Gift by HUF to strangers to the family is void except for pious purpose

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Gift by HUF to strangers to the family is void except for pious purpose

Gift by HUF to strangers to the family is void except for pious purposes: Bombay HC

Whether HUF can make gift to any one of its members is one of the common questions by lot many taxpayers. In such cases, income will be an income of an HUF or it will be an individual income is another question.

Bombay High Court in the case of Gangadhar N. Agrawal (HUF) vs. CIT (1986) 51 CTR (Bom) 286 : (1986) 162 ITR 320 (Bom) & Gangadhar Narsingdas Agarwal (HUF Vs. Commissioner Of Income Tax(1996) 217 ITR 0665  has held as under:

  1. In the case of a managing member, he has a representative character. A managing member represents the family in the family’s relations towards the rest of the world. In the case of a gift, however, the position under Hindu law is different…. If an individual member, i.e., a coparcener, cannot make a valid gift in respect of his undivided interest in the coparcenary property, we fail to see how a managing member would be able to make a valid gift in respect of the family property.
  2. Gift of immovable property by Karta to the wife of karta is void & so income from the gifted property would be assessable as HUF’s income
  3. Gift of movable property by Karta to his relatives who are strangers to the family can be made only for pious purposes & if gift is not for pious purposes then it is void. Income from such gifted property would be assessable as HUF income
  4. As far as the Karta is concerned, his acts of management are merely in a representative capacity and, therefore, it cannot be open to him to gift away even movable property of the joint family to his relatives who are strangers to the family, except for pious purposes.
  5. Gifts by the Karta of an HUF of immovable property belonging to the family, other than gifts for pious purposes are void per se and not merely voidable.
  6. In the present case, if the gifts were void on account of having been made to strangers, it was the assessee-HUF which retained the title to the properties gifted away and the income from these properties gifted must be regarded in law as accruing or deemed to be accruing to the assessee.

In short, one can hold that Gift of HUF property by Karta to relatives who are strangers to HUF is void. The Bombay HC in the present case has dissented from the Honble Rajasthan HC in the case of (1969) 37 CCH 0260, (1970) 76 ITR 0043

The complete order of 1986 & 1996 order in the case of Gangadhar Narsingdas Agrawal (HUF) along with the order of the Rajasthan HC in the case of Commissioner Of Wealth Tax & Ors. Vs. Motilal Ramswaroop (1969) 37 CCH 0260, (1970) 76 ITR 0043 is produced hereunder for the benefit of the readers:

1ST CASE:

GANGADHAR NARASINGDAS AGARWAL vs. COMMISSIONER OF GIFT TAX

HIGH COURT OF BOMBAY

Kania & Bharucha, JJ.

IT Ref. Nos. 236, 236A & 236B of 1975

(1985) 53 CCH 0652 MumHC

(1986) 51 CTR 0286 : (1986) 162 ITR 0320 : (1986) 24 TAXMAN 0147

Legislation Referred to

Section 4(1)

Case pertains to

Asst. Year 1964-65, 1965-66, 1966-67

Decision in favour of:

Revenue

Counsel appeared:

R.J.Joshi with N.A.Dalvi & C.N.Mistry, for the Assessee: G.S.Jetly with J.P.Devadhar & Miss S.G.Shah, for the Revenue

KANIA, J. :

These are three references made by the Tribunal under s. 256(1) of the IT Act, 1961, on reference applications made by the assessee. The assessment years with which we are concerned are the asst. yrs. 1964-65, 1965-66 and 1966-67. As the Tribunal has submitted a common statement of the case in respect of these references and as the controversies in the references are common, we are disposing of the references by this single judgment.

  1. The assessee is an HUF (for brevity’s sake, referred to hereinafter as ” HUF “) of Gangadhar Narsingdas Agrawal. The said Gangadhar was the Karta of the HUF. It appears that Gangadhar received Rs. 60,000 in cash from his father in March, 1950, when he was a student aged 18 years. Within a decade, he acquired wealth amounting to Rs. 1,50,00,000 in Goa which was then a Portuguese territory. The said wealth belonged to the assessee, namely, the HUF. Gangadhar as the Karta of the family made several gifts. The gifts with which we are concerned are a gift of immovable property of the value of Rs. 4,00,000 to his wife and gifts of money amounting to Rs. 4,80,000, Rs. 1,00,000 and Rs. 45,000 in the previous years relevant to the asst. yrs. 1964-65, 1965-66 and 1966-67, respectively, to his relations. The gift of immovable properties of Rs. 4,00,000 was made by Gangadhar to his wife in 1963. From the order of the ITO, it appears that gifts aggregating to Rs. 4,80,000 were made by Gangadhar in the previous year relevant to the asst. yr. 1964-65 and they were gifts to his sister-in-law, nephews, niece, cousin and a sister. Gifts amounting to Rs. 1,00,000 in cash were made by Gangadhar to two of his nephews in the previous year relevant to the asst. yr. 1965-66 and gifts amounting to Rs. 45,000 in cash were made in the previous year relevant to the asst. yr. 1966-67 by Gangadhar to his sister-in-law and to his sister, respectively. The ITO held that these gifts were not valid in law and he taxed the income earned on the property and the amounts gifted in the hands of the assessee. On appeals preferred by the assessee to the AAC, the AAC took the view that the gifts were valid and he deleted the addition to the income made by the ITO. On second appeal preferred by the Revenue, the Tribunal took the view that the said gifts were void and upheld the view of the ITO that the income earned from the property and sums gifted was liable to be added to the assessee’s income.
  2. From the aforesaid decision of the Tribunal, the following four questions have been referred to us for determination :

” (1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the gifts of immovable properties of the value of Rs. 4,00,000 to the wife of the Karta of the assessee-HUF were void and ineffective in law?

