Commissioner of Gift Tax v. S. Raja Ramalingam — 1996 DIGILAW 504 (MAD)

Judgment :- K. A. THANIKKACHALAM, J. At the instance of the Department, the Tribunal referred the following question for the opinion of this court under section 26(1) of the Gift-tax Act, 1958: "Whether, on the facts and in the circumstances of the case, gifts made by the assessee totalling Rs. 2, 50, 077 by remitting moneys from America during the assessment year 1974-75 were exempt from tax under section 5(1)(ii)(a) of the Gift-tax Act for the assessment year 1974-75 ?" The assessee, Dr. S. Raja Ramalingam, is a resident of Salem. He is employed as a doctor at Canton in Ohio in the United States of America having left India on June 28, 1968. On May 11, 1973, he obtained a draft from the State Bank of India, New York Branch, drawn in favour of his father, Sri V. S. D. Sundararaja Chettiar, on the State Bank of India, Salem, for Rs. 89, 552.24. That was despatched by him by post to his father at Salem on May 14, 1973, along with a covering letter wherein he stated that the said sum was a gift to his brother, S. Kumarashanmugham, to enable the latter to undergo medical education. The father was requested to encash the draft and hand over the money to the donee. The cheque was encashed by the assessee's father on June 4, 1973, and the proceeds were credited in the accounts of Kumarashanmugham in the books of the assessee's father on the same day On February 8, 1974, the assessee obtained a draft for rupees one lakh from the State Bank of India, New York, drawn in favour of his father on the State Bank of India, Salem. That was despatched by the assessee to his father at Salem on February 12, 1974, along with a covering letter wherein the assessee stated that the said sum was a gift to his father. That was despatched by the assessee to his father at Salem on February 12, 1974, along with a covering letter wherein the assessee stated that the said sum was a gift to his father. The said draft was encashed by the assessee's father on February 23, 1974, and the proceeds were credited in his capital account in his booksOn February 21, 1974, the assessee obtained a draft for 7, 500 dollars from Herson Bank at Canton in the United States of America in the name of his father on a bank at Salem and the same was despatched by the assessee on February 24, 1974, along with a covering letter of even date wherein he had stated that the said sum was a gift to his mother by the son. The said draft was encashed at Salem on March 7, 1974, and the proceeds were credited in the account of the assessee's mother in the books of the assessee's father For the assessment year 1974-75, a gift-tax return was filed on March 2, 1976, disclosing a total gift of Rs. 2, 50, 077 made up of Rs ; 89, 552 being the gift made to the assessee's brother, Kumarashanmugham ; rupees one lakh being the gift made to the assessee's father and Rs. 60, 525 being the gift made to the assessee's mother. It was contended that the gift was exempt from tax under section 5(1)(ii)(a) of the Gift-tax Act, 1958. It was also claimed that the assessee was a non-resident. The Gift-tax Officer did not accept the assessee's claim for exemption. He noticed that the assessee had been in India during the period from April 1, 1973, to March 31, 1974, and had also maintained a dwelling place in India, and had occupied the same during the period of stay in India. He, therefore, held that the assessee could not be considered a non-resident, but was considered as a resident, but not ordinarily resident. With regard to the claim for exemption under section 5(1)(ii)(a) of the Gift-tax Act, the Gift-tax Officer held that since the amounts had been gifted through drafts and since the drafts were encashed only in India, it could not be said that the gifts were of movable property, situate outside India. He accordingly determined the taxable gift as Rs. 2, 45, 077 and levied tax of Rs. He accordingly determined the taxable gift as Rs. 2, 45, 077 and levied tax of Rs. 42, 770Aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner and contended that the assessee is a non-resident and the exemption claimed should be allowed. The assessee contended that inasmuch as he is residing along with his father in his house, he is not a resident of India. Regarding the claim for exemption it was contended that the gift was of movable property, viz., money in America, and hence outside the taxable territories. The Appellate Assistant Commissioner accepted the first contention but rejected the latter contention. Again the assessee preferred a second appeal before the Tribunal. It was contended by the assessee that what was gifted was only money in American currency and that the gifts were complete when the assessee paid the money to the American banks and obtained drafts and since the gifted properties were movable properties situate in America, the gifts were exempt from tax under section 5(1)(ii)(a) of the Gift-tax