Power of appointment as transfer under gift-tax, with valuation fixed to the date of exercise rather than later effectiveness.

Exercise of a power of appointment in favour of persons other than the donee was treated as a transfer within the inclusive definition under the Gift-tax Act, because the decisive act was the actual exercise of the power and not the mere possibility that it could have been exercised in the donee's favour. The Finance (No. 2) Act, 1980 amendment was read as clarificatory, and a direct transfer by the original trustees was rejected on the trust deed's terms. Gift-tax therefore applied. For valuation, the taxable event was the date of exercise of the power, so only the interest then transferred had to be valued, not the later effective transfer made by the trustees.

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Issues: (i) Whether the exercise of a power of appointment in favour of persons other than the donee amounted to a transfer of property and consequently a taxable gift under the Gift-tax Act, 1958; (ii) What was the correct date and basis for valuing the interest transferred where the power of appointment was exercised and later made effective by the trustees.

Issue (i): Whether the exercise of a power of appointment in favour of persons other than the donee amounted to a transfer of property and consequently a taxable gift under the Gift-tax Act, 1958.

Analysis: The definition of transfer in section 2(xxiv)(c) was treated as an inclusive one and the decisive factor was held to be the actual exercise of the power of appointment, not merely its scope. The amendment made by the Finance (No. 2) Act, 1980 was read as clarificatory of that position. The fact that the power could have been exercised in favour of the donee did not prevent its exercise in favour of others from amounting to a transfer. The contention that there was a direct transfer by the original trustees was rejected, as the trust deed did not authorise transfer of the corpus to persons outside the named beneficiaries.

Conclusion: The exercise of the power of appointment amounted to a transfer of property and was chargeable to gift-tax; this issue was decided against the assessee.

Issue (ii): What was the correct date and basis for valuing the interest transferred where the power of appointment was exercised and later made effective by the trustees.

Analysis: Since the taxable event was the exercise of the power of appointment, valuation had to be made as on that date and not on the later date when the trustees accelerated the operation of the appointment. What was transferred at the earlier stage was the assessee's interest in the corpus, not the entire corpus itself. The valuation therefore had to reflect the interest actually transferred, with the later effective transfer of the balance tied to the trustees' chosen date and the relevant evidence on share values and discounting to be considered by the assessing authority.

Conclusion: The valuation had to be made on the date of exercise of the power of appointment and only the transferred interest was to be valued; this issue was decided partly in favour of the assessee.

Final Conclusion: The appeals were allowed only to the limited extent that the valuation approach was corrected, while the finding that the exercise of the power of appointment attracted gift-tax was sustained.

Ratio Decidendi: Exercise of a power of appointment in favour of persons other than the donee constitutes a transfer within the inclusive definition in the Gift-tax Act, and the taxable value is to be determined with reference to the date of such exercise, not the later date on which the transfer is made effective.

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