Holding

Because the licence was revocable with six months' notice, the gift was not irrevocable for a period of at least one year, so under Rule 11(1) the capitalized value is nil and no gift tax is payable.

Summary

The appellant, a partnership firm, granted a five‑year licence to a private limited company, with either party able to terminate the licence by giving six months' written notice. The Gift Tax Officer treated the transfer of the business as a gift made for inadequate consideration and levied gift tax for AY 1970‑71. The Appellate Authority exempted the transaction under Sec 5(1)(xiv) of the Gift Tax Act, but the Income Tax Appellate Tribunal reversed that order, holding the transfer a taxable deemed gift. The High Court affirmed the Tribunal’s view. The Supreme Court held that under Rule 11(1) of the Gift Tax Rules, the decisive factor is the period for which the gift is not revocable; since the licence could be terminated with six months' notice, it was revocable for less than one year, making the capitalized value nil and no gift tax payable. Consequently, the appeals were allowed and the High Court’s order set aside.

Issues considered

Whether the transaction constituted a taxable deemed gift under the Gift Tax Act, 1958 for assessment year 1970‑71.

Legislation cited

Gift Tax Act, 1958s. 4(1)(a), s. 5(1)(xiv), s. 6(2)

Subjects

gift taxrevocabilitycapitalized valuepartnership firmlicence agreementSection 6(2)Rule 11deemed giftexemptionSection 5(1)(xiv)

Judgment

A MIS. KHODAY ESWARSA AND SONS
v.
THE COMMISSIONER OF GIFT TAX

OCTOBER 16, 2001

B [S.P. BHARUCHA, Y.K. SABHARWAL AND BRIJESH KUMAR, JJ.]

Gift Tax Act, 1958 : Section 6(2).

Gift Tax-AY 1970-71-G(fted property-Revocability of-Capitalized
value-Assessee granted licence to a private company for five years subject
c to its termination with six months' notice-Gift Tax Officer treated it as a gift
and levied g~ft tax-Validity of-Held: Revocability of the gift is the relevant
fact-It is immaterial whether it was, in fact, revoked or not-In the instant
case, gift is revocable/terminable with six months' notice-It is not revocable
for a specified period which is less than a year-Therefore, the capitalized
D value under R. JI (1) is 'nil'-Hence, no gift tax is payable-Gift Tax Rules, R.
11(1).

The appellant-assessee,- a partnership firm, was carrying on various
businesses. The partnership firm consisted of seven partners. Four part-
ners retired from the firm, which was reconstituted by the remaining
E partners. The newly constituted firm entered into an agreement with a
private limited company. Under the said agreement the appellant-assessee
granted licence and persmission to the private limited company as a
licensee to carry on and conduct the business of manufacturing certain
products. The period of licence provided in the agreement was five years
F subject, however, to the termination by either party, giving to the other,
six months' notice in writing. As a consideration for the agreement, the
licensee agreed to pay a certain minimum fee or compensation.

The Gift Tax Officer treated the transfer of business by the firm to
the private limited company as a gift under the Gift Tax Act, 1958 made
G for inadequate consideration and levied the gift tax for the Assessment
Year 1970-71 on the value of the deemed gift. However, the Appellate
Authority held that the deemed gift made by the assessee under the agree-
ment was exempt under Section S(l)(xiv) of the Act. But the Income Tax
Appellate Tribunal reversed the order of the Appellate Authority. The
H High Court answered the reference under Section 26(1) of the Act against
178
KHODA Y ESWARSA v. COMMR. OF GIFf TAX [SABHARWAL, J.] 179
the appellant-assessee. Hence this appeal. A
On behalf of the appellant it was contended that no gift tax was
payable as the case squarely fell within the ambit of Section 6(2) of the
Act read with Rule 11 of the Gift Tax Rules.

Allowing the appeals, the Court B
HELD : 1. The language of Rule 11(1) of the Gift Tax Rules is clear.
It does not admit of any two interpretations. The relevant factor is the
revocability of the gift and not whether, in fact, it was revoked or not
within the period of five years. Under Rule 11(1) what is of relevance is
"the number of compete years.••.. for which the· gift is not revocable.•.". In
c
the present case, the gift was revocable/terminable with six months' notice.
Thus, it was not revocable for a specified period, which was less than a
year, namely, six months. The capitalized value has to be fixed under Rule
11(1) under which if it was revocable for a period less than one year, the
value. could not be worked out and, thus, it had to be 'nil'. [183-F·G] D

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2751~2752 of
1998.