Act. However, the Department contended that the gifts were made in India and not in America. Therefore, no exemption can be granted under section 5(1)(ii)(a) of the Gift-tax Act. It was pointed out that the delivery took place only when the drafts were encashed at Salem in India, and, therefore, the gift transaction was completed within the Indian territory. Hence, the gifts sent by the assessee are assessable under the Gift-tax Act. However, the Tribunal held that in view of the fact that the Foreign Exchange Regulation Act was in force, the assessee cannot remit the American currency directly to India, and, therefore, the assessee purchased demand drafts in the name of the donees in India and thereafter sent the drafts by post to the donee in India. Therefore, when the drafts were purchased in the American banks, the assessee has forgone the ownership over the moneys by which the drafts were purchased. Hence, according to the Tribunal, the gift took place in American territories. Therefore, the gifts sent by the assessee are exempted under section 5(1)(ii)(a) of the Gift-tax Act. Therefore, when the drafts were purchased in the American banks, the assessee has forgone the ownership over the moneys by which the drafts were purchased. Hence, according to the Tribunal, the gift took place in American territories. Therefore, the gifts sent by the assessee are exempted under section 5(1)(ii)(a) of the Gift-tax Act. Accordingly, the Tribunal set aside the order passed by the Appellate Assistant Commissioner and allowed the appeal filed by the assesseeBefore us, learned senior standing counsel appearing for the Department submitted that in order to have a gift completed there must be a donor, there must be a donee and the gift must be accompanied by delivery of possession. It was submitted that the assessee purchased demand drafts in the name of his relations, who were in India. The drafts were purchased in American banks. It is no doubt true that the American dollars cannot be despatched to India, which would be in violation of the Foreign Exchange Regulation Act. Two drafts were purchased in the name of the father with a direction to encash the same and hand over the money to the assessee's brother and the mother. One draft was purchased directly in the name of his father as a gift to him. Learned senior standing counsel pointed out that when the drafts were sent by post through the post office, the post office cannot be an agent of the donee. If at all, the post office can be an agent of the donor. It was further submitted that there was no evidence on record to show that the donees made a request to make the gifts to them. In the absence of such a request, it was submitted that the post office cannot act as an agent of the donees. According to learned senior standing counsel the gift became complete only on delivery and such a delivery took place when the drafts were encashed at Salem in India and not outside the taxable territories. There is no request or any agreement between the donor and the donee requesting to send the moneys by way of gift from America. According to learned senior standing counsel the gift became complete only on delivery and such a delivery took place when the drafts were encashed at Salem in India and not outside the taxable territories. There is no request or any agreement between the donor and the donee requesting to send the moneys by way of gift from America. Learned senior standing counsel also pointed out that in the case of the gifts made by the assessee to his mother and brother, the drafts had been taken in the name of the assessee's father, that the assessee had requested his father to encash the drafts and hand over the moneys to the donees and thus it was clear that the assessee had constituted his father as an agent for delivering the money in question to the donees and that since the assessee's father encashed the drafts and constructively handed over the money to the donees at Salem, such gift took place only at Salem. It was, therefore, submitted that the Tribunal was not correct in granting exemption under section 5(1)(ii)(a) of the Gift-tax Act in the case of the assesseeWe have heard learned senior standing counsel appearing for the Department and perused the records carefully. We have already set out the facts in detail. The assessee is a non-resident. On May 11, 1973, he purchased a draft from the State Bank of India, New York branch, drawn in favour of this father, V. S. D. Sundararaja Chettiar, on the State Bank of India, Salem, for Rs. 89, 552.24. That was despatched by post to his father at Salem on May 14, 1973, along with a covering letter wherein he requested his father to encash the draft and hand over the money as a gift to his brother. So also on February 8, 1974, the assessee purchased a draft for Rs. one lakh from the State Bank of India, New York, drawn in favour of his father, on the State Bank of India, Salem. That was despatched to the father