Commissioner of Gift Tax v. K. M. Ziauddin — 1997 DIGILAW 1541 (MAD)

Judgment :- N. V. BALASUBRAMANIAN, J. The assessee is an individual and was not ordinarily a resident during the previous year ended on March 31, 1975, relevant to the assessment year 1975-76. The assessee made the following gifts to his daughters Date of gift Amount in Amount in Names of the donees Malaysian Indian dollars rupees 24-6-1974 31, 750 1, 00, 000 K. M. Fowzia Begum 21-8-1974 30, 041 1, 00, 000 K. M. Z. Mehrunnisa 21-8-1974 15, 021 50, 000 K. M. Z. Salamath Nachia The above gifts were made by way of drafts purchased in Malaysian dollars at Kuala Lumpur in the name of the donees. According to the assessee, the gifts took place at Kuala Lumpur and the gifts were accepted on behalf of his daughters in Kuala Lumpur itself and the assessee purchased the drafts thereafter. The assessee, therefore, contended that the gifts were movable properties situated in foreign country and the assessee being not ordinarily a resident, is entitled to exemption under section 5(1)(ii) of the Gift-tax Act (hereinafter to be referred to as "the Act"). The Gift-tax Officer, however, did not accept the contentions urged on behalf of the assessee and held that the assessee had not proved the acceptance of the gifts at Kuala Lumpur. He, therefore, held that the gifts took place in India and levied the gift-tax The assessee preferred an appeal to the Commissioner of Gift-tax (Appeals) against the order of the Gift-tax Officer. The Commissioner (Appeals) held that the purchase of drafts at Kuala Lumpur would amount to movable properties situated in a foreign country and the assessee was eligible for exemption under section 5(1)(ii) of the Act. In this view of the matter, he allowed the appeal preferred by the assessee Dissatisfied with the order of the Commissioner (Appeals), the Revenue preferred an appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal, following its earlier order in the case of one Dr. S. Raja Ramalingam of Salem in G.T.A. No. 58 (Mds.) of 1977-78 dated April 26, 1978, held that the gifts were not made of Indian currency in India and that the place where the gifts were complete is not relevant. The Appellate Tribunal also held that the assessee is a non-resident and when the gifts were of movable properties outside India, the assessee is entitled to exemption under section 5(1)(ii) of the Act. The Appellate Tribunal also held that the assessee is a non-resident and when the gifts were of movable properties outside India, the assessee is entitled to exemption under section 5(1)(ii) of the Act. The Tribunal also noticed that the drafts were purchased in the foreign country in the names of the donees and, therefore, the case of the assessee is stronger than the case in Raja Ramalingam's case decided earlier. In this view of the matter, the Tribunal held that it is not necessary to go into the question whether there was any actual acceptance of the gifts in the foreign country and dismissed the appeal preferred by the RevenueIn compliance with the directions of this court in T. C. P. No. 216 of 1983 dated November 29, 1983, the Tribunal referred to the following question of law for our consideration "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the demand drafts purchased in foreign currency in Kuala Lumpur and sent to his three daughters are gifts exempt under section 5(1)(ii) of the Gift-tax Act, 1958 ?" * Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the issue raised in the question is squarely covered in favour of the Revenue by two decisions of this court in the case of CGT v. S. Raja Ramalingam and in the case of CGT v. P. D. Kumaresan. Learned counsel for the Revenue submitted that in P. D. Kumaresan's case this court held that where there was a gift of moneylying in deposit in a bank in England and the fact of posting the drafts in the post office in England and the receipt by his relatives in India were not sufficient for the grant of the exemption under section 5(1)(ii) of the Act. He also submitted that the earlier order of the Tribunal in Raja Ramalingam's case was the subject-matter of consideration before this court in CGT v. S. Raja Ramalingam. He further submitted that at least the facts in one of the transactions in S. Raja Ramalingam's case are similar to the facts in the present case and thus, he submitted, that since in that case this court held that the gift took place in India, following the same logic, the gifts in the instant case were not exempt under section 5(1)(ii) of the Act. Notice was served on the assessee, but there was no representation on behalf of the assesseeWe have carefully considered the submissions of learned counsel for the Revenue and also perused the records. The facts in Raja Ramalingam's case are as under: "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. 