M/S. KHODAY ESWARSA AND SONS versus THE COMMISSIONER OF GIFT TAX

Citation: [2001] SUPP. 4 S.C.R. 178 · Decided: 16-10-2001 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
MIS. KHODAY ESWARSA AND SONS 
v. 
THE COMMISSIONER OF GIFT TAX 
OCTOBER 16, 2001 
B 
[S.P. BHARUCHA, Y.K. SABHARWAL AND BRIJESH KUMAR, JJ.] 
c 
D 
E 
F 
G 
H 
Gift Tax Act, 1958 : Section 6(2). 
Gift Tax-AY 1970-71-G(fted property-Revocability of-Capitalized 
value-Assessee granted licence to a private company for five years subject 
to its termination with six months' notice-Gift Tax Officer treated it as a gift 
and levied g~ft tax-Validity of-Held: Revocability of the gift is the relevant 
fact-It is immaterial whether it was, in fact, revoked or not-In the instant 
case, gift is revocable/terminable with six months' notice-It is not revocable 
for a specified period which is less than a year-Therefore, the capitalized 
value under R. JI (1) is 'nil'-Hence, no gift tax is payable-Gift Tax Rules, R. 
11(1). 
The appellant-assessee,-a partnership firm, was carrying on various 
businesses. The partnership firm consisted of seven partners. Four part-
ners retired from the firm, which was reconstituted by the remaining 
partners. The newly constituted firm entered into an agreement with a 
private limited company. Under the said agreement the appellant-assessee 
granted licence and persmission to the private limited company as a 
licensee to carry on and conduct the business of manufacturing certain 
products. The period of licence provided in the agreement was five years 
subject, however, to the termination by either party, giving to the other, 
six months' notice in writing. As a consideration for the agreement, the 
licensee agreed to pay a certain minimum fee or compensation. 
The Gift Tax Officer treated the transfer of business by the firm to 
the private limited company as a gift under the Gift Tax Act, 1958 made 
for inadequate consideration and levied the gift tax for the Assessment 
Year 1970-71 on the value of the deemed gift. However, the Appellate 
Authority held that the deemed gift made by the assessee under the agree-
ment was exempt under Section S(l)(xiv) of the Act. But the Income Tax 
Appellate Tribunal reversed the order of the Appellate Authority. The 
High Court answered the reference under Section 26(1) of the Act against 
178 
KHODA Y ESWARSA v. COMMR. OF GIFf TAX [SABHARWAL, J.] 
179 
the appellant-assessee. Hence this appeal. 
On behalf of the appellant it was contended that no gift tax was 
payable as the case squarely fell within the ambit of Section 6(2) of the 
Act read with Rule 11 of the Gift Tax Rules. 
Allowing the appeals, the Court 
HELD : 1. The language of Rule 11(1) of the Gift Tax Rules is clear. 
It does not admit of any two interpretations. The relevant factor is the 
revocability of the gift and not whether, in fact, it was revoked or not 
within the period of five years. Under Rule 11(1) what is of relevance is 
"the number of compete years .••.. for which the· gift is not revocable .•. ". In 
the present case, the gift was revocable/terminable with six months' notice. 
Thus, it was not revocable for a specified period, which was less than a 
year, namely, six months. The capitalized value has to be fixed under Rule 
11(1) under which if it was revocable for a period less than one year, the 
value. could not be worked out and, thus, it had to be 'nil'. [183-F ·G] 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 2751~2752 of 
1998. 
From the Judgment and Order dated 16.3.90 of the Karnataka High Court 
in T.R.C. Nos. 66 and 67 of 1982. 
G. Sarangan, P.R. Ramasesh and Abhay Prakash Sahay for the Appellant. 
M.L. Verina, Ms. Neera Gupta, B.\r. Balaram Das for Ms. Sushma Suri 
for the Respondent. 
The Judgment of the Court was delivered by 
Y.K. SABHARW AL, J. At the instance of the assessee, three questions 
that were referred to the High Court for its opinion under Section 26(1) of 
the Gift Tax Act, 1958 are as under : 
I. 
"Whether on the facts and in the circumstances, of the ·case, the 
Tribunal was right in holding that there was a deemed gift 
taxable under the Gift Tax Act, 1958 for assessment year 1970-
A 
B 
c 
D 
E 
F 
G 
71. in respect of arrangement in pursuance of agreement dated 
21.11.1969 between the assessee and M/s. Khoday Industries 
H 
180 
SUPREME COURT REPORTS 
[2001] SUPP. 4 S.C.R. 
A 
Pvt. Ltd.? 
B 
c 
2. 
Whether on th~ facts and in the circumstances of the case, the 
Tribunal w_as right. in holding that a partnership firm is an 
assessable entity under the provisions of Gift-Tax Act, 1958? 
3. 
Whether on the facts and in the circumstances of the 

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