(2) Whether, in any event, the said gifts were valid in law after November, 1966, when a partial partition was effected ?

(3) Whether, on the facts and in the circumstances of the case, the gifts amounting to Rs. 4,80,000, Rs. 1,00,000 and Rs. 45,000 for the assessment years 1964-65, 1965-66 and 1966-67, respectively, made by the Karta of the assessee-HUF to the relations of the Karta are void and ineffective in law ?

(4) Whether, in any event, the gifts having been completed and possession of the amount and property gifted having been given to the donees of the gifts who have received the amount and used the same for themselves and paid tax thereon, the Tribunal erred in law in treating the income on the amounts gifted as the income of the assessee-HUF on the ground that the gifts when made were bad in law?”

  1. As far as question No. 2 is concerned, Mr. Joshi, learned counsel for the assessee, submitted that he did not desire that the said question should be answered by us and accordingly we decline to answer the same.
  2. We propose to consider first the question as to the legal validity of the gift of immovable properties amounting to Rs. 4,00,000 made by Gangadhar as the Karta of the assessee HUF to his wife. In, respect of this gift, the submission of Mr. Joshi is that this gift made by Gangadhar to his wife is voidable but not void and it is only one of the members of the assessee-HUF who could apply for setting aside that gift. As no such application was made, it was not open to the IT authorities to treat the said gift as void or invalid and to include the income earned from the same in the income of the assessee on that footing. It was, on the other hand, contended by Mr. Jetly, learned counsel for the Revenue, that Gangadhar as the Karta had no power in law to make the said gift of immovable properties to his wife. The gift made was altogether beyond the power of the Karta and hence was void and not merely voidable.
  3. The controversy raised in this question has, to some extent, been considered in certain judicial decisions which it would be useful to notice. InAmmathayee alias Perumalakkal vs. Kumaresan alias Balakrishnan, AIR 1967 SC 569, one of the controversies related to a gift made by a deceased in favour of his second wife of certain immovable property belonging to his joint family. In connection with this question, the Supreme Court observed as follows (p. 572) :

” Hindu law on the question of gifts of ancestral property is well settled. So far as movable ancestral property is concerned, a gift out of affection may be made to a wife, to a daughter and even to a son, provided the gift is within reasonable limits…. But so far as immovable ancestral property is concerned, the power of gift is much more circumscribed than in the case of movable ancestral property. A Hindu father or any other managing member has power to make a gift of ancestral immovable property within reasonable limits for ‘pious purposes’ (see Mulla’s Hindu Law, 13th Edn., para. 236, p. 252). Now what is generally understood by ‘ pious purposes ‘ is gift for charitable and/or religious purposes. But this Court has extended the meaning of ‘pious purposes’ to cases where a Hindu father makes a gift within reasonable limits of immovable ancestral property to his daughter in fulfilment of an antenuptial promise made on the occasion of the settlement of the terms of her marriage, and the same can also be done by the mother in case the father is dead.”

  1. The Supreme Court went on to observe :

” But we have not been referred to a single case where a gift by a husband to his wife of immovable ancestral property, if made, has been upheld. We see no reason to extend the scope of the words ‘pious purposes’ beyond what has already been done in the two decisions of this Court to which reference has been made. The contention of the donee- appellant that the gift in her favour by her husband of ancestral immovable property made out of affection should be upheld must, therefore, fail, for no such gift is permitted under Hindu law in so far as immovable ancestral property is concerned. “

  1. InGuramma Bhratar Chanbasappa Deshmukh vs. Mallappa Chanbasappa, AIR 1964 SC 510, one of the controversies related to a gift made by one Chanbasappa as the Karta of his HUF to one Channappa. In the deed of gift, it was stated that the gift was made in token of love for the services rendered by the donee to the donor during his lifetime and that the donee was a relation of the donor. It was also stated that the gift was made out of love and affection. The gift was of immovable property valued at Rs. 1,500. A perusal of the judgment shows that Channappa was an outsider as far as the joint family was concerned, being neither a coparcener nor a member of the HUF of which Chanbasappa was the Karta. After referring to some authoritative commentaries on Hindu law, the Supreme Court observed as follows (p. 516):

” The decisions of Hindu law sanctioned gifts to strangers by a manager of a joint Hindu family of a small extent of property for pious purposes. But no authority went so far, and none has been placed before us, to sustain such a gift to a stranger, however much the donor was beholden to him on the ground that it was made out of charity. It must be remembered that the manager has no absolute power of disposal over joint Hindu family property. The Hindu law permits him to do so only within strict limits. We cannot extend the scope of the power on the basis of the wide interpretation given to the words ‘pious purposes’ in Hindu law in a different context. In the circumstances, we hold that a gift to a stranger of a joint family property by the manager of the family is void. “

