1. These appeals are filed by the Department against the orders of ld.Commissioner of Gift Tax (Appeals) both dated 5^th December, 1997. The assessee(s) has filed cross objections supporting the orders of the ld.CGT(A).
2. In both the appeals, on the basis of the facts, the issue involved is identical, i.e., whether the assessee(s) is liable for gift tax under Section 4(1)(c) of the Gift Tax Act in regard to deemed gift on the notional amount of interest on the interest fee advances/loans lying with the sister concern(s) inspite of an admitted fact that there is no covenant or mutual agreement between the creditor and the debitor for payment of interest. Therefore, we, dispose of both these appeals alongwith the cross objections by this common order for the sake of convenience.
3. In order to discuss, the issue involved in these appeals, we state the facts in detail in the case of M/s. Sahara India (Firm) (G.T.A. No.15/Alld/1998). We may state that the ld. CGT(A) has also passed a detailed order in the case of M/s. Sahara India (Firm) and has follows his order in the case of M/s. Sahara India Limited (Gift Tax Appeal No.11/Alld/1998).
4. The grounds of appeal taken by the Department in the case of M/s.
Sahara India (Firm) are as under:- 1. That the ld. CGT(A) has erred in law and on facts in deleting the addition on account of deemed gift of Rs. 1,70,00,000/- without appreciating the provision of Section 4(1)(c) of the Gift Tax Act wherein the relinquishment of right has been considered as deemed gift and accordingly non-charging of interest on the amounts advanced to the sister concern would come under the ambit of deemed gift.
2. That the ld. CGT(A) has further erred in analyzing the provisions of Section 4(1)(c) of the G.T. Act in a manner which defeats the very intention of the legislature to plug the diversion of income and thus reducing the tax liability.
5. The relevant facts are that M/s. Sahara India (Firm) (hereinafter to be referred as the assessee) is a partnership, which came into effect from 1st January, 1982. The main object of the assessee firm is to encourage the habit of savings among the public for their general benefits. At the very inception, the assessee had taken over the business of (i) M/s. Sahara Savings and Finance Private Limited, Gorakhpur and (ii) Sahara Investment (India) Limited, Gorakhpur. The various financial schemes are offered by these two companies were also taken over by the assessee firm.
6. The A.O. has stated that on perusal of the balance sheet, it was found that the large funds of the assessee firm were lying with its sister concerns and its partners and Directors. It is further stated that the assessee firm has shown a total interest earned on loans/fixed deposit receipts of Rs. 1,63,00,000/-. It is further stated that the interest has been charged by the assessee firm from its sister concerns @ 18%. It is further stated that the assessee had also paid the interest @ 18% to its sister concerns.
7. The A.O. has stated that the assessee firm had total funds of Rs. 18,50,00,000/- with it and it should have earned an interest income of Rs. 3,33,00,000/-. However, the assessee firm earned interest income of only Rs. 1,63,00,000/-. The A.O. stated that the assessee company was supposed to utilize its money to earn income by way of interest from the market, but has, in fact, let these funds be held by its sister concern without any payment or charge of interest.
8. The A.O. observed that the assessee firm by not charging interest on the funds lying with its sister concerns on the loans and advances given to them, has willingly abandoned/surrendered its earning by way of interest income of Rs. 1,70,00,000/- (Rs. 3,33,00,000/- (-) Rs. 1,63,00,000/-), thus, attracting the provisions of the Gift Tax Act.
9. In view of the above facts, the A.O. issued notice Under Section 16 of the Gift Tax Act asking the assess to furnish the return of gift.
Pursuant thereto, the assessee filed he return of gift showing Nil value of the gift.
10. The A.O. held that Clause (c) of Section 4(1) of the Gift Tax Act is attracted in the case of the assessee as the assessee has surrendered/abandoned the interest income of Rs. 1,70,00,000/- in favour of its sister concern to whom no interest had been charged on the advances/loans given. He completed the assessment computing the taxable gift of Rs. 1,70,00,000/- by applying the provisions of Section 4(1)(c) of the Gift Tax Act.