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." The issue that arose before the court in S. Raja Ramalingam's case (in which one of us was a party) was whether there was a request made by the donee to the donor to send the draft by post. This court in the absence of any request by the donee to the donor to send the draft by post came to the conclusion that the gift was complete in India where the donee accepted the gift as the donor posted the draft without the express request of the donee and the post office cannot be regarded as an agent of the donee. The above view was also followed in P. D. Kumaresan's case (in which one of us was a party) and there also the only question that was raised was where the acceptance took place and this court held that the acceptance took place after the draft came to India by post and was received by the assessee's father. This court, therefore, held that the subject-matter of the gift was in India at the time of the acceptance of the gift and at the time when the transfer was made, the subject-matter of the gift was in IndiaIt is no doubt true, a fair reading of the above decisions does support the stand of the Revenue that the assessee is not eligible to get exemption under section 5(1)(ii) of the Act. However, the facts of the case are slightly different. We have seen the facts earlier and it is seen that the drafts were purchased in a foreign country in the name of the donees and the drafts were sent by post to India in favour of the donees. Even assuming, without conceding that the donees have not instructed the donor to send the drafts by post and the post office in India acted as an agent of the donor at the time of delivery of the drafts in favour of the donees, still the question that arises is where the property was situate at the time of receipt of the drafts by the donees and acceptance of the gifts by the donee. It is already seen that the assessee had deposited the money in the foreign country and purchased the drafts in the names of the donees and as soon as the drafts were purchased in the names of the donees, we have to see what is the exact relationship between the bank and the donees The relationship between banker and customer is one of a contract. The true relationship between the parties is explained in Sheldon's Practice and Law of Banking (Tenth edition), at page 186, as under "The true relationship between the two parties was admirably described by Lord Cottenham in Foley v. Hill [1848] 2 HL Cas 28. The true relationship between the parties is explained in Sheldon's Practice and Law of Banking (Tenth edition), at page 186, as under "The true relationship between the two parties was admirably described by Lord Cottenham in Foley v. Hill [1848] 2 HL Cas 28. 'Money', said his Lordship, 'when paid into a bank, ceased altogether to be the money of the principal ; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the bank is money known by the principal to be placed there for the purpose of being under the control of the banker ; it is then the banker's money ; he is known to deal with it as his own ; he makes what profit he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places . . . That being established to be the relative situation of banker and customer, the banker is not an agent or factor, but he is a debtor'. In N. Joachimson v. Swiss Bank Corporation 1921 (3) KB 110, Lord Justice Atkin gave an admirable summary of the position. He stated that the banker undertakes to receive money and collect bills for his customer's account and that money so received is not held in trust for the customer but borrowed from him with a promise to repay it or any part of it during banking hours at the branch of the bank at which the account is kept, against the customer's written order addressed to the bank at such branch." * In Paget's Law of Banking (Ninth Edition), the learned author described the nature of the relation between a banker and a customer as under "The contract is not capable of definition, but only of description of which the best is that of Atkin LJ. in the Joachimson (N.) v. Swiss Bank Corporation 1921 (3) KB 110. in the Joachimson (N.) v. Swiss Bank Corporation 1921 (3) KB 110. Nevertheless, the formula for the relation of banker and customer was for long based on Foley v. Hill [1848] 2 HL Cas 28, and was there defined as that of debtor and creditor with the super-added obligation of honouring the customer's cheques when there was a sufficient available credit balance to meet them. The debt due from the banker was said to be payable on demand, but this was not regarded as affecting the relation. As Scrutton L.J. put it in Bradford Old Bank Ltd. v. Sutcliffe 1918 (2) KB 833 at 848 'Even if the word "demand" is used in the case of a present debt, it is meaningless and express demand is not necessary, as in the case of a promissory note payable on demand : Norton v. Ellam [1837] 2 M & W 461.' So also, in the same case, Pickford L.J. said that 'on demand' has no effect in the case of money lent, the liability existing as soon as the loan is made, but that this does not apply to a collateral promise or a collateral debt Bradford Old Bank Ltd. v. Sutcliffe 1918 (2) KB 833 at 840. Moreover, the view that the banker's debt was of this nature was justified by the opinion of Lord Lyndhurst in the earlier stages of Foley v. Hill [1848] 2 HL Cas 28 and by the judgments in Pott v. Clegg [1847] 16 M & W 321 and Re Tidd, Tidd v. Overell 1893 (3) Ch 154, which recognised the banker's debt as being subject to the statutes of limitation (as they were then called), and so, indirectly, at all times immediately due and recoverableBut it was common knowledge that there were debts which were really not payable except on demand, nor enforceable till after demand. The distinction is drawn in Walton v. Mascall [1844] 13 M & W 452 at 455. 