  1. Both the aforesaid decisions of the Supreme Court have been considered by a Full Bench of the Punjab and Haryana High Court inCGT vs. Tej Nath (1972) 86 ITR 96. The gifts in question were of a large area of land belonging to the HUF of Tej Nath, the very assessee Who was the very party concerned in the aforesaid case. The gifts were of the said land in equal shares to the assessee’s wife, his mother, his stepmother and some other persons. The assessee, Tej Nath, himself took up the contention that the said gifts were void ab initio. It was, on the other hand, contended by the Revenue that the gifts in question were voidable, but not void. This is the very question before us, although in this case it is the Revenue which contends that the said gift to the wife is void and the assessee who contends that the gift is merely voidable. After referring to the aforesaid decisions of the Supreme Court and certain other decisions and certain commentaries on Hindu law, the Full Bench took the view that the position in Hindu law is that whereas the father as the Karta has the power to gift ancestral movables within reasonable limits, he has no such power with regard to ancestral or coparcenary immovable property. He can, however, make a gift within reasonable limits of ancestral immovable property for pious purposes. The Full Bench took the view that the text of Hindu law clearly shows that the father cannot make a gift of immovable property belonging to the coparcenary to his minor sons. The Full Bench took the view that the gifts in question were void. The Full Bench has pointed out in this decision that the line has to be sharply drawn between alienations by way of sale or exchange and gratuitous gifts. In the case of alienations other than gifts by a Karta of the HUF, the alienation in the very nature of this would be voidable, because the Karta cannot avoid the gift, whereas in the case of gifts, the alienation would be void per se because even the Karta can avoid the gift.
  2. We now come to the decision of this Court inTatoba Ganu Mohite vs. Tarabai Kedari Tambe, AIR 1957 Bom 280. In that case, one Balgonda, the manager of a joint family consisting of himself and his two brothers, in his capacity as the managing member, executed a deed of gift in respect of ancestral property held by the joint family in favour of the plaintiff . The motive for the gift, as recited in the deed of gift, was the friendship which subsisted between the family of the plaintiff and the donor’s grandfather. It was observed by Dixit J., in his judgment, as follows (at p. 282 of AIR):

” In the case of a managing member, he has a representative character. A managing member represents the family in the family’s relations towards the rest of the world. In the case of a gift, however, the position under Hindu law is different…. If an individual member, i.e., a coparcener, cannot make a valid gift in respect of his undivided interest in the coparcenary property, we fail to see how a managing member would be able to make a valid gift in respect of the family property. “

  1. Dixit, J. pointed out that there is an essential difference between the case of a deed of sale and a deed of gift (at p. 283 of AIR). It was pointed out by Dixit J., that the deed of gift in question was not affirmed at any time by other coparceners. Vyas J., in his concurring judgment, has stated as follows (at p. 288 of AIR) :

” Mr. Paranjpe says that this is a case of a donor having merely exceeded his power and, therefore, the gift is not void but voidable. The contention must fail. Where there is power, there can be a case of an excess of power. Where there is a right, there can be a case of an excess in the exercise of that right. Where there is no power at all to start with, no question can arise of a person having acted in excess of it. A person has no power at all to give away that which is not his own. If a person gives away what is not his own, he does not do something which is merely in excess of his power, but does what he has no power to do. Here what Balgonda gave away was not his own. Therefore, the gift was void ab initio. “

  1. The submission of Mr. Joshi in connection with these judgments is that the Supreme Court has not specifically held inGuramma vs. Mallappa, AIR 1964 SC 510 or Ammathayee alias Perumalakkal vs. Kumarasen alias Balakrishnan, (supra), that the gifts in question were void, and hence these cases cannot be taken as deciding that gifts of immovable property belonging to the coparcenary by a Karta to his wife are void. It was submitted by him that the decision of the Full Bench of the Punjab and Haryana High Court in CGT vs. Tej Nath (supra) is not good law. In support of his submission that such a gift would be voidable but not void, Mr. Joshi relied upon the decision of the Supreme Court in Raghubanchmani Prasad Narain Singh vs. Ambica Prasad Singh, AIR 1971 SC 776. This is a decision of a Division Bench comprising two learned judges of the Supreme Court. Mr. Joshi strongly relied upon the observations in paragraph 5 of the judgment that, ” In any event an alienation by the manager of the joint Hindu family even without legal necessity is voidable and not void “. In our opinion, Mr. Joshi’s reliance on this decision is somewhat misplaced. In the first place, in the case relied on by Mr. Joshi, the question did not relate to a gift of immovable property, but to a settlement of immovable property. The facts recited in the judgment show that the High Court in the judgment appealed against had found that this property was settled not merely gratuitously but because the two persons on whom it was settled were gotias of the family of the appellant, that in respect of certain lands taken away from them no consideration had been paid, that all along these persons helped the zamindar who was the ancestor of the settlor in a previous litigation and certain promises were made to them as reward for services rendered which till then were not rewarded. Thus, the settlement made was not gratuitous like a gift but was for consideration. In fact, the High Court in the judgment appealed against had taken the view that the settlement was beneficial to the estate as an act of a prudent manager by the Raja. These facts clearly show that the ratio of the case and observations therein are not applicable to the case before us.
  2. Mr. Joshi next relied upon the decision of a Division Bench of the Madras High Court inCGT vs. R. M. D. M. Ranganathan Chettiar (1980) 19 CTR (Mad) 221:(1982) 133 ITR 890 (Mad). This decision, we are afraid, is of no assistance to Mr. Joshi at all. In that case, the Karta of the assessee-HUF gifted a half share of the immovable property and the movables valued at Rs. 20,000 belonging to the family to his wife. The High Court on reference took the view that the gift of immovable property by the Karta of an HUF to his wife was not valid. This decision nowhere supports the contention that the gift was merely voidable but not void. What was held by the Madras High Court was that the gift was ” invalid “, which is quite consistent with its being void.
  3. The decisions of the Supreme Court inAmmathayee alias Perumalakkal vs. Kumaresan alias Balakrishnan, AIR 1967 SC 569, and Guramma Bhratar vs. Mallappa, AIR 1964 SC 510, contain passages to which we have already referred. These passages, although they do not state specifically that the gift of an immovable property belonging to the coparcenary by the Karta to his wife is void, lead to a conclusion that such a gift would be void. In fact, these decisions have been so interpreted by the Full Bench of the Punjab and Haryana High Court in CGT vs. Tej Nath (supra) and, with respect, we agree with the view taken by the Punjab and Haryana High Court. In view of what we have stated, we are of the view that the gift of immovable property by the assessee as the Karta to his wife must be regarded as void and ineffective in law.
  4. As far as question No. 3 is concerned, the gifts in question were made by the Karta of the assessee-HUF to some of his relatives. The order of the ITO to which we have referred earlier shows that these relations are the sister-in-law, nephews, niece, cousin and sister, respectively, of the Karta. In this regard, we may point out that in the judgment in the case ofGuramma vs. Mallappa, (supra), the Supreme Court has clearly stated as follows :

