{"id":272338,"date":"2001-10-16T00:00:00","date_gmt":"2001-10-15T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/khoday-eswarsa-and-sons-vs-commissioner-of-gift-tax-on-16-october-2001"},"modified":"2018-05-14T06:03:50","modified_gmt":"2018-05-14T00:33:50","slug":"khoday-eswarsa-and-sons-vs-commissioner-of-gift-tax-on-16-october-2001","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/khoday-eswarsa-and-sons-vs-commissioner-of-gift-tax-on-16-october-2001","title":{"rendered":"Khoday Eswarsa And Sons vs Commissioner Of Gift Tax on 16 October, 2001"},"content":{"rendered":"<div class=\"docsource_main\">Supreme Court of India<\/div>\n<div class=\"doc_title\">Khoday Eswarsa And Sons vs Commissioner Of Gift Tax on 16 October, 2001<\/div>\n<div class=\"doc_bench\">Bench: S.P. Bharucha, Y.K. Sabharwal, Brijesh Kumar<\/div>\n<pre id=\"pre_1\">           CASE NO.:\nAppeal (civil)  2751-2752 of 1998\n\nPETITIONER:\nKHODAY ESWARSA AND SONS\n\nRESPONDENT:\nCOMMISSIONER OF GIFT TAX\n\nDATE OF JUDGMENT: 16\/10\/2001\n\nBENCH:\nS.P. BHARUCHA &amp; Y.K. SABHARWAL &amp; BRIJESH KUMAR\n\nJUDGMENT:\n<\/pre>\n<p id=\"p_1\">JUDGMENT<\/p>\n<p>2001 Supp(4) SCR 178<\/p>\n<p>The Judgment of the Court was delivered by<\/p>\n<p>Y.K. SABHARWAL, J. At the instance of the assessee, three questions that<br \/>\nwere referred to the High Court for its opinion under <a href=\"\/doc\/1225675\/\" id=\"a_1\">Section 26(1)<\/a> of the<br \/>\nGift Tax Act, 1958 are as under :\n<\/p>\n<p id=\"p_1\">1. &#8220;Whether on the facts and in the circumstances of the case, the Tribunal<br \/>\nwas right in holding that there was a deemed gift taxable under the <a href=\"\/doc\/641852\/\" id=\"a_1\">Gift<br \/>\nTax Act<\/a>, 1958 for assessment year 1970-71 in respect of arrangement in<br \/>\npursuance of agreement dated 21.11.1969 between the assessee and M\/s.<br \/>\nKhoday Industries Pvt. Ltd.?\n<\/p>\n<p id=\"p_2\">2.      Whether on the facts and in the circumstances of the case, the<br \/>\nTribunal was right in holding that a partnership firm is an assessable<br \/>\nentity under the provisions of <a href=\"\/doc\/641852\/\" id=\"a_2\">Gift-Tax Act<\/a>, 1958?\n<\/p>\n<p id=\"p_3\">3.     Whether on the facts and in the circumstances of the case, the<br \/>\nTribunal was right in holding that the gift, if any, in the arrange-ment<br \/>\nwas not exempt under the provisions of Sec. 5(l)(xiv) of the Act?&#8221;\n<\/p>\n<p id=\"p_4\">The High Court having answered the questions against the assessee, these<br \/>\nappeals have been preferred by the assessee. The appellant has not pressed<br \/>\nquestion Nos. 2 and 3. The only question that is required to be examined is<br \/>\nthe first question.\n<\/p>\n<p id=\"p_5\">The appellant, a partnership firm, was carrying on various businesses. The<br \/>\npartnership firm consisted of seven partners. On 20th November, 1969, four<br \/>\npartners retired from the firm which was reconstituted by the remaining<br \/>\npartners by taking into reconstituted firm, the children of the outgoing<br \/>\npartners. On 21st November, 1969, the newly constituted firm entered into<br \/>\nan agree-ment with a private limited company floated by the four outgoing<br \/>\npartners. Under the said agreement, the firm granted licence and permission<br \/>\nto the private limited company as a licensee to carry on and conduct the<br \/>\nbusiness of manufacturing Indian-made liquors, carbon-papers, typewriting-<br \/>\nribbons etc. and for running the business handed over the premises,<br \/>\nbuildings, plants, machineries and all other equipments which were being<br \/>\nused by the firm for the said businesses. The period of licence provided in<br \/>\nthe agreement was five years subject, however, to the termination by either<br \/>\nparty, giving to the other six months notice in writing. As a consideration<br \/>\nfor the agreement, the licensee agreed to pay a minimum fee or compensation<br \/>\nof Rs. 50,000 per month and maximum of Rs. 60,000 per month.