on February 12, 1974, along with a covering letter wherein he stated that the said sum was a gift to his father. The said draft was encashed by his father on February 23, 1974. That was despatched to the father on February 12, 1974, along with a covering letter wherein he stated that the said sum was a gift to his father. The said draft was encashed by his father on February 23, 1974. Similarly, on February 21, 1974, the assessee purchased a draft for 7, 500 dollars from New York Bank at Canton in the United States of America in the name of his father on a bank at Salem and the same was despatched by the assessee on February 24, 1974, along with a covering letter wherein he requested to encash the draft and pay the amount to his mother. The draft was encashed and the amount was credited in the account of the assessee's mother Now, the point for consideration is whether the gifts sent by the assessee from the United States of America are amenable to gift-tax assessment. The assessee submitted that the gifts sent by him are exempted under section 5(1)(ii)(a) of the Gift-tax Act, 1958. For the assessment year 1974-75, a gift-tax return was filed, disclosing a total gift of Rs. 2, 50, 077 made up of Rs. 89, 552 being the gift made to the assessee's brother, Rs. one lakh being the gift made to the assessee's father and Rs. 60, 525 being the gift made to the assessee's mother. The assessee claimed exemption under section 5(1)(ii)(a) of the Gift-tax Act. According to the assessee, all these gifts took place not within the taxable territory of India, but they took place in the United States of America when the demand drafts were purchased by the assessee from the American banks payable at a bank in Salem. As regards the claim for exemption under section 5(1)(ii)(a) of the Act, the Department was of the view that since the amounts had been gifted through drafts and since the drafts were encashed only in India, it could not be said that the gifts were of movable property situate outside the India. Accordingly gift-tax was levied to the extent of Rs. 42, 770. According to the assessee, what was gifted was only money in American currency and the gifts were complete when the assessee paid the money to the American banks and purchased the drafts. Accordingly gift-tax was levied to the extent of Rs. 42, 770. According to the assessee, what was gifted was only money in American currency and the gifts were complete when the assessee paid the money to the American banks and purchased the drafts. According to the assessee, only two requirements are to be satisfied for claiming exemption (1) that the property gifted must be situate outside the taxable territories (2) that the donor should not be either a citizen of India or a person ordinarily resident in the taxable territories. Section 5(1)(ii)(a) of the Act was introduced by the Taxation Laws (Amendment) Act 13 of 1966, (sic) which provides that gifts by an individual, who is not a resident of India to any person resident in India of foreign currency or other foreign exchange as defined in clauses (c) and (d) of section 2 of the Foreign Exchange Regulation Act, 1947, remitted from a country outside India in accordance with the provisions of the said Act and the rules made thereunder during the period between the 26th day of October, 1965, and ending on the February 28, 1966, would be exempt from tax. Thus, it will be seen that the above provision grants exemption in respect of movable property situate outside India under two conditions, viz., (a) if the donor is an individual, that is to say, a natural person ; (b) he is not either a citizen of India or ordinarily resident in India during the previous year. According to the assessee, he was not a resident, but he was a non-resident. There is no dispute in the present case that the property gifted was movable propertyIf a non-resident donor makes a gift in foreign exchange or foreign currency to a person in India and the bank draft or cheque or the currency is received by or on behalf of the donee outside India, there will obviously be no liability to gift-tax in respect of such a gift. That is because the subject-matter of the gift in such cases will be property situated outside India. Again, where the property in such foreign currency or foreign exchange is delivered to the donee in India, i.e., where the cheque or draft is sent by the donor to the donee in India on his own by post or otherwise, the gift undoubtedly would attract liability to gift-tax. Again, where the property in such foreign currency or foreign exchange is delivered to the donee in India, i.e., where the cheque or draft is sent by the donor to the donee in India on his own by post or otherwise, the gift undoubtedly would attract liability to gift-tax. This is because in such a case where the post office or the agency through which the gift is sent, acts as an agent of the donor and the subject-matter of the gift will be property situated in India