11. Being aggrieved, the assessee filed appeal before the First Appellate Authority contending that there was no covenant and/or mutual agreement to charge interest on the advances/loans given by the assessee to its sister concern(s) and not charging of interest cannot amount to any release, surrender, discharge or abandonment, because there was no existing right or obligation for recovery of interest. A notional or hypothetical gift cannot be a subject matter of gift tax under the Gift Tax Act.
12. The ld. CGT(A) accepted the contention of the assessee and held that the assessee firm did not make any gift at all. He has cancelled the assessment order framed by the Assessing Officer under Sections 15(3)/16 of the Gift Tax Act. Hence, the Department is in further appeal before the Tribunal.
13. The ld. D.R. strongly supported the order of the A.O. He submitted that Clause (c) in Sub-section 4(1) of the Gift Tax Act has been inserted to plug the loop hole by bringing in its ambit the deeming provisions of deemed gift. He submitted that the assessee by not charging the interest from its sister concern(s) on the loans/advances given by it, has abandoned its right and this action of the assessee falls within the purview of Section 4(1)(c) of the Gift-tax Act. The ld. D.R. submitted that the Law Lexicon has defined the word "abandonment" means giving up of a thing. He submitted that the assessee by not charging the interest @ 18% which it had charged from some other concerns, abandoned its right, as the assessee firm being a Finance Company, was supposed to utilize its money, so collected from the public to earn income by way of interest. The action of the assessee firm of not charging the interest is against the very basis of its business activity. Hence, the deeming provisions of Gift Tax Act, are attractive. The ld. D.R. in support of his submission relied on the decision of Allahabad High Court in the case of Sir Padampat Singhania and Ors. v. CGT, (1988( 172 ITR 292 (All).
14. On the other hand, the ld. Authorized Representative of the assessee, at the outset, objected the grounds of appeal taken by the Department. He submitted that in the grounds of appeal, the Department has disputed the order of the First Appellate Authority stating that there was "relinquishment of right" by the assessee by not charging the interest on the amounts advanced to the sister concern, but in the assessment order, the provisions of Gift Tax Act have been applied on the ground of abandonment of right. He submitted that Section 14(1)(c) of the Gift-tax Act, does not state the word "relinquishment" and this word "relinquishment" is used only in Clause (e) in Section 4(1) of the Gift-tax Act and that too in the context of an immovable property. In reply, the ld. D.R. clarified and submitted that it was a typographical un-intentional mistake in stating the word "relinquishment" and the same should be read as "abandonment of right" by the assessee in not charging the interest.
15. The ld. Authorized Representative of the assessee further submitted that the addition made by the Assessing Officer in the income tax proceeding on account of notional interest on the interest free loans/advances given by the assessee to its sister concern, which is the subject matter in the present appeal, has already been deleted by the First Appellate Authority. At this, the ld. D.R. submitted that the proceedings under the Income-tax Act, 1961, are different proceedings and even if the addition of the interest in the income tax proceedings has been deleted by the Appellate Authority/Authorities still a thing/right could be a subject matter of a deemed gift Under Section 4(1)(c) of the Gift Tax Act. The ld. Authorized Representative of the assessee submitted that even otherwise the appeal filed by the Department against the impugned order of ld. CGT(A) has no substance.
He submitted that Section 4(1)(c) of the Gift-tax Act covers only certain deemed gift viz., where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person . . . .