\n<\/p>\n<p id=\"p_6\">The Gift-Tax Officer treated the transfer of business by the firm to the<br \/>\nprivate limited company as a gift under the <a href=\"\/doc\/641852\/\" id=\"a_3\">Gift Tax Act<\/a> made for<br \/>\ninadequate consideration and levied the gift tax on the value of the deemed<br \/>\ngift which was computed at Rs. 1,10,25000. On the appeal preferred by the<br \/>\nassessee, the Appellate Authority held that the deemed gift made by the<br \/>\nassessee under the agreement dated 21st November, 1969 was exempt under<br \/>\nSection5(l)(xiv) of the Act on the ground that the gift made was for the<br \/>\npurpose of business of the donor.\n<\/p>\n<p id=\"p_7\">On the appeal of the Revenue, the Income Tax Appellate Tribunal, reversing<br \/>\nthe order of the Commissioner of Income Tax (Appeals), held that the<br \/>\nagreement amounted to transfer of property; the consideration was not<br \/>\nadequate with the result that there was a deemed gift within the meaning of<br \/>\n<a href=\"\/doc\/1786477\/\" id=\"a_4\">Section 4<\/a>(1 )(a) of the <a href=\"\/doc\/641852\/\" id=\"a_5\">Gift Tax Act<\/a> and that the transaction was not bona<br \/>\nfide. Therefore, the Tribunal held that <a href=\"\/doc\/1299153\/\" id=\"a_6\">Section 5(l)(xiv)<\/a> which, inter<br \/>\nalia, provides that the gift tax shall not be charged in respect of gifts<br \/>\nmade by any person in the course of carrying on a business to the extent to<br \/>\nwhich the gift is proved to the satisfaction of the Gift-Tax Officer to<br \/>\nhave been made bona fide for the purpose of such business, is not<br \/>\napplicable.\n<\/p>\n<p id=\"p_8\">The aforestated questions were answered by the High Court against the<br \/>\nappellant.\n<\/p>\n<p id=\"p_9\">Learned counsel for the appellant contends that the transaction under the<br \/>\nagreement dated 21st November, 1969 was a commercial transaction whereby<br \/>\nlicence was granted by the appellant to the private limited company for<br \/>\nrunning of the business by the said company for a period of five years and<br \/>\nboth the Tribunal and the High Court fell into an error in coming to the<br \/>\nconclusion that the transfer of business under the agreement was a &#8216;gift&#8217;.<br \/>\nThe Tribunal, on appreciation of the facts, has recorded a finding of fact<br \/>\nthat the consideration was less than half the value of the property. On<br \/>\nthis finding, the Tribunal concluded that to the transaction the provisions<br \/>\nof <a href=\"\/doc\/1786477\/\" id=\"a_7\">Section 4<\/a>(1 )(a) are clearly attracted. <a href=\"\/doc\/1786477\/\" id=\"a_8\">Section 4<\/a>(1 )(a), inter alia,<br \/>\nstipulates that where property is transferred otherwise than for adequate<br \/>\nconsideration, the amount by which the market value of the property at the<br \/>\ndate of the transfer exceeds the value of the consideration shall be deemed<br \/>\nto be a gift made by the transferor. The Tribunal has held that the<br \/>\nproperty has been transferred for inadequate con-sideration inasmuch as the<br \/>\nconsideration stipulated in the agreement was less than half the value of<br \/>\nthe property. The appellant did not bring on record any special<br \/>\ncircumstances which may justify such a reduced consideration. The<br \/>\nconclusion drawn by the Tribunal and affirmed by the High Court that the<br \/>\ntransaction was not bona fide and the property was transferred otherwise<br \/>\nthan by adequate consideration is very possible conclusion on the facts<br \/>\nfound. In this view we are unable to accept the contention that it was a<br \/>\ncommercial transaction and not a gift.