” We cannot extend the scope of the power on the basis of the wide interpretation given to the words ‘pious purposes’ in Hindu law in a different context. In the circumstances, we hold that a gift to a stranger of a joint family property by the manager of the family is void. “

  1. Although in the case before the Supreme Court, the gift was of immovable property, in our view, the aforesaid observation of the Supreme Court is applicable equally to the case of a gift of movable property. InCGT vs. Tej Nath (supra), decided by the Full Bench of the Punjab and Haryana High Court, the gifts in question were of immovable property by the Karta, inter alia, to the wife of his brother, his mother, his stepmother and others. As we have already pointed out, it was held by the Full Bench that gifts by the Karta of an HUF of immovable property belonging to the family, other than gifts for pious purposes, are void per se and not merely voidable. The observations in the judgment of the Full Bench show that the aforesaid relatives, although they were close relatives of the Karta, were regarded as strangers to the HUF and not as members of the HUF. In our view, with reference to an HUF (HUF), the only persons who can be regarded as members thereof are the coparceners, their respective wives, daughters, their sons and grandchildren and others recognised as such according to the texts of Hindu law and, although other persons may be related to the Karta or coparceners, in the context of the family they must be regarded as strangers. Mr. Joshi, however, submitted that close relatives of the Karta like the ones in question before us cannot be regarded as strangers to the family, and in support of that contention, he relied upon the decision of a Division Bench of the Punjab and Haryana High Court in CIT vs. Daljit Singh (1980) 15 CTR (P & H) 260:(1981) 131 ITR 719 (P & H). In that case, the gifts were, inter alia, of movables, namely, HUF funds to the respective wives and minor children of the Karta’s brothers. The Division Bench took the view (pp. 724-25) that the donees were nearly related to the donor and the gifts made by the Karta, as the donor, on account of love and affection to these relatives cannot be said to be void. If the gifts are of excessive amounts or are not given for love and affection, these may be termed as voidable and can be challenged by the sons and not by third persons. With respect, we are unable to agree with this view. As we have already pointed out, the decision of the Full Bench of the Punjab and Haryana High Court in CGT vs. Tej Nath (supra) contains observations which would clearly suggest that relatives of the Karta, other than the members of the HUF, must be regarded as strangers, as the far as joint family is concerned, and, with respect, we agree with the view of the Full Bench. The observations contained in the decision of Tatoba Ganu Mohite vs. Tarabai Kedari Tambe, AIR 1957 Bom 280, clearly show that as far as the Karta is concerned, his acts of management are merely in a representative capacity, and, therefore, in our view, it cannot be open to him to gift away even movable property of the joint family to his relatives who are strangers to the family, except for pious purposes. Moreover, we find that the Division Bench of the Punjab and Haryana High Court which decided the case of CIT vs. Daljit Singh (supra), has relied upon the decision of a Division Bench of the Punjab High Court in Raghbir Singh Sandhawalia vs. CIT (1958) 34 ITR 719, which was, in fact, not a case of a gift by the Karta to a stranger at all, but to his second wife, who was clearly a member of the joint family. It is significant that even then the gift was held to be voidable and not valid. In the result, in our view, the gift of movables referred to in question No. 3 must be regarded as void.
  2. Coming now to question No. 4, the submission of Mr. Joshi, learned counsel for the assessee, is that even if the gifts in question are regarded as void, the fact remains that the properties gifted away went into the hands of the donees, and it is the donees who have derived income therefrom, and paid the tax on that income and hence the donor, as the Karta of the HUF, cannot be taxed in respect of this income. In support of this contention, Mr. Joshi relied upon the decision of a Division Bench of the Rajasthan High Court inCIT vs. Motilal Ramswaroop and CWT v.Motilal Ramswaroop (1970) 76 ITR 43. In that case, the Karta of an HUF gifted an aggregate amount of Rs. 4,00,000 to seven divided members of his family. The ITO did not accept the gifts on the ground that the Karta of the assessee- family was not competent to make the gifts in question. The ITO included the income earned on the said sum of Rs. 4,00,000 in the income of the assessee. On a reference to the High Court, both under the IT Act and the WT Act, it was held by the High Court that the interest accrued on the gifted amounts did not accrue to the assessee-family for the purpose of income-tax on either view, namely, whether the gifts of Rs. 4,00,000 were void or voidable. The entire sum had passed into the hands of the other persons and they were earning income from the same and not the assessee. The IT Act taxes the person whose income it is and not the person who may, per chance, have title to the property through which the income had been earned. With respect, we are unable to agree with the decision in the aforesaid case or to accept the submission of Mr. Joshi. We may point out that under s. 4 of the IT Act, the charge of income-tax is in respect of the total income of every person. Sec. 5 defines the scope of the term “total income”, and, inter alia, states that, in the case of a resident, it includes all income which is received or deemed to be received in India by or on behalf of a resident- assessee. Sec. 9 deals with incomes which were deemed to accrue or arise in India. In the present case, if the gifts were void, it was the assessee-HUF which retained the title to the properties gifted away and the income from these properties gifted must be regarded in law as accruing or deemed to be accruing to the assessee. We may make it clear that this is not a case where the property of an assessee has been taken away against his wishes or without his knowledge and income earned by another person from such property. In such a case, perhaps, different considerations might arise, but we are not concerned with such a case. In the present case, the gifts were made by the assessee himself, and, if the view were taken that, even if the gifts were void, the income therefrom would not be regarded as the income of the assessee, it would amount to allowing the assessee to take advantage of his own wrong and avoid his liability to pay income-tax. We are of the view that the income from the properties gifted must be regarded as the income of the assessee-HUF and was liable to be included in the income of the assessee-HUF.
  3. In the result, the questions referred to us are answered as follows:

Question No. 1 : In the negative.

