Jacob v. The Commissioner Of Income Tax Ernakulam — 1972 DIGILAW 190 (KER)

JUDGMENT P. Subramonian Poti, J. 1. The question referred to us under section 26 (1) of the Gift Tax Act, 1958 by the Income-tax Appellate Tribunal, Cochin Bench is” " Whether, on the facts and in the circumstances of the case, the appellate Tribunal was right in law in holding that the gift made by the applicant was not entitled to exemption under section 4 (c) or under section 5 (1) (xiv) of the Gift Tax Act?" 2. The question arises in connection with the assessment for the year 1965-66 under the Gift Tax Act, 1958 (hereinafter referred to as the Act). The Gift-Tax Officer held that during the previous year relevant to the assessment year, the assessee had made certain gifts. These included (1) a cash gift of Rs. 2,500 and (2) gift of 25 per cent of the good-will in two firms, namely, M/s C. A. Ouseph and Sons and M/s C. A. Ouseph and V. J. Paul. The dispute concerns the latter item. Prior to the relevant accounting year the assessee was one of the partners of the above-mentioned firms and the share of the profit which he was entitled to after deducting the remuneration payable to the manager of the respective firms was said to be 50 per cent. One of the firms namely C. A. Ouseph and Sons was carrying on business in jewellery and bullion and the other in grocery, edible oil, etc. The two firms were reconstituted by two deeds executed on 1st Dhanu 1139 corresponding to 16th December 1963. In so reconstituting one of the sons of the assessee was introduced as partner in both the firms. Necessarily there was readjustment of the share of the profits. The Gift-tax Officer considered this readjustment resulting in the reduction of the profit of the assessee as amounting to a transfer of property by him in favour of his son who was introduced as a fresh partner under the new partnership deeds and such transfer was considered as of 25 per cent of the good-will in view of the reduction of that percentage in the profit due to the assessee before the firms were so reconstituted. Since the new partner had brought in new capital to the business, proportionate value of the good-will alone was considered as such transfer by way of gift by the assessee to his son. Since the new partner had brought in new capital to the business, proportionate value of the good-will alone was considered as such transfer by way of gift by the assessee to his son. The assessment was made overruling the objection by the assessee to the inclusion of the estimated value of the good-will of these firms on the ground that it was exempt under section 5(1) (xiv) of the Act and alternatively that it could not be considered as the subject of a gift. The matter was taken to the Appellate Assistant Commissioner by the assessee. Before him a preliminary objection was taken, that the assessee had not made any gift to his son, that the mere re-adjustment of the shares in the profit of the partners cannot amount to any gift by the assessee and, that at any rate even if it was considered that the assessee had released or surrendered or abandoned a portion of his interest in the firm it must be a case falling within section 4 (c) of the Act and consequently exempt from taxation. It was further urged that gift, if at all, could only be in the course and for the purpose of carrying on the business of the original firm and if that be the case the gift would be (exempt under section 5 (1) (xiv) of the Act. There was a further contention that, at any rate, the gift could only be of 6¼ per cent of the total value of the good-will. The appellate authority took the view that it was a case of surrender or abandonment and therefore exempt under section 4 (c) of the Act in view of the absence of any finding by the Gift Tax Officer that the surrender or abandonment had not been bona fide made. 3. Before the Appellate Tribunal to which the matter was taken at the instance of the department the assessee reiterated these pleas. But the Appellate Tribunal found that there was a gift in regard to the good-will which was liable to be taxed and in support of this the decision of the Madras High Court in C. G. T. v. V. A. M. Ayya Nadar (73 I.T.R 761) cited by the department was relied on. But the Appellate Tribunal found that there was a gift in regard to the good-will which was liable to be taxed and in support of this the decision of the Madras High Court in C. G. T. v. V. A. M. Ayya Nadar (73 I.T.R 761) cited by the department was relied on. It also found that the gift was not exempt under section 4 (c) of the Act nor exempt under section 5 (1) (xiv) of the Act. The reference arises out of this order of the Tribunal. 4. The deeds of the partnership which are annexures to the statement of the case show that the new partner who is said to be the donee brought in his own capital into the partnership. When he was so inducted to the partnership, necessarily there had to be a question of re-adjustment of the shares in the profit. In such re-adjustment the share of assessee was reduced. On these facts the assessee seeks to claim exemption under section 4 (c) of the Act. That section provides that” "4. For the purposes of these Act, ........ (a) ........ (b) ........ (c) Where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment, to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been, bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment." Releases, discharges, surrenders, forfeitures or abandonments are normally not understood as amounting to gifts in legal or common parlance. But the scheme of this sub-section is to tax releases, discharges, surrenders, forfeitures or abandonments as gifts if they are found to have been not made bona fide. Apparently the purpose is to tax transactions which are, in truth, gifts pure and simple, though cloaked as transactions in the nature of release, surrender and the like to avoid taxation or for other ulterior purposes. In such cases, in spite of the apparent nature of the transaction the assessing authority is empowered to ignore the disguise if he is satisfied about the absence of bona fides. In such cases, in spite of the apparent nature of the transaction the assessing authority is empowered to ignore the disguise if he is satisfied about the absence of bona fides. The applicability of the section would arise only if the transaction is one falling within the categories of releases, discharges, surrenders, forfeitures or