From the Judgment and Order dated 16.3.90 of the Karnataka High Court
in T.R.C. Nos. 66 and 67 of 1982. E

G. Sarangan, P.R. Ramasesh and Abhay Prakash Sahay for the Appellant.

M.L. Verina, Ms. Neera Gupta, B.\r. Balaram Das for Ms. Sushma Suri
for the Respondent.
F
The Judgment of the Court was delivered by

Y.K. SABHARWAL, J. At the instance of the assessee, three questions
that were referred to the High Court for its opinion under Section 26(1) of
the Gift Tax Act, 1958 are as under :
G
I. "Whether on the facts and in the circumstances, of the ·case, the
Tribunal was right in holding that there was a deemed gift
taxable under the Gift Tax Act, 1958 for assessment year 1970-
71. in respect of arrangement in pursuance of agreement dated
21.11.1969 between the assessee and M/s. Khoday Industries H
180 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A Pvt. Ltd.?

2. Whether on th~ facts and in the circumstances of the case, the
Tribunal w_as right. in holding that a partnership firm is an
assessable entity under the provisions of Gift-Tax Act, 1958?

B 3. Whether on the facts and in the circumstances of the case, the
Tribunal was right in holding that the gift, if any, in the arrange-
ment was not exempt under the provisions of Sec. S{l)(xiv) of
the Act?"

The High Court having al!swered the questions against the assessee,
c these appeals have been preferred by the assessee. The appellant has not
pressed question Nos·: 2' and 3. The only question that is required to be
examined· is the first question.

The appellant, a partnership firm, was carrying on various businesses.
D The partnership firm consisted of seven partners. On 20th November, 1969,
four partners retired from the firm which was reconstituted by the remaining
partners by taking into reconstituted firm, the children of the outgoing partners.
On 21st November, 1969, the newly constituted firm entered into an agree-
ment with a private limited company floated by the four outgoing partners.
E Under the said agreement, the firm granted licence and permission to ·the
private limited company as a licensee to carry on and conduct the business
of manufacturing Indian-made liquors, carbon-papers, typewriting-ribbons
etc. and for running the business handed over the premises, buildings, plants,
machineries and all other equipments which were being used by the firm for
the said businesses. The period of licence provided in the agreement was five
F
years subject, however, to the termination by either party, giving to the other
six months notice in writing. As a consideration for the agreement, the
licensee agreed to pay a minimum fee or compensation of Rs. 50,000 per
month and maximum of Rs. 60,000 per month.

G The Gift-Tax Officer treated the transfer of business by the firm to the
private limited company as a gift under the Gift Tax Act made for inadequate
consideration and levied the gift tax on the value of the deemed gift which
was computed at Rs. 1,10,25000. On the appeal preferred by the assessee, the
Appellate Authority held that the deemed gift made by the assessee under the
H agreement dated 21st November, 1969 was exempt under Section5(1)(xiv) of
KHO DAY ESWARSA v. COMMR. OF GIFf TAX [SABHARWAL, J.] 181
the Act on the ground that the gift made was for the purpose of business of A
. the donor.

On the appeal of the Revenue, the Income Tax Appellate Tribunal,
reversing the order of the Commissioner of Income Tax {Appeals), held that
the agreement amounted to transfer of property; the consideration was not
B
adequate with the result that there was a deemed gift within the meaning of
Section 4(1){a) of the Gift Tax Act and that the transaction was not bona fide.
Therefore, the Tribunal held that Section 5{1)(xiv) which, inter alia, provides
that the gift tax shall not be charged in respect of gifts made by any person
in the course of carrying on a business to the extent to which the gift is proved
to the satisfaction of the Gift-Tax Officer to have been made bona fide for c
the purpose of such business, is not applicable.

The aforestated questions were answered by the High Court against the
appellant.

Learned counsel for the appellant contends that the transaction under
the agreement dated 21st November, 1969 was a commercial transaction
whereby licence was granted by the appellant to the private limited company
for running of the business by the said company for a period of five years and
both the Tribunal and the High Court fell into an error in coming to the
E
conclusion that the transfer of business under the agreement was a 'gift'. The
Tribun~I, on appreciation of the facts, has recorded a finding of fact that the
consideration. was less than half the value of the property. On this finding,
the Tribunal concluded that to the transaction the provisions of Section 4(l)(a)
are clearly attracted. Section 4(1)(a), inter alia, stipulates that where property
is transferred otherwise than for adequate consideration, the amount by which F
the market value of the property at the date of the transfer exceeds the value
of the consideration shall be deemed to be a gift made by the transferor. The
Tribunal has held that the property has been transferred for inadequate con-
sideration inasmuch as the consideration stipulated in the agreement was less
than half the value of the property. The appellant did not bring on record any · G
special circumstances which may justify such a reduced consideration. The
conclusion drawn by the Tribunal and affirmed by the High Court that the
transaction was not bona fide and the property was transferred otherwise than
by adequate consideration is very possible conclusion on the facts found. In
this view we are unable to accept the contention that it was a commercial H
182 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A transaction and not a gift.