Question No. 2 : As far as this question is concerned, we decline to answer the same as the assessee does not desire that the same should be answered.

Question No. 3 : In the affirmative.

Question No. 4.: In the negative.

  1. It is clarified that all the questions decided are answered against the assessee.
  2. The assessee to pay the costs of these references in one set.

I1nd CASE:

GANGADHAR NARSINGDAS AGARWAL (HUF) vs. COMMISSIONER OF INCOME TAX

HIGH COURT OF BOMBAY

Dr. B.P. Saraf & S.M. Jhunjhunuwala, JJ.

IT Ref. No. 61 of 1983

16th November, 1994

(1994) 62 CCH 0740 MumHC

(1995) 125 CTR 0253 :: (1995) 80 TAXMAN 0584

Legislation Referred to

S 4, 37(1), 40A(7)

Case pertains to

Asst Year 1974-75

Decision in favour of:

Revenue

Counsel appeared:

P.J. Pardiwalla i/b Mulla & Mulla & Craisue Blunt & Caroe, for the Applicant : G.S. Jetly with P.S. Jetly i/b Mrs. S. Bhattacharya, for the Respondent

  1. B.P. SARAF, J.

By this reference under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions at the instance of the assessee to this Court for opinion :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to claim deduction of interest paid to the relatives of G.N. Agrawal on the ground that the amount on which interest was paid came out of invalid gifts ?

  1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the jetty charges on barge loading expenses paid to M/s Mahesh and Rajiv Mor were not allowable business expenditure ?
  2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to claim deduction on account of gratuity liability on the ground that the provisions of s. 40A(7) have not been complied with?
  3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of sales-tax claim?”
  4. Learned counsel for the parties are agreed that questions 1, 2, and 3 are covered by the decisions of the Supreme Court and this Court and they may be answered in the light thereof. We, therefore, first answer these three questions as follows. Question No. 1 is covered by the decision of this Court in the case of Gangadhar N. Agrawal (HUF) vs. CIT (1986) 51 CTR (Bom) 286 : (1986) 162 ITR 320 (Bom). Following the same it is answered in the affirmative and in favour of the Revenue. The second question is also covered by the decision of this Court in the assessee’s own case (IT Ref. No. 457 of 1978) dt. 24th Aug., 1993. Following the same question Nos. 2 is answered in the affirmative and in favour of the Revenue. Question No. 3 is covered by the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC). Following the same it is also answered in the affirmative and in favour of the Revenue. The only question that is left for determination is question No. 4. We shall, therefore, set out relevant facts pertaining to the said question only.
  5. This reference pertains to asst. yr. 1974-75, relevant previous year being the year ended 31st March, 1974. During the course of the assessment proceedings for this assessment year, the ITO found that the assessee had debited to the P&L account a sum of Rs. 22,780 as arrears of sales-tax paid during the year. The ITO was of the opinion that the liability for Sales-tax had arisen long back and not during the accounting year under consideration. The liability related to asst. yrs. 1963-64 and 1964-65. Sales-tax assessment order was dt. 12th Nov., 1968. The assessee paid a total sum of Rs. 22,780.70 during the period 1st April, 1973 to 30th March, 1974. There is no dispute about the fact that these payments related to sales-tax liability for asst. yrs. 1963-64 and 1964-65 for which the sales-tax assessment order has been made on 12th Nov., 1968. The assessee’s plea before the ITO was that since the payments were made during the year 1973-74 according to the instalments granted by Sales-tax authority, the claim for deduction of the same should be allowed on payment basis. This plea was rejected by the ITO on the ground that the assessee was maintaining its books of account on mercantile basis. The appeal of the assessee against the order of the ITO in so far as it related to the disallowance claimed for deduction of the above amount was rejected by the CIT(A) as well as Tribunal. Hence, this reference at the instance of the assessee.
  6. We have heard learned counsel for the assessee at length. We have perused the impugned order of the Tribunal. The Tribunal noted the fact that the claim related to asst. yrs. 1964-65 and 1965-66. The assessee denied the liability and preferred appeals against the assessments made by the STO on 12th Nov., 1968. The assessee lost at all stages. The plea of the assessee was dismissed by the High Court in June, 1974. This date was also after the close of the accounting period relevant to the assessment year under consideration. The Tribunal, therefore, held that neither did the liability relate to the assessment year under consideration nor had the liability become final during the accounting period. The Tribunal, therefore, approved rejection of the claim by the lower authorities on the ground that the assessee, who was maintaining its books of account on mercantile basis, was not entitled to claim deduction in respect of the above amount in the assessment of the year under consideration.
  7. The only submission of the learned counsel for the assessee is that the payments were made by the assessee in the accounting year relevant to the assessment year under consideration. No claim had been made in the past in respect of the very same amount. It is not the case where the assessee is claiming deduction twice. According to the learned counsel the assessee did not claim deduction earlier in the asst. yrs. 1963-64 and 1964-65 to which the liability related or in the year in which the demand was made by the Sales-tax Department inasmuch as it was disputing the liability. The assessee has claimed the deduction in the year in which the payment was made. In such a situation, according to the learned counsel, the method of accounting is not determinative. The claim of the assessee, being genuine, is allowable under s. 37(1) of the Act. Reliance is placed in support of this contention on the decision of the Madras High Court in the case of CIT vs. V. Krishnan (1979) 12 CTR (Mad) 371 : (1980) 121 ITR 859 (Mad), Gauhati High Court in the case of CIT vs. Nathmal Tolaram (1973) 88 ITR 234 (Gau) and decision of Orissa High Court in the case of Kalinga Tubes Ltd. vs. CIT (1987) 63 CTR (Ori) 117 : (1988) 169 ITR 374 (Ori). We have carefully considered this submission and perused the decisions relied upon by the learned counsel for the assessee. We, however, find it difficult to agree with the submission of the learned counsel in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) which is a complete answer to the submissions of the learned counsel for the assessee. In the above case before the Supreme Court, the assessee-company which followed mercantile system of accounting incurred a liability of Rs. 1,49,776 on account of sales-tax determined to be payable by the Sales-tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the asst. yr. 1955-56. Liability was quantified and demand was created by means of notice dt. 21st Nov., 1957. The assessee claimed deduction of that amount in its assessment for the asst. yr. 1955-56. The claim of the assessee was rejected by the ITO on the ground that the assessee had contested the sales-tax liability in appeals and that it made no provision in its books with regard to the payment of that amount. Appeals to higher authority or Courts taken by the assessee contesting its liability to pay the sales-tax ultimately failed. The Supreme Court held that the obligation to pay tax arise and taxability is attracted under all sales-tax laws, the moment a dealer makes either purchases or sales which are subject to taxation. It was further observed that although that liability cannot be enforced till the quantification is effected by assessment proceedings the liability for payment of tax is independent of assessment. It was further observed :