He submitted that in order to apply provisions of Section 4(1)(c) of the Gift Tax Act, there must be a pre-existing right or interest in property. He further submitted that the act of the assessee not to charge interest on the loans/advances given by it to its sister concerns, could only be considered as a benefit given by the assessee and there is no such concept under the Gift-tax Act to bring a benefit within the purview of "Gift". He further submitted that there could be an abandonment of a right or relinquishment of aright by a person, only if he has a pre-existing right to it or he is the owner of a thing. He submitted that unless a person is owner of a property, he cannot abandon the property or his right therein. The ld. Authorized Representative of the assessee referred to Clause (xii) of Section 2 of the Gift Tax Act and submitted that if there is no existing movable or immovable property, which could be transferred, the deeming provision of Section 4 of Gift Tax Act could not be made applicable. He placed reliance on the decisions of the Hon'ble Supreme Court of India in the case of CIT v. Dr. R. S. Gupta, (1987) 165 ITR 36 (S.C.), and in the case of CIT v. Rasiklal Maneklal (HUF), (1989) 177 ITR 198 (S. C.). The ld. Authorized Representative of the assessee further submitted that there was no contract to charge interest on the advances/loans given by it to the sister concern(s) and, therefore, the A.O. in the income tax proceedings made the addition of Rs. 1,70,00,000/- on account of interest @ 18% on a notional or hypothetical basis, has already been deleted by the appellate authorities. He submitted that in the absence of any document on record, the assessee was not obliged to charge interest on the advances/loans from its sister concern and there is no accrual of right to the assessee and consequently, the question of levy of gift tax on deemed gift on account of abandonment of interest does not arise. He further submitted that a similar issue also came up for consideration before the Bangalore Bench of I.T.A.T. in the case of Raikar Theatre v. ACIT, (2002) 83 ITD 304. The ld. Authorized Representative of the assessee justified the impugned order of ld.CGT(A) in cancelling the assessment.
16. We have considered the rival submissions and have carefully perused the orders of the authorities below. We have also considered the cases relied upon by ld. Representatives in support of their submissions.
17. The Department has not disputed the contention of the assessee that there was no contract express or implied between the assessee and the sister concerns of the assessee firm for charging of interest on the loans/advances lying with them. Nor the Department has brought on record any evidence to show that there was any contractual obligation between the assessee and the sister concern(s) of the assessee as regards payment of interest on outstanding balance. Therefore, there is no dispute on the fact that the parties never intended to pay and/or to receive interest on the outstanding balance amount. In view of the above, we are of the considered view that the A.O.'s presumption that the assessee has abandoned/surrendered the interest amount of Rs. 1.70 crores in favour of its sister concerns has no basis as there is no accrual of interest.
18. Section 4 of the Gift tax Act includes certain transfers for the purpose of Gift Tax Act. The relevant Clause (c) of Section 4(1) of the Gift-tax Act, is as under : "(c) where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been bona fide, shall be deemed to be gift made by the Assessing Officer person responsible for the lease, discharge, surrender, forfeiture or abandonment." 19. The ld. D.R. in his submission has referred the definition of "abandonment" from the Law Lexicon. On perusal of the meaning of the said word "abandonment", we observe that the abandonment means giving up of a thing or a right. It is evident from the above definition that the abandonment could be made by the person of a thing i.e. a property, on which he has a right. If a person has no right on a thing, the question of abandonment of such thing by him does not arise. Further, Section 2(xii) of the Gift-tax Act provides that "gift" means the transfer by one person to another of an existing movable or immovable property voluntarily and without consideration ...... Section 122 of the Transfer of Property Act also defines gift as the transfer of certain existing movable or immovable property made voluntarily and without consideration by one person called the donor to another called the donee and accepted by or on behalf of the donee.
20. The above definition of "gift" clearly emphasizes that for a valid gift there must be a transfer of an existing movable and/or immovable property from one person to another voluntarily. Therefore, the property must be in existence which is capable of being transferred in order to constitute a valid gift. The Hon'ble Supreme Court of India has also held in the case of Dr. R.S. Gupta (supra) that in order to constitute a valid gift, there must be an existing property to be parted with. Since in the case before us, there is no pre-existing property/right/thing with the assessee, we are of the considered view that there could not be a valid transfer either by way of release, discharge, forfeiture, surrender or abandonment. Thus, the question of making a deemed gift within the purview of Section 4(1) of the Gift-tax Act, does not arise. It is a settled position of law that giving of loans and charging or non-charging of interest are contractual obligation and no addition can be made by way of notional interest or hypothetical basis. Law does not cast any obligation upon an assessee to earn income from its amount. At the most, the Department could disallow the interest if claimed by the assessee in its profit and loss account in the income tax proceedings. The Hon'ble Allahabad High Court has also held in the case of Jawala Prasad Radha Krishna v. CIT, (1992) 1998 ITR 415 (Alld), that if no interest is charged by the assessee on the advance of a money to a sister concern, there could be no interest accrued to the assessee, which could be liable to tax under the Income-tax Act, 1961. In a case where no income by way of interest has accrued to the assessee, there is no right, which has vested in the assessee and, therefore, the question of relinquishment and/or abandonment of the right does not arise. Thus, the provisions of Section 4(1)(c) of the Gift Tax Act are inapplicable in the present circumstances of the case In regard to the case of Sir Padampat Singhania and Others (supra), relied by the ld. D.R., we observe that the facts are different and are not applicable to the case before us.