abandonments. The assessee before us has no plea that we have to consider the case as one of forfeiture or discharge. It is contended that it must be treated as a release, surrender or abandonment. A release or surrender pre-supposes a pre-existing jural relationship between the person who executes such release or surrender and the person in whose favour such release or surrender is made. In the case of a transaction in favour of a stranger it would be a mere transfer and not a release or surrender. A release is a discharge of an existing obligation or right of action by a person in whom the obligation or right is vested to the person against whom it exists. A release is the giving up or abandoning of a claim or right to the person against whom the claim exists or the right is to be enforced or exercised. (The Law Lexicon P. Ramanatha Aiyar.) A surrender is of a nature directly opposite to a release in that it is yielding up of a lesser estate to him who has a greater estate whereas in the case of a release a greater estate descends upon the lesser. A surrender is therefore again only as between persons who have pre-existing mutual rights and obligations which terminate by reason of such surrender. 5. Abandonment is again different from transfer. A person who abandons a right does not really intend that the right should pass on to another. The term abandonment has been defined as "giving up of a thing". It is distinguished from surrender as in a surrender there is a transfer from one to the other. There is no abandonment in such a case in the sense in which we understand the term 'abandon'. In the case of abandonment a person gives up his rights regarded as useless. It is a unilateral act. It is distinguished from surrender as in a surrender there is a transfer from one to the other. There is no abandonment in such a case in the sense in which we understand the term 'abandon'. In the case of abandonment a person gives up his rights regarded as useless. It is a unilateral act. In a case such as the one before us, where, what is considered as transfer is the right to a share in the good-will and that transfer is from a partner to the new partner, we cannot see any release or surrender as there was no pre-existing obligation to release or surrender in favour of the new partner. It is a mere transfer. It is also not a case of abandonment in the sense the term abandonment is understood in law. Therefore we consider that the Tribunal was right in holding that the assessee was not entitled to seek exemption under section 4 (c) of the Act. 6. The claim to exemption under section 5 (1) (xiv) of the Act has been made, since, according to the assessee, even if a gift of the good-will in favour of the son by the assessee is assumed, it must be found, on the facts that such a gift was in the course of the business of the firms and for the purpose of carrying on the business of these firms. The question of exemption under section 5 (1) (xiv) in circumstances similar to these has been considered by the Supreme Court in C.G.T. v. Dr. George Kuruvilla ( (1970) 77 I.T.R. 746 ) and in C.G.T. v. P. Gheevarghese ( (1972) 83 I.T.R. 403 ). Referring to this provision the Supreme Court in C.G.T. v. Dr. The question of exemption under section 5 (1) (xiv) in circumstances similar to these has been considered by the Supreme Court in C.G.T. v. Dr. George Kuruvilla ( (1970) 77 I.T.R. 746 ) and in C.G.T. v. P. Gheevarghese ( (1972) 83 I.T.R. 403 ). Referring to this provision the Supreme Court in C.G.T. v. Dr. George Kuruvilla ( (1970) 77 I.T.R. 746 ) said thus: "The clause does not enact that a gift made by a person carrying on any business is exempt from tax, nor does it provide that a gift is exempt from tax merely because the property is used for the purpose for which it was used by the donor." In C.G.T. v. P. Gheevahrgese ( (1970) 77 I.T.R. 746 ) the Supreme Court considered the scope of the term " in the course of " in the exemption clause with which we are concerned here and said thus : " Thus the expression ˜in the course of carrying on of business, etc.,' means that the gift should have some relationship with the carrying on of the business. If a donor makes a gift only while he is running the business that may not be sufficient to bring the gift within the first part of clause (xiv) of section 5(1) of the Act. It must further be established, to bring the gift within that provision, that there was some integral connection or relation between the making of the gift and the carrying on of the business." 7. It is pressed before us that the new partner who was the son of the assessee was inducted into the partnerships for the purpose of the continuity of the business and for the more effective carrying on of the business with a view to see that the son was trained up in the business for securing continuity of the business of the firms as and when the assessee retired. The Appellate Tribunal has observed that the new partner who is hardly 19 years of age and one prosecuting his studies, was only a sleeping partner and the business did not get any benefit from his admission. This court had occasion in several cases to consider the scope of the clause regarding exemption with which we are concerned here. Particular reference may be made to the decisions in I.T.R. Nos. 1 of 1970 and 43 of 1970. This court had occasion in several cases to consider the scope of the clause regarding exemption with which we are concerned here. Particular reference may be made to the decisions in I.T.R. Nos. 1 of 1970 and 43 of 1970. The latter was a case where the business was transferred to the sons of the assessee, the assessee being a very old lady and it was said that she was unable to carry on the business and therefore in the interests of the business and for the purpose of carrying on the business the transfer had to be made. This court did not accept this case of the assessee and the question was answered against the assessee, relying on the decisions of the Supreme Court. Of course, on the facts of the case before us, we see no justification to take a view different from that adopted by the Appellate Tribunal. That would mean that we too are of the view that the transfer was not made for the purpose of the business much less in the course of the business. Therefore the assessee would not be entitled to exemption-under section 5(1) (xiv) of the Act. 8. This should have answered the reference made to us as the question which has