\n<\/p>\n<p id=\"p_10\">Learned counsel next contends that assuming that it was a gift, then too no<br \/>\ngift tax is payable as the case squarely falls within the .ambit of <a href=\"\/doc\/1509852\/\" id=\"a_9\">Section<br \/>\n6(2)<\/a> of the Gift Tax Act read with Rule 11 of the Gift Tax Rules. The<br \/>\ncontention is that it is a gift which is not revocable for a specified<br \/>\nperiod and the capitalized value can be worked out only under Rule 11.<br \/>\nUnder that rule, the contention further is, the minimum period for<br \/>\ncomputing the value of the gift is one year and here the gift being<br \/>\nrevocable with six months notice, the valuation has to be nil.\n<\/p>\n<p id=\"p_11\">The termination has been provided for in clause (3) of the agreement. The<br \/>\nsaid clause reads as under :\n<\/p>\n<p id=\"p_12\">&#8220;The period of the licence and permission shall be five years commencing<br \/>\nfrom the 21st day of November, 1969. However, this agreement may be<br \/>\nterminated by either party giving to the other party at least six calender<br \/>\nmonths notice in writing.&#8221;\n<\/p>\n<p id=\"p_13\">The licence deemed to be a gift, is not revocable for a specified period,<br \/>\nnamely, six months.\n<\/p>\n<p id=\"p_14\"><a href=\"\/doc\/1530077\/\" id=\"a_10\">Section 6<\/a> provides for determination of valuation of gifts. It is nobody&#8217;s<br \/>\ncase that sub-section (1) or (3) of <a href=\"\/doc\/1530077\/\" id=\"a_11\">Section 6<\/a> has any applicability to the<br \/>\npresent case. Sub-section (2) of <a href=\"\/doc\/1530077\/\" id=\"a_12\">Section 6<\/a> which is relevant here for<br \/>\ndetermination of the value of the gift reads as under :\n<\/p>\n<p id=\"p_15\">&#8220;6(2) Where a person makes a gift which is not revocable for a specified<br \/>\nperiod the value of the property gifted shall be the capital-ized value of<br \/>\nthe income from the property gifted during the period for which the gift is<br \/>\nnot revocable.&#8221;\n<\/p>\n<p id=\"p_16\">Rule 11(1) may also be extracted. It reads as under :\n<\/p>\n<p id=\"p_17\">&#8220;11(1) In the case of property referred in sub-section (2) of <a href=\"\/doc\/1530077\/\" id=\"a_13\">Section 6<\/a> of<br \/>\nthe Act, the capitalized value of the income shall be taken to the product<br \/>\nof the number of complete years included in the period for which the gift<br \/>\nis not revocable and the average of the income received from the property<br \/>\nduring the three years or such lesser period of complete years in which<br \/>\nsuch property was in existence, preceding the previous year for the year of<br \/>\nassessment after discounting it at a rate of 4 per cent per annum :\n<\/p>\n<p id=\"p_18\">Provided that where the property was in existence for less than one<br \/>\ncomplete year preceding the previous year for the year of assessment or<br \/>\ncame into existence in the previous year for the year of assessment, the<br \/>\nincome from such property for one complete year shall be the income which<br \/>\nwould have been receivable, if the property were in existence for one<br \/>\ncomplete year.