Commissioner of Gift Tax vs K. Marappa Gounder

Ratnam, J.—u/s 26(3) of the Gift-tax Act, 1958 (hereinafter referred to as ""the Act""), at the instance of the Revenue, the following question

of law has been referred for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the ''gifts'' arose at the time when the

assessee spent the amounts of the benefit of his son, and not at the time when he had actually written off the entire debit balance standing in the

account of his son and, consequently, the gifts should have to be severally assessed in the relevant years in which the amounts were spent by the

assessee on his son ?

The assessee, an individual, was originally assessed to gift-tax on November 30, 1972, in respect of certain lands settled on his grandson by

means of a settlement deed. While examining the accounts for the assessment year 1972-73, the Gift-tax Officer noticed that a sum of Rs.

55,633.10 was forgone by the assessee in favour of this son and in the view that that amounted to a gift which had escaped assessment in the

original assessment made earlier, action u/s 16(1) of the Act was initiated. The assessee raised the objections that there was no abandonment of

any debt due to the assessee and that there was on gift either. However, the Gift-tax Officer found that advances had been made by the assessee

to his son as loans and debited to the folio of his son land calculation interest also on the loans so advanced, the advances made as well as the

interest were both brought to tax under the Act. On appeal to the Appellate Assistant Commissioner, she took the view that a sum of Rs. 6,000

could be said be represent the obligatory expenses on the part of the assessee towards maintenance and education of his son and that the further

expenditure incurred by the assessee for preparing his son to occupy the position he did, could be deemed gifts as and from the dates when the

expenses were incurred and not from a future date when the amounts expended were ultimately written off. In that view, the Gift-tax Officer was

directed t modify his order accordingly. On further appeal by the Revenue and the preferring of a cross-objection by the assessee, the Tribunal

upheld the order of the Appellate Assistant Commissioner holding that the expenses incurred by the assessee in relation to his son were liable to be

treated as gifts in the years in which they had been incurred and that it is not possible to accept the contention that there was an outstanding loan

which came to be written off only on February 5, 1972, and so holding, the appeal by the Revenue and the cross-objection by the assessee were

both dismissed and that is how the question of law referred to at the outset has come up before this court for its opinion.

Learned counsel for the Revenue, referring to the entries in the books of accounts maintained by the assessee as found in the revised order of

assessment passed by the Gift-tax Officer and relying upon the definition of ""gift"" in section 2(xii) and section 4(1)(c) of the Act, submitted that

even according to the entries in the accounts maintained by the assessee, it was clearly established that the assessee had advanced loans to his son

for the purpose of meeting his expenditure and had also carried forward these amounts which were ultimately written off on February 5, 1972, and

that disclosed that prior to the writing off, no gift at all had been intended and, therefore, the gift should be regarded as having arisen on the date of

the writing off of the entire debit balance standing in the account of his son. On the other hand, learned counsel for the assessee contended that,

considering the relationship between the assessee and the person to whom the loans were advanced and also the fact that such amounts were

advanced by the assessee only for the purpose of securing a career for his son in the political field, incurring expenditure in connection therewith,

the amounts advanced should be treated as gifts, as and when the amounts were made available to the son of the assessee and not at the point of

time when they were written off.

There is no dispute that the assessee had advanced from time to time amounts to his son and we are not concerned with the purpose behind

those advances. What is significant is that the amounts advanced by the assessee to his son have all been shown in the accounts maintained by the

assessee only as loans. The loans so advanced had also been carried for ward. If, as and when the amounts were advanced, much advances had

been considered to be gifts, they would not have been treated in the manner as, reflected by the accounts. In other words, the assessee should

have debited the amounts advanced to his son directly to his capital account, in which case, such advances could have been treated as gifts as and

when they had been made. Instead, the assessee had treated the amounts advanced to his son as loans and advances and had also, on February 5,

1972, after giving credit for a sum of Rs. 19,000 realised by the sale of a motor car belonging to his son, written off the balance of the amounts

paid to his son. u/s 4(1)(c) of the Act, where there is a release or abandonment of any debt by any person, the value of the release or

abandonment, to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been made bona fide, shall be deemed

to be a gift made by the person responsible for the release or abandonment. It, therefore, follows from section 4(1)(c) of the Act that having regard

to the manner in which the advances had been treated by the assessee in his accounts, the release or abandonment resulting in a deemed gift within

the meaning of section 4(1)(c) of the Act took place only on the date on which the assessee wrote off the advances made to his son. To consider,

in the face of the entries in the books of account of the assessee referred to in extenso by the Gift-tax Officer in the course of his order, that the

gifts were made on the dates when the amount were advanced, would be to totally ignore the treatment of the amounts advanced by the assessee

to his son as loans, even as per the accounts, and the carry forward of the loans so advanced from year to year and also to ignore the gibing of

credit for the realisation of amounts by the sale of the motor car of the son of the assessee and the final writing off of the amounts. If really the gifts

had been made on the respective dates of the advances made by the assessee to his son land had taken effect, there was absolutely no need

whatever for the assessee to have brought forward in his accounts the amounts so advanced, given credit for the amounts realised by the sale of an

asset belonging to the son and eventually to write off the entire t amounts advanced to his son. The fact that the son of the assessee might have

come in to possession of funds to meet his expenses on the date of the respective advances would not, in our view, make any difference,

particularly having regard to the treatment of those advances in the accounts of the assessee. The very act of writing off of the amounts by the

assessee established that even according to him, at least till that date, he had entertained hopes of recovering the amounts as loans, as per the

accounts. The subsequent writing off to the amounts is of considerable significance in ascertaining when the gifts took place. The Tribunal

purported to rely upon the letter of the assessee to the effect that there was no intention on his part to get back any portion of his drawings account

in the name of his son and from this, it drew the inference that even at that time when the amounts were give by the assessee to his son and spent

by him, gifts had taken place. What would be relevant is the contemporaneous treatment of the amounts advanced in the books of account o the

assessee himself and not the contents of the letter with reference to the intention entertained then, almost two years after the event. It may be that

the son of the assessee also maintained that there was no gift at an time made by his father. Whether there was a gift within the meaning of the Act

or not cannot be made to depend upon the view of the transaction taken by the son of the assessee, but it must rest on the definitions in the Act.

Considering the manner in which the advances made by the assessee to his son have been treated in the accounts of the assessee and the writing

off of the amounts eventually, we are of the view that the gift took place only when the assessee realised or abandoned the debt within the meaning

of section 4(1)(c) of the Act and that was on February 5, 1972, and not at an earlier point of time. We, therefore, hold that the Tribunal was error

in the view it took that the advances made by the assessee to his son should be treated as gifts in the years in which they were made. We answer

the question referred to us in the negative and in favour of the Revenue. The Revenue will be entitled to tits costs. Counsel''s fee Rs. 500.