In the said case, the Hon'ble High Court confirmed the decision of the Tribunal to hold that the surrender of loan was not bona fide transaction and, thus, the amount surrendered or relinquished by the assessee in favour of J.K. Company was a taxable gift. In the said case, the assessee had deposited the amount with M/s. J.K. Company. The assessee surrendered the amount standing to their credit in favour of J.K. Company authorizing it to re-coup its loss. In the case before us, there is no existing right in favour of the assessee to charge interest from its sister concern(s) on the outstanding amount and, therefore, the question of abandoning the right or a property in favour of the sister concern does not arise.
21. The Bangalore Bench of the I.T.A.T. in the case of Raikar Theatre (supra), has dealt with a similar issue. In the said case, the assessee did not charge interest on the amount due from its sister concern. The Department held that the assessee had forgone its right to receive interest on the deposit without adequate consideration. The A.O.treated the interest forgone on the amount due to the assessee from its sister concern and brought to tax as deemed gift. The First Appellate Authority upheld the order of the A.O. In further appeal, the Tribunal held that when no interest was payable by the sister concern, there could be no question of any release, discharge, surrender, forfeiture or abandonment. Therefore, the Assessing Authority exceeded his jurisdiction by presuming that there was an element of interest, which had been waived by the assessee in favour of its sister concern. It was held that in the absence of any contract between the two parties, regarding charging of interest the question of levy of gift tax on deemed gift on interest surrendered was not justified. In the case before us, there is no pre-existing right in favour of the assessee to charge interest from its sister concern(s). Therefore, the question for abandonment of a thing/right in favour of a third party does not arise at all. Hence, there is no deemed gift within the meaning of Section 4(1)(c) of Gift Tax Act and accordingly, we uphold the order of the ld.CGT(A), in cancelling the gift tax assessment that there was no gift by the assessing Thus, the grounds of appeal taken by the Department are rejected. Consequently the cross objections filed by the assessee supporting the order of the ld. CGT(A) are allowed.
22. In this case, the assessee company is also a Finance Company, which collects deposit from the public. The A.O. observed that a large funds of the assessee company were lying with the sister concern M/s. Sahara India (Firm) or were advanced to another sister firm M/s. Sahara India Housing. The A.O. stated that the assessee did not charge any interest from assessee firm/companies in respect of the said funds. He calculated the interest @ 18% which comes to Rs. 89,52,969/-. The A.O.stated that the assessee has abandoned/surrendered its income in favour of the assessee firm/company and, accordingly, issued notice Under Section 16 of the Gift Tax Act. The A.O. completed the assessment by treating the said interest of Rs. 89,52,969/- as deemed gift Under Section 4(1)(c) of the Gift Tax Act in favour of the sister concern(s) from whom no interest had been charged on the advances/loans. The First Appellate Authority cancelled the said gift tax assessment by following the reasoning given in the case of M/s. Sahara India (Firm), the case which we have discussed hereinabove. The Department has filed this appeal disputing the order of the CGT(A). The assessee has filed cross objections supporting the order of the First Appellate Authority.
23. Since facts and issue are identical to the case of Sahara India (Firm), we, for the reasons mentioned in paras 17 to 21, uphold the order of the First Appellate Authority and reject the grounds of appeal taken by the Department. Consequently, the cross objections filed by the assessee are allowed.
24. In the result, both the appeals filed by the Department are dismissed and both the cross objections filed by the assessee are allowed.