The situation which requires some clarification, however, is where a non-resident donor makes a gift in foreign exchange or foreign currency to a person in India and the bank draft or cheque representing the gift is sent by the donor by post to the address of the donee in India at the request of the donee. The Board clarified that there will be no liability to gift-tax in respect of these transactions. This is because in such a case, the gift can be said to have been received by the banks/post offices as agent of the donee outside India. This inference is based on the decision in the case of Rajkumar Mills Ltd. v. CIT 1976 (103) ITR 92 at page 99, wherein the Bombay High Court on a review of the relevant principles laid down by the Supreme Court, quoted as under: "If the cheque is sent by post the receipt would be at the place where the cheque is posted provided the mode of sending it by post is adopted at the express or implied request of the addressee, in such cases, the post office being the agent of the addressee ; otherwise the receipt would be at the place where the cheque is delivered by the post office to the addressee." According to the facts arising in the present case, there was no material on record to show that any request was made by the donees to the donor for sending the gifts. If such a request was there, then the post office from which the drafts were sent would act as the agent of the donee. But, in the present case, as much as there was no request made by the donee, the post office in which the drafts were sent by the donor would be the agent of the donor and not the agent of the donee. But, in the present case, as much as there was no request made by the donee, the post office in which the drafts were sent by the donor would be the agent of the donor and not the agent of the donee. This was the view taken by this court in CGT v. K. A. Abdul Kader 1996 (217) ITR 780, 1996 (134) CTR 141 wherein this court, after taking into consideration the following decision of the Supreme Court in CIT v. Kirloskar Bros. Ltd. 1954 (25) ITR 547, 1954 (24) CC 537, 1954 AIR(SC) 504, and another decision of the Supreme Court in CIT v. Ogale Glass Works Ltd. 1955 (1) SCR 185 , 1954 AIR(SC) 429, 1954 SCJ 522, 1954 (24) CC 520, 1954 (25) ITR 529, 1952 AIR(Bombay) 306 a decision of the Kerala High Court in Gomes (A. J.) v. CGT 1991 (187) ITR 320, 1991 (56) TAXMAN 151 and the decision of the Bombay High Court in Rajkumar Mills Ltd. v. CIT 1976 (103) ITR 92 and another decision of the Supreme Court in Shri Jagdish Mills Ltd. v. CIT 1959 AIR(SC) 1160, 1959 (37) ITR 114, 1960 (1) SCR 236 held that (1) when payment is received by cheque, the receipt is at the time when the cheque is delivered and not when it is encashed ; (2) if the cheque is sent by post, the receipt would be at the place where the cheque is posted, provided the mode of sending it by post is adopted at the express or implied request of the addressee. In such cases, the post office becomes the agent of the addressee. Otherwise, the receipt would be at the place where the cheque is delivered by the post office to the addressee ; (3) Having regard to business, a request to make payment by cheque may in itself imply a request to send it by post, while a request to remit the amount would be tantamount to an express request to send it by post ". As already pointed out, according to the facts arising in the present case, no request was made by the donees for making the gift by the donor. As already pointed out, according to the facts arising in the present case, no request was made by the donees for making the gift by the donor. There is also no business relationship between the donor and the donees in the present caseThe view of the Tribunal that when the assessees purchased demand drafts from the American bank, the assessee would have lost domain over the amounts for which the drafts were purchased, and, therefore, the gift would have been completed at that point itself in the United States of America, is not correct. In fact, the Tribunal has not considered as to whether there is any agency on behalf of the donees to act for the purpose of accepting the gifts in the United States of America itself. It remains to be seen that two cheques were sent to the father of the donor with a request to hand over the moneys to the donees and one cheque was sent directly to the father of the assessee for his benefit. In the earlier instances, the father of the donor would act as the agent of the donor in delivering the gifts to the donees. This instance took place within the taxable territory. Therefore, it is not correct on the part of the Tribunal to state that the property gifted was only money in American currency and the delivery of the gifted property took place in America when the assessee obtained the drafts after remitting the money thereto. Accordingly, we answer the question referred to us in the negative and in favour of the Department. No costs.