1990 (2) TMI 91 - AT - Income Tax

Summary

Issues:
Deduction claimed towards gift-tax liability.

Analysis:
The appeal by the Revenue concerns the deduction claimed towards gift-tax liability. The case involves the assessee, who gifted jewellery to her granddaughter, resulting in a gift-tax assessment. The value of the jewellery was determined after allowing the basic exemption. The assessee raised two points in appeal, one regarding valuation and the other concerning the deduction of gift-tax liability. The first appellate authority directed the GTO to allow the deduction of gift-tax liability. The Departmental Representative argued that gift-tax liability should not be considered a prior charge for allowing the deduction. The assessee's representative contended that the gift was made subject to the condition that the donee would pay the gift-tax, creating a liability at the time of transfer. Various court decisions and commentaries were cited to support the arguments.

The key question was whether the deduction claimed for gift-tax liability could be allowed. It was established that when a property subject to charge or encumbrance is gifted, the value of the charge or encumbrance should be deducted. This deduction is permissible if the liability or encumbrance existed before the gift. Court precedents illustrated scenarios where liabilities attached to gifts were deductible from the value of the gifted property. However, it was emphasized that the liability to pay gift-tax arises only upon completing the gift, as per the provisions of the Gift Tax Act. The liability primarily falls on the donor, and any agreement between the donor and donee regarding gift-tax payment does not warrant a deduction.

Two significant precedents were referenced to support the position that gift-tax liability cannot be considered as a pre-existing liability eligible for deduction. The Karnataka High Court and Madras High Court decisions clarified that the gift-tax payable by the donee does not constitute consideration and should not be allowed as a deduction. Therefore, the deduction granted by the first appellate authority was deemed legally impermissible, leading to the reversal of the Commissioner(A)'s finding and upholding the assessment by the GTO. Ultimately, the appeal by the Revenue was allowed, affirming the decision to disallow the deduction claimed towards gift-tax liability.