“It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc.”

It was held that the assessee who follows mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed.

  1. The Supreme Court approved the decision of the Madras High Court in the case of Pope the King Match Factory vs. CIT (1963) 50 ITR 495 (Mad) where it was held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector’s demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract or retract the efficacy of the liability which had been imposed upon him by the excise authorities. As in the case before the Supreme Court, in the case before us the liability relates to asst. yrs. 1963-64 and 1964- 65. The demand for payment of the amount was also received by the assessee from the STO on 12th Nov., 1968. The assessee was maintaining its accounts on mercantile system. He was fully justified in claiming deduction of the above amount being the amount of sales-tax which it was liable under the law to pay during the accounting years relevant to the asst. yrs. 1963-64 and 1964-65 in the assessment of those assessment years. Even if the submission of the assessee is accepted that according to him he was not liable to pay any sales-tax for the asst. yrs. 1963-64 and 1964-65 and, hence, no liability accrued during account years relevant to those assessment years, he did incur enforceable legal liability on and from the date on which he received the STO’s notice of demand for payment of the amount which was on 12th Nov., 1968. The said liability remained intact even after the assessee had taken appeals to higher authorities or Courts which failed. The ultimate rejection of the appeal of the assessee in the High Court was also not in the accounting year relevant to the assessment year under consideration. It was also in June, 1974, i.e., in the accounting year relevant to the next assessment year, viz., asst. yr. 1975-76. That being so, the assessee who is maintaining mercantile system of accounting is not entitled to claim deduction in respect of the above amount on any reasoning in the computation of income for the assessment under consideration.
  2. This view of ours is also fully supported by the decision of the Kerala High Court in L.J. Patel & Co. vs. CIT (1974) 97 ITR 152 (Ker), wherein following the decision of the Supreme Court in Kedarnath Jute Mfg. Co. (supra) it was held that the assessee could not claim deduction in the asst. yr. 1963-64 where the liability of the assessee who was maintaining mercantile system of accounting to pay excise duty arose in 1952. The deduction of such amount could be claimed only in the year 1952 in accordance with s. 145(1) of the IT Act, 1961. It cannot be claimed in the asst. yr. 1963-64 on the ground that as the assessee was contesting the liability, the amount was paid in the year 1962. We have perused the decision of the Gauhati High Court in the case of CIT vs. Nathmal Tolaram (supra). With great respect, we are unable to agree with the view of the Gauhati High Court in that case. Even otherwise, the decision of the Gauhati High Court does not assist the assessee because in that case the assessee was called upon to pay the amount of sales-tax during the previous year relevant to the assessment year in which the deduction was claimed. In the instant case the claim has been made even much later. It has been made in the year when the actual payment was made. We also find it extremely difficult, on the face of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. (supra) to agree with the decision of the Orissa High Court in Kalinga Tubes Ltd. vs. CIT (supra), where it was held that the assessee who maintains its account on the mercantile system can claim deduction in the year when the liability to sales-tax was finally determined by the Sales-tax Tribunal. In our opinion this decision goes counter to the decision of the Supreme Court where it was clearly held that the liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced. The Supreme Court clearly stated that the liability remained intact even after the assessee had taken appeals to higher authorities or Courts which failed. The decision of the Madras High Court in CIT vs. Krishnan (supra) in our opinion, does not help the assessee because in this case it has held that in the absence of any provision to show that the existence of demand is a condition precedent to the liability arising, the liability to sales-tax would ordinarily relate to the year in which the transaction took place. It was categorically held that the assessee cannot be allowed deduction in the year in which the tax is paid. The observation of the Madras High Court to the effect that the deduction would be available either in the year of accrual of liability or in the year of payment and not in the year of receipt of the disputed demand notice has to be read in the light of s. 145 of the Act. So read it would be clear that in a case where mercantile system of accounting is followed deduction would be available only in the year of accrual of liability whereas in a case where the assessee follows cash system of accounting, the deduction would be available in the year of payment.
  3. In the premises, we are of the opinion that the Tribunal was right in holding that the assessee was not entitled to deduction of sales-tax claim. Accordingly, we answer question No. 4 in the affirmative, i.e., in favour of the Revenue and against the assessee.
  4. In the facts and circumstances of the case, there shall be no order as to costs.

