Commissioner of Gift Tax vs Lady Hirabai C. Jehangir

M.H. Kania, J.—This is a reference u/s 26(1) of the Gift-tax Act, 1958 (hereinafter referred to as "the Act"). The questions referred to us for determination in this reference are as follows:

1.Whether, on the facts and in the circumstances of the case, the gift during the previous year, relevant to the year under reference, was only for a cosmopolitan charity?

Whether, on the facts and in the circum stances of the case, no gift in favour of the grand-children existed during the year under reference?

Whether, on the facts and in the circum stances of the case, exemption provision u/s 5(1)(v) of the Act was not attracted?

Whether the gift in question did not qualify for exemption u/s 5(1)(v) being an initial gift?

The facts giving rise to this reference are as follows:

On 29-3-1961, the assessee. Lady Hirabai Cowasji Jehangir, settled 3,800 ordinary shares of the Bank of India Ltd., worth Rs. 4,75,000, on a trust for the purposes set out in a deed of trust, which was duly executed. The settlor under the said deed was the said Lady Hirabai and the trustees were herself and one Aloo Kaikhushru Cama. Clause 3 of the said deed of trust, inter alia, provided that the net income of the trust fund was to be used till the period ending 10-3-1973 or the date of the death of the survivor of the settlor''s grandchildren, Jahangir and Ardeshir, whichever date was earlier, for the cosmopolitan charitable purposes set out in the said clause. It may be mentioned that there is no dispute that these purposes are such purposes to which the provisions of section 15B of the Indian income tax Act, 1922, were applicable and to which now the provisions of section 80G of the income tax Act, 1961, are applicable. Without referring in detail to the clauses of the said deed of trust, we may point out that from 10-3-1973 up to 10-3-1978, the net income of the said trust was to be utilised for the maintenance, support and benefit of both the said grandchildren of the settlor and the trust fund, including the accumulations of the net income, was to be handed over to the said grandchildren in equal shares absolutely on 10-3-1978. Sub-clause (b) of clause 4 of the said trust deed specifically provides that in case both the said grandchildren, Jehangir and Ardeshir, are living on 10-3-1978, and then in such case the trustees shall on that date pay, transfer and hand over the trust fund to them as tenants-in-common in equal shares absolutely. There are provisions in the trust deed as to what should happen, if either of the said grandchildren or both of them die either before 10-3-1973 or 10-3-1978. It is not necessary for us to consider those provisions here. The assessee showed in her return for the relevant assessment year, being the assessment year 1961-62, a taxable gift of Rs. 1,55,352. She claimed exemption in respect of the gift constituted by the creation of the aforesaid trust on the ground that the said gift was exempt under the provisions of section 5(1)(v) of the Act. In the alternative, she claimed exemption from gift-tax in respect of the capitalised value of the income of the said trust up to 10-3-1973 u/s 5(1)(v). The GTO rejected both the pleas of the assessee. He held that in no case the corpus of the trust goes to charity and the disbursement to charity is only out of the income of the corpus. He further held that the corpus would remain intact on the vesting date. The assessee then preferred an appeal to the AAC. The AAC held that the very gift was made by means of a settlement and the gifted property consisted of the settled property as a whole and the beneficiaries under the settlement had to be regarded as "in one whole". He held that the trustees were the donees by force of clause (viii) of section 2 of the Act and the legal right to the entire property vested in the trustees and the entire settled property formed one unit for the purposes of gift-tax assessment notwithstanding the fact that various interests were carved out from the settled property. On the basis of these conclusions, he upheld the order of the GTO in this regard. He, however, held that the capitalised value of the gift to charity for the period of 12 years should be excluded from the total value of the settled property and only the balance amount should be subjected to gift-tax. An appeal was preferred by the department before the Appellate Tribunal, and the assessee filed her cross-objections therein. The Tribunal held that in view of certain decisions of this Court, which have been referred to in the order of the Tribunal, only the facts present during the previous year should be taken into account in making the assessment and there should be no speculation on the future probabilities. The Tribunal rejected the contention of the department that the gift, in order to attract section 5(1)(v), must be of the full interest in the property with complete power of disposition. It also rejected the contention of the department that an initial gift to charity was not covered by section 5(1)(v). On the basis of these conclusions, the Tribunal held that the entire gift, constituted by the creation of the said trust was entitled to exemption u/s 5(1)(v). Arising from the said decision of the Tribunal, aforesaid questions have been referred to us for our determination.

