Is Asset Transfer A Capital Gain?

The desire to minimise or reduce the tax burden is extremely tempting for various reasons, including lack of faith in the government that it may not utilise the funds thus collected for people's benefit. Thus the safest way to minimise the tax burden was the transfer of income yielding assets to the spouse. However, the IT and Wealth Tax Acts have been vigilant, and have thwarted all such attempts by the taxpayers. Section 64 (1) (iv) read with Section 27 (i) of the IT Act, provides that where an asset, including a house, is transferred by an individual to his/her spouse directly or indirectly, (otherwise for adequate consideration or in connection with an agreement to live apart), any income from such assets will be deemed to be the income of the transferor.

 

Natural love and affection may be considered, but that is not adequate for considerations under Section 64(1) as in the case of Tulsidas Kilachand vs CIT (1961) 42 ITR 1 (SC). Moreover, the Andhra Pradesh high court in Potti Veerayya Sresty vs CIT (1972) 85 ITR 194, made the following observation in this context:

Good consideration to support a contract under provisions of the Indian Contract Acts is one thing and `adequate consideration' to avoid tax under the Income Tax Act is quite a different thing. Since the law insists that the consideration for transfer must be adequate, there must be some means to measure the adequacy of the consideration. This is to say, the consideration that supports the transfer should be one the value of which can be measured in terms of money or money's worth.

Thus religious, spiritual and other such benefits which cannot be measured in terms of money, cannot be held adequate for consideration to rule out the application of the two provisions in the IT and Wealth Tax Acts.

However, the expression `to live apart' has been held to have wider connotations and even the voluntary agreements to live apart can fall within the exception to the above mentioned two provisions.

Recently, the scope of the phrase agreement to live apart' came up for consideration in the Madhya Pradesh high court (Indore bench), in the case CIT vs H H Maharani Maheka Raje Pawa(1996) 219 ITR 577. The facts of the case indicated that the assessee gave 5,852 equity shares of Union Carbide and 1,637 equity shares of Chemical and Fibres, apart from cash and other properties to his wife, in connection with an agreement to live apart in pursuance of a consent decree obtained from the competent court. The assessing office held that there was a transfer of assets from the husband to wife, which attracted the provisions of Section 45, justifying levy of capital gains tax, amounting to Rs 74,098. Therefore, he added this sum as income from capital gains to the assessee's income. CIT (A) approved this action. However, the IT Tribunal accepted that there was transfer of shares by the assessee to his wife but no gain accrued, which can be added in the income of the assessee as capital gain.

The high court has affirmed the Tribunal's order. Two questions were referred to it for decision viz:

Whether the giving of shares to wife amounted to transfer?

Whether such `transfer' resulted in capital gain liable to tax?

On the first issue the court decided that the assessee gave up his rights on the aforesaid property and as such the Act is covered by the aforesaid definition and is clearly the transfer in terms of the provisions of the Act. The asset was relinquished and the rights were extinguished. Now the spouse was the owner of the said property, given to her in connection with the agreement to live apart. It is in the area of legislative ambiguities, yet not receding, that courts have to fill gaps, clear doubts and mitigate hardships. The words of judge Learned Hand, spoken in Cabell vs Markhan (1945) 148 F2D 737, 739 shows the correct path:

It is one of the surest indexes of a nature and developed jurisprudence to remember that statues always have some purpose or object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning.

Hence, the first question has been answered in affirmative. On the second issue, it has been said that the property was given to the wife in connection with an agreement to live apart. Such an act is permissible under Section 64(1) (iv) of the IT Act. The Tribunal noted the expression or in connection with an agreement to live apart as employed in Section 64(i) (iv) and observed that the legislature meaningfully did not use the word consideration instead it used the world connection. The property was given on terms of a compromise decree.

Thus the property was given not as a consideration but in connection with an agreement to live apart and hence no capital gain arose to the husband in transferring the property.

In this case, the provision of Section 64(i) (iv) was very clear hence, prima facie, the assessee should not have been dragged upto the high court stage. A correct appraisal of the legal provision at the assistant commissioner's stage could have avoided waste of time, money and effort at both the department's and taxpayer's levels.