Important Point: Court find no reason, to hold that there has been a “transfer” or “gift” in favour of the present assessee of any Capital asset, even assuming that the definition of “Gift” under the Gift Tax Act can be pressed into service by the Revenue.

A.K. MENON, J.

1. This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal) seeks our opinion on the following question of law : -

“(i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset coming within the purview of Sec. 49(1)(ii) as it was acquired on the release executed by the previous life interest holder which amounted to a gift and therefore, the cost of the acquisition of asset would be deemed to be the cost of the original settlor ?”

2. This Reference relates to the Assessment Year 1984-85. The brief facts leading to the present Reference as indicated in the statement of case are as under :

(a) By an indenture dated 30th January, 1947, Sir Nusserwanjee Nowrosjee Wadia (Sir Ness Wadia) created an irrevocable trust for the benefit of his son Neville Ness Wadia (Neville Wadia) and his children by settling 1001 fully paid shares of Bombay Dyeing and Manufacturing Co. on trustees of Neville Ness Trust Fund No. 2 (the Trust). The indenture of lease provided that Neville Wadia (son of the settlor) would have life interest in respect of the dividends, interest and income of the settlor for his life. After the death of said Neville Ness Wadia, the property is to be divided into two equal shares and held by another Trust.

(b) On 30th March, 1957, Mr. Neville Wadia relinquished his life interest in the Trust and life interest in the property belonging to the Trust. This on the ground that it did not amount towards transfer. The aforesaid issue was challenged in appeal before the authorities under the Act and finally referred to this Court by the Tribunal. This Court in the above Reference at the instance of the respondent – Revenue in Commissioner of Income Tax Vs. Neville Ness Wadia, [90 ITR 155] held that surrendering of life interest by the assessee would not amount to transfer of property to his children so as to attract the provisions of Section 16(3) (a)(iii) of the Indian Income Tax Act, 1922.

(c) During the previous year relevant to assessment year 1984-85 the respondent assessee sold his life interest in the income from the property of the Trust under an Agreement dated 19th March, 1984 to M/s. Kapadia Trading Co. Ltd. and Anr. for consideration of Rs. 21.70 lakhs. The respondent assessee took the stand that the amounts received on transfer of life interest to M/s. Kapadia Trading Co. Pvt. Ltd. would not give rise to any capital gains as the cost of acquisition of life interest in the shares / securities held by the respondent assessee was Nil. Thus, no capital gains could be taxed upon the respondent assessee. In support, reliance was placed upon the decision of the Apex Court in Commissioner of Income Tax vs. B.C.Shrinivas Shetty, [128 ITR 294].

(d) The Tribunal held that the Settlement Deed by Neville Wadia in favour of Shri Nusli Wadia amounted to a Gift therefore, covered by Section 49(1)(ii) of the Act and concluded that the respondent assessee had become the “owner” of the property under a gift. The cost of property to the previous owner was to be taken as cost of acquisition for determining the capital gains. Consequently, the cost of acquisition to the original owner was to be taken as the cost for arriving at the capital gains tax, if any, payable by the respondent assessee. Consequently, the impugned order of the Tribunal restored the issue to the file of the Assessing Officer to correctly compute the capital gains payable in accordance with law.

3. Mr. Agarwal, learned Counsel appearing for the applicant assessee in support made the following submissions:

(a) Section 49(1)(ii) of the Act provides the method of determining the cost of acquisition of the capital asset received under a Gift or a Will. While computing the capital gains tax payable on the sale of the capital asset, the cost of acquisition of such asset in the han