&#8221;\n<\/p>\n<p id=\"p_19\">The Tribunal held that since <a href=\"\/doc\/1509852\/\" id=\"a_14\">Section 6(2)<\/a> refers to revocable gifts for a<br \/>\nspecified period and in the present case, the licence was for a period of<br \/>\nfive years and, therefore, it has to be taken as a full period according to<br \/>\nRule 11. The Tribunal was of the opinion that &#8220;The fact that it is<br \/>\nterminable at six months&#8217; notice is also not relevant&#8221;. Further, the<br \/>\nTribunal took into consideration the fact that the agreement was not<br \/>\ncancelled within the period of five years. The High Court affirmed the view<br \/>\nof the Tribunal by holding that &#8220;Though the clause provided for revocation<br \/>\nwith six months&#8217; notice on either side, it was not acted upon. Therefore<br \/>\nthe Tribunal was right in upholding the levy of gift tax on the capitalized<br \/>\nvalue of the gift, taking the gift as for five years&#8221;.\n<\/p>\n<p id=\"p_20\">The Tribunal as well as the High Court clearly fell into an error in<br \/>\nupholding the levy of gift tax on the capitalized value of the gift taking<br \/>\nthe gift as for five years and treating as irrelevant the clause providing<br \/>\nfor termination at six months notice and also taking into consideration the<br \/>\nfact that the argeement was not cancelled within the period of five years.<br \/>\nIn our view, that is of no consequence. The language of Rule 11(1) is<br \/>\nclear. It does not admit of any no two interpretations. The relevant factor<br \/>\nis the revocability of the gift and not whether, in fact, it was revoked or<br \/>\nnot within the period of five years. Under Rule 11(1) what is of relevance<br \/>\nis &#8220;the number of complete years&#8230;for which the gift is not<br \/>\nrevocable&#8230;.&#8221;. In the present case, the gift was revocable\/terminable with<br \/>\nsix months&#8217; notice. Thus, it was not revocable for a specified period which<br \/>\nwas less than a year, namely, six months. The capitalized value has to be<br \/>\nfixed under Rule 11(1) under which if it was revocable for a period less<br \/>\nthan one year, the value could not be worked out and, thus, it had to be<br \/>\n&#8216;nil&#8217;.\n<\/p>\n<p id=\"p_21\">The Tribunal as well as the High Court were in error in rejecting the<br \/>\nassessee&#8217;s contention that in terms of Rule 11(1), no gift tax was payable.<br \/>\nAdmittedly, there is no other provision under which the capitalized value<br \/>\ncould be fixed.\n<\/p>\n<p id=\"p_22\">In the aforesaid premises, we allow the appeals and set aside the judgment<br \/>\nand order of the High Court, in regard to the first question aforestated.<br \/>\nAccordingly we answer that question in the negative and in favour of the<br \/>\nassessee. Parties are left to bear their own costs.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Supreme Court of India Khoday Eswarsa And Sons vs Commissioner Of Gift Tax on 16 October, 2001 Bench: S.P. Bharucha, Y.K. Sabharwal, Brijesh Kumar CASE NO.: Appeal (civil) 2751-2752 of 1998 PETITIONER: KHODAY ESWARSA AND SONS RESPONDENT: COMMISSIONER OF GIFT TAX DATE OF JUDGMENT: 16\/10\/2001 BENCH: S.P. BHARUCHA &amp; Y.K. SABHARWAL &amp; BRIJESH KUMAR JUDGMENT: [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-272338","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Khoday Eswarsa And Sons vs Commissioner Of Gift Tax on 16 October, 2001 - Free Judgements of Supreme Court &amp; High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/khoday-eswarsa-and-sons-vs-commissioner-of-gift-tax-on-16-october-2001\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Khoday Eswarsa And Sons vs Commissioner Of Gift Tax on 16 October, 2001 - Free Judgements of Supreme Court &amp; 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