Before dealing with the controversy arising before us, it may not be out place to set out some of the relevant provisions of the Act. The definition section under the Act is section 2. Clause (viii) of section 2 defines the term "donee" as meaning any person who acquires any property under a gift and, where a gift is made to a trustee for the benefit of another person, as including both the trustee and the beneficiary. Clause (ix) defines "donor" as meaning a person who makes a gift. Clause (xii) defines "gift" which at the material time ran thus:

''''(xii) ''gift'' means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or moneys worth, and includes the transfer of any property deemed to be a gift u/s 4.

Clause (xxii) gives an extensive definition of the term "property" and states that it includes any interest in property, movable or immovable. The charging section under the Act is section 3, which levies the charge of gift-tax in respect of gifts, if any, made by a person during the previous year (other than gifts made before 1-4-1957) at the rate or rates specified in the Schedule. Section 5(1), at the relevant time, provided that gift-tax shall not be charged under the Act in respect of gifts as were covered by clauses (i) to (xvi) thereof.

Clause (v) of sub-section (1) of the said section, inter alia, provided that gift-tax would not be charged under the Act in respect of the gifts made by a person to any institution or fund established for a charitable purpose to which the provisions of section 15B of the Indian income tax Act, 1922 (corresponding to the provisions of section 80G of the income tax Act, 1961) applied. Section 6 of the Act deals with the valuation of gifts, with which section we are not concerned in this reference.

We propose to deal first with Question No. 4 set out earlier. In respect of this question, the submission of Mr. Joshi is that under the said deed of trust the undisputed position is that there was a gift made by the settlor, namely, the assessee, to the donees, being the trustees. He urged that the said gift deed did not qualify for exemption under clause (v) of sub-section (1) of section 5, being an initial gift, even assuming that it was for such charitable purposes as were included in section 15B of the 1922 Act. It is common ground that this contention of Mr. Joshi has been negatived by a Division Bench of this Court in Commissioner of Gift Tax, Bombay City I Vs. Yogendra N. Mafatlal and Another, , where it was held that u/s 5(1)(v) the initial gift made for the purpose of starling or constituting a fund for charitable purposes of the kind specified in the clause would be entitled to exemption in the same manner in which subsequent gifts to the fund would be entitled. In view of the aforesaid decision, as far as this Court is concerned, this question will have to be answered in the negative, that is, in favour of the assessee.