been referred has been completely dealt with by what we have found here. But counsel for the assessee urged that there is yet another aspect of the matter which has to be looked into in sending our answer to the reference to the Appellate Tribunal. According to him the question requires to be re-formulated or re-framed and consequently we should also answer whether, on the facts and in the circumstances of the case, there was any gift assessable to gift tax. It is the counsel's case, that he urged before the assessing authority as well as the appellate authority that there was no transfer of any good-will arising in the circumstances of the case. His case is that mere readjustment in the share of the profits by any partner of a firm resulting in an enlargement of the share of another partner or a new partner getting a share in the profits would not be sufficient to consider that there has been a transfer of property and even if there is a transfer of some property it is not of the good-will. It is true that the same contention was urged more or less in the same form, before the Appellate Assistant Commissioner and also before the Appellate Tribunal and that has been considered by the Appellate Tribunal though not by the Appellate Assistant Commissioner. It is therefore counsel's contention that this question arises out of the order of the Tribunal and if so this court, exercising jurisdiction under section 26 of the Act, can re-frame the question so as to answer this contention also. 9. We have already pointed out that the question referred to us stands fully answered by what we have already found. The only question referred to (us is the claim for exemption under the provisions of the Act. What is further urged now is a claim to non-taxability on the ground that there is no gift within the meaning of the Act. It is not sufficient if a question arises out of the order of the Tribunal. It is also necessary that the question must be one referred to this court. The powers of this court are limited to answering the question which is referred under section 26 (1) of the Act. Sub-section (6) of section 26 of the Act provides that upon hearing any such case, the High Court shall decide the question of law raised therein, and in doing so, may, if it thinks fit, alter the form of the question of law. Altering the form of the question is nothing but re-framing the question to bring out the real controversy covered by the question referred. It is true that all aspects of the question which has been referred by the Appellate Tribunal could very well be urged before this court even if it be that such aspects had not been urged before the Appellate Tribunal. It is also true that different approaches may be made to the question referred. But this is essentially different from urging an entirely different question, the answer to which also may lead to the result desired by the assessee, a result same as that which may arise from the answer to the question referred if that happens to be in favour of the assessee. It is not the final result that is material. The one and only question is, what exactly is the scope of the question referred. It is not the final result that is material. The one and only question is, what exactly is the scope of the question referred. An assessee may succeed if his claim to exemption under certain provision is found tenable. The same result may, possibly, follow if, irrespective of any question of exemption the assessee is found to be not taxable on the same income for other reasons. But that certainly will not be sufficient to call upon a court sitting in advisory jurisdiction under section 26 of the Gift Tax Act to answer the latter when the question referred is the former. The position is identical in a reference under section 256 (1) of the Income-tax Act, 1961. It is not as if the question of exemption from certain provisions of the Act is to be treated as enabling the court to answer a plea as to the non-taxability under the Act. In the case before us the pleas of exemption as also non-liability were urged before the Appellate Tribunal and these were considered. For reasons best known to the assessee he has not chosen to seek reference of the question as to whether he is liable to be taxed under the Act, in regard to the transaction which is the subject-matter of the order of assessment. To permit him now to raise the question and answer it, as pleaded by the counsel for the assessee, would be not to re-frame the question which has already been referred to us, but to answer a further question "whether on the facts and in the circumstances of the case there was any gift assessable to tax under the Act". We do not see any reason to so "re-frame" the question, when we feel that under guise of reframing what the assessee seeks is the answer to a further question which, according to him, would give him adequate relief. The provision in section 26 (6) indicates the limits within which we could deal with such matters and accordingly we hold that there is no scope for answering any questions besides what has been done by us in this judgment. 10. Our attention has been drawn by counsel for the assessee to the decision in Commissioner of Income-tax v. B.C. Swimming Bath Trust ((1955) 27 I.T.R. 279) and Ismailia Grain Marchants Association v. Commissioner of Income-tax ((1957) 31 I.T.R. 433). 10. Our attention has been drawn by counsel for the assessee to the decision in Commissioner of Income-tax v. B.C. Swimming Bath Trust ((1955) 27 I.T.R. 279) and Ismailia Grain Marchants Association v. Commissioner of Income-tax ((1957) 31 I.T.R. 433). These decisions of the Bombay High Court do not, according to us, help the assessee. In neither of these cases was there any case of re-framing the question beyond the scope of the reference, re-framing in such a way as to answer a question independent of the question referred. The relevant query in every case would be whether the question urged is different from the question referred and the answer would depend on the facts and circumstances of each case. 11. In the circumstances the question which is referred to us is answered in the affirmative, that is, in favour of the Revenue and against the assessee. Parties will bear their costs. A copy of this judgment under the signature of the Registrar and seal of this court will be sent to the Income-tax Appellate Tribunal, Cochin Bench as required under section 26 (6) of the Gift Tax Act, 1958.