III rd CASE:

COMMISSIONER OF WEALTH TAX & ORS. vs. MOTILAL RAMSWAROOP

HIGH COURT OF RAJASTHAN

D.M. Bhandari, C.J. & S.N. Modi, J.

DB Civil WT Ref. No. 36 of 1966

25th August, 1969

(1969) 37 CCH 0260 RajHC

(1970) 76 ITR 0043

Legislation Referred to

Sections WT 2(m), WT 4(1)(a)(iv)

Case pertains to

Asst. Year 1957-58, 1958-59, 1959-60

Decision in favour of:

Assessee

BHADARI, C.J.

As D. B. Civil IT Ref. No. 66/66 am D. B. Civil Wealth-tax Reference No. 36/66 arise out of the same facts, they are disposed of by this single judgment.

  1. We first take up D. B. Civil IT Ref. No. 66/66. The Tribunal, Delhi Bench ‘ C ‘ (hereinafter called ” the Tribunal “), has referred the following question for the opinion of this Court under s. 66(1) of the IT Act, 1922 (hereinafter called ” the Act “) :–

” Whether, on the facts and in the circumstances of the case, the gift of Rs. 4 lakhs was voidable and as such the interest accruing on the aforesaid gifted amount did not accrue to the family for income-tax purposes?”

  1. The statement of the case submitted by the Tribunal shows that the assessee is an HUF whose Karta is Shri Ramswaroop. By a deed dt. 25th Feb., 1956, Shri Ramswaroop gifted to the undermentioned persons the amounts noted against their names:
Rs.
1. Shri Shankerlal (brother of Ramswaroop) 80, 000
2. Shri Prem Narain (son of Shankerlal) 40,000
3. Shri Surajnarain (son of Shankerlal) 40,000
4. Shri Rameshchand (son of Shankerlal) 40,000
3. Shri Kishanswaroop (son of Motilal) 1,00,000
6. Shri Ashok Kumar (son of Kishanswaroop) 50,000
7. Shri Surendra Kumar (son of Kishanswaroop) 50,000
. 4,00,000
  1. All these persons were members of another family which was at one time joint with the family of Ramswaroop. The assessee family was having transactions with the Bombay branch of the HUF, Hazarimal Chhogalal, which was carrying on its business at Bombay. The credit balance of the assessee family in the books of account of the aforesaid Bombay branch was Rs. 5,59,251 on Diwali day of 1933. Shri Ramswaroop drew seven hundis in all amounting to Rs. 4,00,000 on Hazarimal Chhogalal, Bombay in favour of the donees. On 23rd Feb., 1956, a sum of 4,00,000 was debited to the account of the assessee family and credited to the accounts of the donees in the account books of Hazarimal Chhogalal, Bombay. The assessee was assessed as an HUF for the asst. yrs. 1957-58, 1958-59, 1959-60 and 1960-61. The ITO concerned did not accept the aforesaid gift amounting to Rs. 4,00,000 on the ground that the Karta of the assesseefamily was not competent to make gifts of a substantially large amount to the donees. He therefore assessed the total income of the assessee after including the aforesaid sum of Rs. 4,00,000 and estimated amount of interest thereon of each of the above years. Appeals were preferred to the AAC, Udaipur, and the said officer called for a report from the ITO as to the circumstances under which the gift had been made and also as to the real motive behind the gifts. After receiving the report, the AAC, Udaipur, decided the appeals in favour of the assessee. Appeals against the orders of the AAC were filed before the Tribunal by the Department and the Tribunal directed that the aforesaid amount together with interest thereon for each of the above years be deleted from the respective assessments on the ground that the Rajasthan High Court, in the case ofCIT vs. Brahamdutt Bhargava (1962) 46 ITR 387, has taken the view that the gifts made by the Karta of an HUF were not void. On the applications made by the CIT, the aforesaid question has been referred to this Court for its opinion.
  2. There is no dispute before us that the gifts were in fact made. But the question is whether the gifts were void in the eye of law and the interest accruing on the aforesaid gifted amount did not accrue to the assessee for income-tax purposes.
  3. It has been laid down by their Lordships of the Privy Council inHanuman Kamat vs. Hanuman Mandur (1891) I.L.R. 19 Cal. 123 that the alienation by a manager of a joint Hindu family was not necessarily void but was only voidable if objections were taken to it by the other members of the joint Hindu family. The Division Bench of the Lahore High Court in Imperial Bank of India, Jullundur vs. Mt. Maya Devi A.I.R. 1935 Lah. 867, 868 has pointed out that on this point there is no distinction between sales and mortgages on the one hand and gifts on the other. We may in this connection refer to the following observations:

” Where however the gift is not for religious purposes, or consists of the whole or large portion of the joint family property, the transaction is voidable, but only at the instance of the other coparceners. No person who is a stranger to the family and does not possess a right to have the transaction defeated on other grounds (e.g., under s. 53, T.P. Act), has a locus standi to intervene and impugn it merely because it was in excess of the authority which the Karta possessed to deal with it for family purposes. “