'It is quite clear that a request for the payment of a debt is quite immaterial unless the parties to the contract have stipulated that it shall be made ; if they have not, the law requires no notice or request, but the debtor is bound to seek out the creditor and pay him when the debt is due'." * The Supreme Court in Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh has held that in banking transactions the following rules are now settled (page 598 of AIR 1955 SC): ". . . the obligation of a bank to pay the cheques of a customer rests primarily on the branch at which he keeps his account and the bank can rightly refuse to cash a cheque at any other branch : Rex v. Lovitt 1912 AC 212, 219 ; State Aided Bank of Travancore Ltd. v. Dhrit Ram and New York Insurance Co. v. Public Trustee 1924 (2) Ch 101, 119 ; (2) A customer must make a demand for payment at the branch where his current account is kept before he has a cause of action against the bank : Joachimson (N.) v. Swiss Bank Corporation 1921 (3) KB 110, 130, quoted with approval by Lord Reid in Arab Bank Ltd. v. Barclays Bank. The rule is the same whether the account is a current account or whether it is a case of deposit." In Shanti Prasad Jain v. Director of Enforcement the Supreme Court held that where moneys are deposited in a bank, the relationship that is constituted between the banker and the customer is one of debtor and creditor. In Smt. Pushpawati v. United Commercial Bank at the instance of respondent No. 3, the petitioner made a fixed deposit at the Chandigarh branch office of the United Commercial Bank and respondent No. 3 fraudulently got the same included in her name. The petitioner produced the receipt to the Chandigarh office to claim repayment, but the bank refused to pay the same on the ground that respondent No. 3 had instructed the bank not to pay the principal to the petitioner. The petitioner therein therefore renewed the deposit for one more year and then, the petitioner forwarded the receipt to the United Commercial Bank for repayment through its branch office at New Delhi and when the repayment was refused, the petitioner filed a suit in the Simla court in Himachal Pradesh against the United Commercial Bank for the repayment of the amount due on the receipt. The bank contended that the court at Simla has no jurisdiction as the deposit was not made at Simla and, therefore, the Simla court has no jurisdiction. The bank contended that the court at Simla has no jurisdiction as the deposit was not made at Simla and, therefore, the Simla court has no jurisdiction. The learned judge, in that situation, held that the respondent-bank has its branch at Simla and the petitioner is also residing at Simla and hence, the Simla court has jurisdiction. The above decision makes it clear that the relationship between the banker and the customer is one of debtor and creditor. The court, no doubt, held that it was open to the petitioner to institute a suit in Simla, but it was on the ground that there was a branch office of the United Commercial Bank at Simla. But, that principle where the suit would be instituted is not of much relevance in deciding the question where the property is situate or located at the time of acceptance of the gift. In Cheshire and North's Private International Law (Eleventh edition), the learned author has observed that there is very little authority on transfer of movables by gift inter vivos, but it is suggested that the validity of such transfer of property should be governed by the lex situs. The learned author referred to an interesting American decision in Morson v. Second National Bank of Boston [1940] 306 Mass 589 : 29 NE 2d 19 and observed as under "The donor, whilst travelling in Italy with the donee, handed her an envelop containing shares in a Massachusetts company, thus purporting to transfer to her the title to the shares ; later, the donor, whilst still in Italy, signed and delivered the stock certificate to the donee. This was adequate under Massachusetts law, but not under Italian law, to effect transfer of legal title to the shares. It was concluded by the Massachusetts court that the lex situs should determine whether there had been a completed gift of a tangible chattel and, had the shares been tangible chattels, Italian law, as the lex situs, would have governed. This rule for the choice of law was, however, inapplicable since a transfer of shares falls to be governed by the law of the country in which the issuing company has been incorporated. This rule for the choice of law was, however, inapplicable since a transfer of shares falls to be governed by the law of the country in which the issuing company has been incorporated. On the other hand, the validity of the transfer of the actual certificate was subject to the lex situs." * In so far as lex situs is concerned, the test indicated by the learned author runs as under "The test by which the locality is determined has been explained by Atkin L.J. in the following words : 'The test in respect of simple contracts was : Where was the debtor residing ? ... The reason why the residence of the debtor was adopted as that which determined where the debt was situate was because it was in that place where the debtor was that the creditor could, in fact, enforce payment of the debt.' This rule, that an intangible movable, such as a right to recover a loan or money due under an insurance policy is situated in the country where the debtor resides, because that is where it can be enforced, is a general but not a universal rule. It has been held that a debt which arises under an irrevocable letter of credit is situate in the place where it is in fact payable against the documents, rather than the place of residence of the bank. The general rule of reference to the residence of the debtor encounters an apparent difficulty where, as will