the donees.

21. The reference is answered as above. The assessee will be entitled to recover her costs of this court from the revenue.


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