  1. This case has been relied on inBrahamdutt Bhargava’s case (1962) 46 ITR 387. Learned counsel for the Department has relied on A. Basaviah Gowder vs. CGT (1963) 49 ITR 817 and Smt. Valluri Janakamma vs. CGT (1967) 66 ITR 255. Brahamdutt Bhargava’s case (1962) 46 ITR 387 is binding on us and we do not feel any necessity for referring the case to a larger Bench, specially for the reason that in our view whether the gifts are void or voidable, the interest accruing on the gifted amounts did not accrue to the assessee for the purpose of income-tax. We may, however, point out that the terms ” void ” and ” voidable ” are often confused, and distinction between these two is not properly recognised. In Pollock on Contracts, page 6 (twelfth edition), this distinction has been truly and correctly pointed out as follows:

” The distinction between void and voidable transactions is a fundamental one, though it is often obscured by carelessness of language. An agreement or other act which is void has from the beginning no legal effect at all, save in so far as any party to it incurs penal consequences, as may happen where a special prohibitive law both makes the act void and imposes a penalty. Otherwise no person’s rights, whether he be a party or a stranger, are affected. A voidable act, on the contrary, takes its full and proper legal effect unless and until it is disputed and set aside by some person entitled so to do.”

  1. It must also be kept in mind that whether the act is void or voidable, it is only persons having some rights in the property affected by that act who can come in a Court of law to seek an appropriate relief by declaring the act void or voidable. Under a void gift there is no passing of title from the donor to the donee, while under a voidable gift, there is such passing of title, but that title is defeasible under certain circumstances under appropriate proceedings brought in by the person interested in the property which has been gifted. In the instant case, there is no question that the amount of Rs. 4,00,000 which was gifted has gone into the hands of the strangers and they had earned some income out of that amount of Rs. 4,00,000. Even if the gifts are treated as void, it is not the assessee who has earned any income out of the amount of Rs. 4,00,000. Under the IT Act, tax is leviable under s. 3 on the total income of the previous year of every individual, HUF, company and local authority and of every firm or other AOPs or the partners of the firm or the members of the association individually. Inclusive definition of ” income ” has been given in s. 2(6C) of the Act. The case before us does not fall within the inclusive definition of income. In the instant case, the entire sum of Rs. 4,00,000 had passed into the hands of other persons and they were earning income from that amount and not the assessee. It cannot be contended that the other persons who had earned the income from the amount of Rs. 4,00,000 were not liable to income-tax and the assessee who had not earned that income was liable to income-tax. The argument addressed to us is that if the gifts are void, then title to the amount of Rs. 4,00,000 remained vested in the assessee and, therefore, it was liable to pay income-tax. The IT Act taxes the person whose income it is and not the person who may per chance have title to the property through which the income has been earned. If such an argument is accepted, a thief who had stolen an amount of rupees one lakh from a bank and had earned income therefrom would not be liable to pay income-tax on the income but the bank which had lost the amount of rupees one lakh would be liable to pay tax simply on the ground that the bank had title to the amount of rupees one lakh. Such are not the provisions of the Indian IT Act. Learned counsel for the Department has pointed out s. 16(1)(c) of the Act, but that section applies to altogether different situations. Lord Macmillan inChamberlain vs. IRCs (1943) 25 T.C. 317, 329 (H.L.), has clarified this possition in the following observation:

” This legislation forms part of a code of increasing complexity beginning with the Finance Act, 1922, s. 20, designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The legislature’s counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly.”

  1. This is not the case here. There is no doubt that in this case Shri Ramswaroop when he made the gift had transferred the amount of Rs. 4,00,000 to the donees without reserving any right in that amount of rupees four lakhs to the assessee or to himself. This being the situation, in our opinion, our answer to the question is that the interest accruing on the gifted amounts did not accrue to the assessee family for income-tax purposes on either view whether the gift of Rs. 4,00,000 was void or voidable.
  2. The second reference No. 36/66 is by the same Tribunal under s. 27(1) of the WT Act (hereinafter called ” the Act “) and the question referred is as follows:

” Whether, on the facts and in the circumstances of the case, the gifts amounting to Rs. 4 lakhs effected by the Karta of the assessee family in favour of separated members of the family were only voidable and as such the said amount together with the estimated interest thereon, ceased to be an asset of the assessee family for wealth-tax purposes ? “

  1. For the reasons which we have given already, in our opinion, for purposes of wealth-tax, the amount of rupees four lakhs had ceased to be an asset of the assessee-family. Under s. 3 of the WT Act, tax is chargeable on the net wealth mentioned therein. Net wealth has been defined in s. 2(m) as follows:

” ‘ net wealth ‘ means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation, date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than ……..”

  1. In our opinion, in the instant case, the amount of rupees four lakhs which had been gifted by Shri Ramswaroop to the various donees referred to above did not remain in the hands of the assessee inasmuch as this entire amount of four lakhs had passed into the hands of the donees. It may be that the members of the assessee family may have a right to recover back those amounts under certain circumstances; but merely because of this, that sum cannot be treated as their asset of such tangible value as may attract the provisions of s. 3 of the Act for the purpose of assessment of wealtl-tax. Learned counsel for the Department has relied on s. 4(1)(a)(iv) of the Act. The relevant provision is as follows:

” In computing the net wealth of an individual, there shall be included, as belonging to that individual the value of assets which on the valuation date are held by a person or AOPs to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer ……..”

  1. In the instant case, it cannot be said that Shri Ramswaroop had not transferred the various amounts under an irrevocable transfer. It may be a different thing that such transfer was liable to be questioned by the members of the assessee family, but that would not make such transfer as a revocable transfer or not an irrevocable transfer. In our opinion, s. 4(1)(a)(iv) of the Act has no application to the instant case.
  2. Our answer to the question, therefore, is that the amount of rupees four lakhs together with the estimated interest thereon ceased to be an asset of the assessee for wealth-tax purposes whether the gifts were void or voidable and that amount could not be taxed under the WT Act.
  3. Both the references are answered accordingly. We pass no order as to costs in both the references
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