2002 (12) TMI 19 - HC - Income Tax

Family arrangement exempts transactions from gift tax liability; court rules in favor of assessee

The High Court held that transactions involving the alienation of self-acquired property to a son through a partition deed and leasing properties to ... Gift Tax Act, 1958 - Whether, Tribunal is right in law and also had valid materials in holding that transaction by which a self-acquired property of the assessee was alienated in favour of her son by way of a partition deed is only a family arrangement and, therefore, is outside the purview of the Gift-tax Act? - 2. Whether, Tribunal is right in law and also had valid materials in holding that the transaction by which the assessee leased out the properties to her husband and two daughters at a lease rent which is far below the annual income of the property is only a family arrangement and is outside the purview of the Gift-tax Act?' - We answer both the questions of law referred to us in the affirmative, against the Revenue and in favour of the assessee. Issues:1. Whether the transaction of alienating a self-acquired property by way of a partition deed to the son constitutes a family arrangement and is outside the purview of the Gift-tax ActRs.2. Whether leasing out properties to husband and daughters at a rent below market value is a family arrangement exempt from the Gift-tax ActRs.Issue 1:The case involved a reference under the Gift-tax Act regarding the alienation of a self-acquired property to the son through a partition deed. The Gift-tax Officer contended that this transaction constituted a gift, leading to a tax liability. However, the Appellate Tribunal found that the transaction was part of a family arrangement aimed at resolving disputes and maintaining harmony within the family. The Tribunal concluded that the transaction was involuntary and did not amount to a gift under the Gift-tax Act. The Tribunal canceled the gift-tax assessment for the relevant year. The Revenue challenged this decision, arguing that the transaction was indeed a gift as the son had no pre-existing right to the property. The High Court analyzed the principles of family arrangements as established by previous court decisions and held that the transaction fell within the scope of a valid family arrangement, resolving family disputes and maintaining peace. The High Court upheld the Tribunal's decision, ruling in favor of the assessee.Issue 2:The second issue pertained to the leasing of properties to the husband and daughters at a rent below the market value. The Gift-tax Officer considered this lease arrangement as falling under the purview of the Gift-tax Act due to the lower rent fixed compared to previous years. The Commissioner of Income-tax (Appeals) upheld this view, stating that the lease amount was below market rent and confirmed the tax assessment. However, the Appellate Tribunal, after considering the family dynamics and circumstances leading to the partition and lease deeds, concluded that these transactions were part of a family arrangement aimed at avoiding future disputes and maintaining family harmony. The Tribunal found that the transactions were involuntary and did not constitute gifts under the Gift-tax Act. The High Court agreed with the Tribunal's analysis, emphasizing the importance of family arrangements in resolving disputes and maintaining family cohesion. Consequently, the High Court ruled in favor of the assessee, holding that the transactions did not attract gift tax liability.In conclusion, the High Court affirmed that both transactions involving the partition deed and the lease arrangement were part of a valid family arrangement, exempt from the Gift-tax Act. The Court found that the transactions were entered into to resolve family disputes and maintain peace within the family, rather than as voluntary gifts. Therefore, the High Court answered both questions of law in the affirmative, against the Revenue and in favor of the assessee.