Deemed gift rules do not apply where a trust deed transfer occurs for stated consideration under a pre-existing purchase right.

A transfer made under a trust deed in exercise of a pre-existing right of purchase was examined for deemed gift treatment under the Gift-tax Act. Section 4(1)(b) was held inapplicable because the stipulated consideration did pass from transferee to transferor. For section 4(1)(a), adequacy of consideration had to be assessed in a broad, common-sense manner, and the existence of a binding obligation under the trust deed was relevant to that assessment. The market value being higher did not by itself make the consideration inadequate, and voluntariness was not to be imported into the deemed-gift provision. On those facts, no deemed gift arose.

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Issues: Whether the transfer of the property under the trust deed for a stated price, pursuant to a pre-existing right of purchase, gave rise to a deemed gift under section 4(1)(a) or section 4(1)(b) of the Gift-tax Act, 1958.

Analysis: The transfer was made in implementation of the trust deed, and the purchaser acquired the property in exercise of a right created long before the Gift-tax Act came into force. Section 4(1)(b) was inapplicable because the stipulated consideration of Rs. 8 lakhs did pass from the transferee to the transferor. For section 4(1)(a), the decisive question was whether the transfer was otherwise than for adequate consideration. The expression 'adequate consideration' was held to have to be judged in a broad common-sense manner, and the existence of a binding obligation under the trust deed was a relevant factor in assessing adequacy. The statutory definition of 'gift' in section 2(xii), read with section 4, did not permit importing the requirement of voluntariness into the deemed-gift provision. On the facts, the consideration fixed by the trust deed could not be treated as inadequate merely because the market value was higher.

Conclusion: The transfer did not attract section 4(1)(a) or section 4(1)(b), and no deemed gift arose.

Concurring Opinion: The Judicial Member concurred in allowing the appeal and held that no gift was involved, but added that voluntariness remained relevant even in the case of a deemed gift under section 2(xii).

Final Conclusion: The gift-tax assessment was unsustainable because the transfer was made for adequate consideration in enforcement of a pre-existing contractual right, and the appeal succeeded.

Ratio Decidendi: A transfer made in discharge of a binding pre-existing obligation is not chargeable as a deemed gift under section 4(1)(a) unless the consideration can properly be characterised as inadequate on a broad and realistic assessment; section 4(1)(b) applies only where the stated consideration does not pass or is not intended to pass.

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