Learned counsel next contends that assuming that it was a gift, then too
no gift tax is payable as the case squarely falls within the .ambit of Section
6(2) of the Gift Tax, Act read with Rule 11 of the .Gift Tax Rules. The
contention is that it is a gift which· is not revocable for a specified period and
B
the capitalized value can be worked out only under Rule 11. Under ~hat rule,
the contention. further i.s. th~ minimum. period for computing the value of the
gift is one. year and here the gift being revocable with six months notice, the
valuation
. has to .be nil.
C The termination has been provided for ill clause (3) of the agreement.
The said clause reads as
under :

"The period of the licence and permission shall be five years com-
mencing from the 21st day of November, 1969. However, this agree-
ment may be terminated by either party giving to the other party at
D least six calender months notice in writing."

The licence deemed to be a gift, is not revocable for a specified period,
namely, six months.

Section 6 provides for determination of valuation of gifts. It is no,body's
E case that sub-section (1) or (3) of Section 6 has any applicability to the present
case. Sub-section (2) of Section 6 which is relevant here for determination of
the value of the gift reads as under :

"6(2) Where a person makes a gift which is not re.vocable for a
F specified period the value of the property gifted shall be the capital-
ized value of the income from the property gifted during the period
for which the gift is not revocable."

Rule 11(1) may also be extracted. It reads as under :

G "11(1) In the case of property
. . .
referred in sub-section (2). of Section
.6 of the Act, the capitalized value of the income shall ~e taken to the
product of t~e number o~ complete years included in the period for ·
. which the gift is not revocable and the av(!rage of the income received
from· the property during the three years or such lesser period of
H complete years in which such property was in existence, preceding the
KHODAY ESWARSA v. COMMR. OF GIFf TAX [SABHARWAL, J.] 183

previous year for the year of assessment after discounting it at a rate A
of 4 per cent per annum :

Provided that where the property was in existence for less than one
complete year preceding the previous year for the year of assessment
or came into existence in the previous year for the year of assessment,
B
the income from such property for one complete year shall be the
income which would have been receivable, if the property were in
- existence for one complete year."

The Tribunal held that since Section 6(2) refers to revocable gifts for
a specified period and in the present case, the licence was for a period of five C
years and, therefore, it has to be taken as a full period according to Rule 11.

-
The Tribunal was of the opinion that "The fact that it is terminable at six
months' notice is also not relevant". Further, the Tribunal took into consid-
eration the fact that the agreement was not cancelled within the period of five
years. The High Court affirmed the view of the Tribunal by holding that D
"Though the clause provided for revocation with six months' notice on either
side, it was not acted upon. Therefore the Tribunal was right in upholding the
levy of gift tax on the capitalized value of the gift, taking the gift as for five
years".
E
The Tribunal as well as the High Court clearly fell into an error in
upholding the levy of gift tax on the fapitalized value of the gift taking the
gift as for five years and treating as irrelevant the clause providing for
termination at six months notice and also taking into consideration the fact
that the argeement was not cancelled within the period of five years. In our
view, that is of no consequence. The language of Rule 11(1) is clear. It does F
not admit of any no two interpretations. The relevant factor is the revocability
of the gift and not whether, in fact, it was revoked or not within the period
of five years. Under Rule 11(1) what is of relevance is "the number of
complete years ... for which the gift is not revocable .... ". In the present case,
the gift was revocable/terminable with six months' notice. Thus, it was not G
revocable for a specified period which was less than a year, namely, six
months. The capitalized value has to be fixed under Rule 11(1) under which
if it was revocable for a period less than one year, the value could not be
worked out and, thus, it had to be 'nil'.

The Tribunal as well as the High Court were in error in rejecting the H
184 SUPREME COURT REPORTS [2001] SUPP. 4 S.C.R.
A assessee's contention that in terms of Rule 11(1), no gift tax was payable.
Admittedly, there is no other provision under which the capitalized value
could be fixed.

In the aforesaid premises, we allow the appeals and set aside the
judgment and order of the High Court, in regard to the first question aforestated.
B Accordingly we answer that question in the negative and in favour of the
assessee. Parties are left to bear their own costs.

v.s.s. Appeals allowed. -