THE COMMISSIONER OF INCOME TAX vs. MRS.SARITA P.SHIRKE and ANR.

ORAL JUDGMENT(PER V. M. KANADE, J.) The   Revenue   is   challenging   the   Judgment   and   Order

2 passed   by   the   Income   Tax   Appellate   Tribunal   which   has confirmed   the   Order   passed   by   the   Deputy   Commissioner   of Income Tax(Appeals) and has held that Respondent No.1 was not liable to pay Gif­Tax and her case was exempted under Section 5(1)(ii).   The   Appeal   was   admitted   by   this   Court   and   the following substantial question of law was framed:­ "A.   Whether   the   gifts   made   in Kashmir   by   the   Assessee   a Non­Resident     of   India,   out   of the   money   transferred   from other   part   of   the   country,   is exempted   from   tax   under   the Gift Tax Act, 1957?"

3 of India, Kashmir.  Thereafter, on 1­11­1982 the Assessee arrived in India and   on   the   next   day   i.e.   on   2­11­1982   the   Assessee   gave   gifts   of Rs.1,58,000/­ to 5 trusts of Chowgule family in Kashmir in favour of the children of Vijay and Ashok Chowgule.   Thereafter   on   2­12­1982, the Assessee sold her  12,340 equity shares to 3 Companies in Kashmir at the rate of Rs.65/­ per share aggregating to Rs.8,02,100/­ by an agreement which was executed at Kashmir. The 3 Companies received loan from the 5 trusts of Rs.7,85,631/­. Thereafter, on 20­12­1982 by Demand Draft of Rs.8,00,000/­ was transferred from Kashmir to Central Bank, Vasco and this amount   was   withdrawn   and   advanced   to   M/s.   Chowgule   Brothers. Thereafter on 27­4­1983 the Assessee received an amount of Rs.8,00,000/­ from M/s. Chowgule Brothers and on 29­4­1983 this amount was invested in Rural Development Bonds and thereafter exemption was claimed in the return of income for the assessment year 1983­84. 3. The   learned   Counsel   appearing   on   behalf   of   the Appellant submitted that the aforesaid transaction of gift was a colourable transaction which had been resorted to solely for the purpose of avoiding tax.   He submitted that it was open for the Court   to   gather   from   the   circumstances   the   real   nature   of   the transaction  and   to  draw  inference  whether the  said   transaction was made with an intention to escape tax liability. He relied on

4 a Judgment of the Supreme Court in the case of  McDowell And Co.   Limited    v.    Commercial   Tax   Office  reported   in   154   ITR

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8 Gift­Tax.     A   concurrent  finding   has   been  recorded   by   both   the lower   authorites   that   the   amount   lying   in   the   account   of Respondent No.1/Assessee in Vasco was transferred by demand draft to her account in Kashmir and there she had made a gift to 5 Trusts in Kashmir. The Respondent No.1 being a Non­Resident of   India   and   permanently   residing   in   Dubai   would   have   very well given the gift in Dubai where the gift is not taxable.  It is, therefore, not possible to come to a conclusion that this was a colourable device for avoiding tax.  In any case, even otherwise, if  a   person is  entitled   to  an  exemption  in  law   and  accordingly makes a plan to avoid the tax liability which is otherwise legally entitled   to   it   would   not   amount   to   a   tax   evasion.  The Supreme Court in a recent case in the case of  Union of India and another v. Azadi Bachao Andolan and another (supra) has to a very large extent watered down the ratio laid down in McDowell And Co. Limited v. Commercial Tax   Office(supra)  and   has   observed   that   the   observations   made   by Chinnappa Reddy, J. in the said Judgment do not necessarily reflect the observations   of   the   other   Hon'ble   Judges.   The   Supreme   Court   in   this Judgment   has   considered   the   majority   view   and   the   view   taken   by Chinnappa Reddy, J. and has observed that the majority Judgment in McDowell  And  Co, Limited  v.  Commercial  Tax Office(supra)  had not endorsed the view of Chinnappa Reddy, J.  The Apex Court has observed as 9 under:­ "As we shall show presently, far from being   exorcised   in   its   country   of origin,   Duke   of   Westminster's   case [1936]   AC     1   (HL);   19   TC   490 continues to be alive and kicking in England   Interestingly,   even   in McDowell's case[1985] 154 ITR 148 (SC),   though   Chinnappa   Reddy   J. dismissed   the   observation   of   J.   C. Shah J. in CIT   v.   A. Raman and Company[1968]   67   ITR   11   (SC) based on Westminster's case [1936] AC 1 (HL);   19 TC 490 [68] and Fisher's   Executors   case   [1926]   AC 395  at  412  (HL),  by  saying  (page 160 of [1985] 154 ITR) "we think that   the   time   has   come   for   us   to depart   from   the   Westminster principle   as   emphatically   as   the British   courts   have   done   and   to dissociate   ourselves   from   the observations of Shah J., and similar observations   made   elsewhere",   it does not appear that the rest of the learned Judges of the Constitutional Bench   contributed   to   this   radical thinking. Speaking for the majority, Ranganath Mishra J.(as he then was) says in McDowell's case [1985] 154 ITR 148, 171 (SC): "Tax   planning   may   be legitimate provided it is within the framework   of   law.   Colourable devices   cannot   be   part   of   tax planning   and   it   is   wrong   to encourage or entertain the belief that it   is   honourable   to   avoid   the payment   of   tax   by   resorting   to dubious methods. It is the obligation of   every   citizen   to   pay   the   taxes

10 honestly   without   resorting   to subterfuges."(emphasis supplied) This opinion of the majority is a far cry from the view of Chinnappa Reddy J.(page 160) : "In our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether a provision   should   be   construed literally or liberally nor whether the transaction   is   not   unreal   and   not prohibited   by   the   statute,   but whether the transaction is a device to avoid   tax,   and   whether   the transaction is such that the judicial process may accord its approval to it."  We are afraid that we are unable to read or comprehend the majority judgment in McDowell's case[1985] 154   ITR   148   (SC)   as   having endorsed   this   extreme   view   of Chinnappa Reddy J., which, in our considered opinion, actually militates against   the   observations   of   the majority of the judges which we have just   extracted   from   the   leading judgment of Ranganath Mishra J.(as he then was)."

11 v.  Tar Chand Saraogi and others reported in Income Tax Reports Vol.163 page 406 has held that the gift of shares is complete as soon as the shares are handed over to the donee along with blank transfer form duly signed by the   donor.     In   the   present   case,   the   shares   of   Respondent   No.1   were transferred  by her to 3  Companies in  Kashmir.   A share is a movable property  and,   therefore,  would  also   be  covered  under  the  provision  of Section 5(1)(ii).   The Respondent No.1 having transferred the shares in Kashmir would also be squarely covered within the exemption granted by Section 5(1)(ii) of the Gift­Tax Act.  The gift of shares was made pursuant to an agreement executed at Kashmir whereby the Assessee/Respondent No.1 herein sold her 12,340 equity shares to the 3 Companies in Kashmir. Both the lower authorities in our view, have not committed any error in coming to   the conclusion that both the transactions were exempted under the provisions of the Gift­Tax Act.  We do not see any reason to interfere with the concurrent findings of fact  recorded by both the  lower authorities. The Appeal is accordingly dismissed. S. S. PARKAR, J. V. M. KANADE, J. RD.