As far as the other three questions are concerned, they can be conveniently dealt with together. In this regard the submission of Mr. Joshi. the learned counsel for the department, is that the gift constituted by the creation of the said trust cannot be said to be a gift for a charitable purpose, because it is not of the entire corpus of the trust fund. It is only a gift whereby for certain years income of the said trust fund is to be utilized solely for charitable purposes. It was urged by him, in the alternative, that charity could not be said to be the sole donee under the said trust, as the aforesaid grandchildren of the settlor were also entitled to certain benefits under the said trust and, hence, even assuming that there was a gift to charity, constituted by the creation of the said trust, it would be exempt only to the extent of the capitalised value of the gift to charity. We are afraid that these contentions of Mr. Joshi cannot be accepted in view of the decision of a Division Bench of this Court in Commissioner of Gift Tax, Bombay City I Vs. G.G. Morarji, . In that case the assessee settled a sum of Rs. 1 lakh on trust for the benefit of his wife and sons. Under the deed of settlement, the wife was entitled to the income from the trust funds during her life time, but was not entitled to dispose of any part of the corpus of the said fund. It was not in dispute that by the said trust there was a gift as defined under the Act. The question was as to whether the assessee was entitled to exemption u/s 5(1)(iii) read with the opening part of section 5(1), which then provided that the gift made by an assessee to his or her spouse, subject to a maximum of Rs. 1 lakh in value in the aggregate in one or more previous years was exempt from the levy of the gift-tax. The question, which arose, was as to whether the assessee was entitled to the benefit of the said exemption. It was, inter alia, contended by Mr. Joshi, who appeared for the revenue in that case too, that there was no gift under the said trust in favour of the wife as what the wife got under it was the right against the trustee and not any interest in the trust fund. After considering the scheme of the Act, the said submission of Mr. Joshi was rejected and it was held that if that submission were accepted, it would virtually amount to denial of the benefit which the Legislature by enacting section 5 conferred on a donor. It would mean that the gifts, which fall within section 5, would fall out of section 5 if made through the instrumentality of a trust. It was held that by creating the aforesaid deed of settlement, the assessee had transferred interest in the said trust fund to his wife. It was alternatively contended by Mr. Joshi in that case that since the spouse, namely, the wife, was not the only donee of the gift, the gift could not be said to fall under clause (viii). It was contended by him that as under the deed of trust the wife was entitled only to the income of the trust fund during her life time and further that as the property was to go to the donor''s children after the death of the wife, she could not be said to be the only donee. In this regard the Division Bench held that having regard to the terms of the settlement deed, there was no joint donee along with the spouse in the year of assessment. The interest which the children and others had in the trust property was a contingent beneficial interest which would come into existence on the happening of the relevant event, namely, the death of the wife. In the light of this reasoning, the Division Bench held that in the assessment year the assessee was entitled to exemption u/s 5(1)(viii) to the extent of the value of the gift involved in the settlement. If the principles laid down by this decision, which is binding on us, have to be applied to the facts of the present case, the conclusion, which would follow, is that in the present case in the assessment year 1962-63 charity was entitled to the benefit of the entire income of the said trust fund, and, hence, the gift must be regarded as solely to the charity. During that year neither the grandchildren nor any of the other beneficiaries, referred to in the said trust deed, had any beneficial interest in the said fund. It is common ground that the charitable purposes for which the income of the trust was to be utilised were such as were covered by section 15B of the 1922 Act. Hence, the only conclusion would be that the gift made by the said trust is entitled to exemption under clause (v) of sub-section (1) of section 5. It was pointed out by Mr. Joshi that in Vadulla Venkata Rao Vs. Commissioner of Gift Tax, , it has been observed by a Division Bench of the Andhra Pradesh High Court that the observations of the Division Bench of this Court in G.G. Morarji''s case (supra) to the effect that the children and the others had only a contingent beneficial interest in the trust in that case and that the said beneficial interest would come into existence only on the happening of an event, namely, the death of Indumati, were merely obiter and the Division Bench of the Andhra Pradesh expressed dissent from that view. We are, however, not concerned with that question here because on the terms of the trust deed before us it is clear that neither the said Jehangir nor the said Ardeshir, the grandchildren of the assessee, can be said to have any vested interest in the corpus of the trust during the relevant assessment year and the terms of the deed of trust make it quite clear that the interest of these grandchildren would be vested only on their surviving, in any event, up to 10-3-1973. That this is so is not disputed by the department before us and in view of this, it must be held that during the relevant assessment year there was no vested interest created in any beneficiary other than charity by the said deed of trust. In the result, the questions referred to us are answered as follows:

Question 1 in the affirmative.

Question 2 in the affirmative.

Question 3 in the negative.

Question 4 in the negative.

It is clarified that all the questions are answered in favour of the assessee

The Commissioner must pay to the assessee the costs of the reference.