Life interest release as gift: deemed-cost rules apply, but capital gains computation must be recomputed for bonus and rights shares.

Release of a life interest in trust property can fall within the statutory concept of a gift for income-tax purposes, so the deemed-cost rule under section 49(1)(ii) applies to the transferred interest. The Tribunal also noted that the cost of acquisition of the life interest, including the effect of later bonus and rights shares, must be recomputed on the correct legal basis. The assessment was therefore sustained on the substantive applicability of the gift-linked cost rule, but remitted for fresh computation of capital gains and cost of acquisition after proper verification and hearing.

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Issues: (i) Whether the assessee's release of life interest in the trust property constituted a gift so as to attract section 49(1)(ii) of the Income-tax Act, 1961; (ii) whether the cost of acquisition of the life interest and the subsequent bonus and rights shares was required to be recomputed in accordance with law.

Issue (i): Whether the assessee's release of life interest in the trust property constituted a gift so as to attract section 49(1)(ii) of the Income-tax Act, 1961.

Analysis: The expression "gift" was considered in the light of the wider definition under the Gift-tax Act, 1958, as contrasted with section 122 of the Transfer of Property Act, 1882. A voluntary transfer without consideration was held to fall within the concept of gift for the purposes of the Gift-tax Act, and the unilateral character of the release did not take the transaction outside that statutory framework. The decision relied on the statutory scheme in section 49 of the Income-tax Act, 1961, under which property acquired under a gift takes the previous owner's cost as the cost of acquisition.

Conclusion: The release of life interest was treated as falling within the scope of gift, and section 49(1)(ii) of the Income-tax Act, 1961 applied against the assessee.

Issue (ii): Whether the cost of acquisition of the life interest and the subsequent bonus and rights shares was required to be recomputed in accordance with law.

Analysis: Although the basic character of the acquisition brought the case within section 49(1)(ii) of the Income-tax Act, 1961, the Tribunal held that the computation of cost had not been correctly worked out in relation to the later bonus and rights issues. The matter therefore required fresh computation on the correct legal basis after giving the assessee an opportunity of being heard.

Conclusion: The assessment was set aside to the extent of recomputation of capital gains and cost of acquisition in accordance with law.

Final Conclusion: The assessee succeeded only on the limited question of recomputation, while the substantive taxability of the transaction was upheld and the matter was remitted to the Assessing Officer for fresh computation.

Ratio Decidendi: For income-tax purposes, property received on release of life interest can fall within the statutory concept of gift, and the cost of acquisition is then governed by the deemed-cost rule applicable to gifts, subject to correct recomputation of later accretions such as bonus and rights shares.

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