often occur in the case of a company, the residence extends to two or more countries. Although the place of residence is chosen because it is there that recovery by action is possible, it has been suggested that a debt is situated in the country where it is payable even though this does not represent the residence of the debtor. The courts, however, have not taken this view. They have insisted that the residence of the debtor is 'an essential element in deciding the situs of the debt'. The courts, however, have not taken this view. They have insisted that the residence of the debtor is 'an essential element in deciding the situs of the debt'. If the debtor resides in two or more countries, then, indeed the debt is situated in the one in which it is required to be paid by an express or implied provision of the contract or, if there is no such provision, where it would be paid according to the ordinary course of businessIf, however, the debtor resides only in one country, it is there alone that the debt is situated notwithstanding that it may be expressly or implicitly payable elsewhere." * Therefore, applying the principles laid down in the above case, it is clear that at the time of acceptance of the gift, the money was situate in the foreign country as the money was deposited in a foreign bank, and the foreign bank was obliged to pay the same to the donee. No doubt, it is true that the donee by depositing the draft in a bank in India can realise the amount and can get the payment in India, but, the subsequent act of realisation of the money by the donee would be after the acceptance of the donee of the gift and for realisation of the donee's money and as soon as the gift is accepted by the donee, the foreign bank becomes the debtor to the donee as the draft was standing in the name of the donee and at that precise point of time, the debt is situate in a foreign country The bank, under the terms of the contract was obliged to pay money and it is not necessary for the donees to go to the foreign country for the encashment of the drafts and it is open to them to encash the drafts by placing the drafts in the donees' bank or at a branch office of the foreign bank and to demand payment. It is well-settled that debts, whether secured or unsecured and whether by way of registered documents or not, are situated at the place where the debtor is residing In this case, the bank being the debtor is in a foreign country and as we have already seen, the relationship between the banker and the customer is one of debtor and creditor and when the debt is situate in the foreign country and the debtor is also having its office in a foreign country, at the time of acceptance of the gifts by the donees in India, the property is situate only in the foreign country. The drafts by themselves do not represent the cash but merely represent the money value of the cash deposit in the bank which would enable the donees to realise the money. But, on that account, it cannot be stated that the cash itself was delivered to the donees in India. As already seen, in normal bank practice, the donees must take further steps to realise the drafts and if there is a failure on the part of the branch office of the foreign bank in India, it would be open to the donees to institute a suit in India, but the crucial question is where the debt is located at the time of acceptance of the gifts by the donees. In our view, since the bank drafts represent only the debt and considering the relationship between the banker and the customer, the debt was situate in the foreign country in the foreign bank, we hold that at the time of acceptance of the gifts the movable property, viz., the debt was situate outside India and the donor being an individual, though a citizen of India, is not ordinarily a resident, is eligible for exemption under clause (ii) of sub-section (1) of section 5 of the ActNo doubt, it is true that this court in the two decisons cited supra viz., CGT v. S. Raja Ramalingam and CGT v. P. D. Kumaresan held that the gift is not exempt under section 5(1)(ii) of the Act. Though one of us was a party in both the judgments, we are of the view, the question of exact relationship between the banker and the customer and the nature of the money deposited in the bank and the location of the money deposited in the bank were not subject-matters of consideration before this court in both the said cases. This court, in those cases, proceeded only on the basis that in the absence of the specific instruction from the donee to send the money by post, the post office cannot be regarded as an agent of the donor when the postal authorities delivered the draft in India. But, this court had no occasion to consider the further aspect of the question that even if the gift is complete in India, where the property is situate and what is the location of the property in respect of the banking laws and the exact relationship between the bank and customer and the points are considered and focussed only in the present case. It is only in this view of the matter, the further questions regarding the location of the debt and the relationship of the banker and the customer were examined and we hold, considering the relationship between the banker and the customer and the location of the debt at the time of acceptance of the gifts, the assessee is entitled to the exemption as provided under section 5(1)(ii) of the Act. In fine, we answer the question of law referred to us in the affirmative and against the Revenue. No costs.