Kerala High Court: Transferring Property to Spouse to Dodge Luxury Tax is Impermissible Evasion

Kochi: The Kerala High Court, in a significant ruling, has held that transferring ownership of a portion of a residential building to a spouse to bring the remaining area below the threshold for luxury tax constitutes tax evasion, not legitimate tax planning. Justice Gopinath P. dismissed a writ petition seeking exemption from luxury tax under the Kerala Building Tax Act, 1975, after such a transfer.

Case Background

The petitioner had initially constructed a two-story residential building with a total area of 315.08 Sq.m. An assessment completed on August 14, 2014 (Ext.P1), levied luxury tax on the building as its area exceeded the statutory limit. The petitioner had been paying this tax.

In 2018, through registered document No.1356/2018 of SRO Mathamangalam , the petitioner transferred the first floor of the building to his wife, Kaniyeri Sreekala . Following this transfer, the petitioner claimed the area of the building in his occupation was reduced to 162.30 Sq.m, falling below the limit for luxury tax as specified in Section 5A of the 1975 Act.

The petitioner sought a court direction for the authorities to recognize this transfer (Ext.P2) and declare him not liable for luxury tax on the remaining portion. He also requested a refund of luxury tax paid after the transfer.

Arguments Presented

Petitioner's Counsel: Argued that luxury tax is leviable only if the owner possesses a residential building with an area meeting or exceeding the limit in Section 5A. Since the transfer reduced the petitioner's owned area below this limit, he should no longer be liable.

Senior Government Pleader: Contended that the petitioner, having constructed a building admittedly above the luxury tax threshold and having been assessed for it, cannot escape liability by transferring a portion to a near relative. Allowing such a "device" would enable widespread evasion, as anyone liable could simply transfer parts of their property to close family members.

Court's Reasoning and Precedents

Justice Gopinath P. sided with the government, stating the petitioner had not made out a case for relief. The court noted it was undisputed that the building, as originally constructed, was liable for luxury tax.

The judge observed, "As rightly pointed out by the learned Senior Government Pleader, if the contention of the learned counsel for the petitioner is accepted, any person who is liable to pay luxury tax under the provisions of Section 5A of the 1975 Act could escape from the liability by transferring a portion of the building to his/her spouse or a near relative."

The court emphasized that despite the transfer, "the entire building continues to be in the occupation and enjoyment of the petitioner, and such a device would amount to evasion of tax as distinguished from tax planning. While tax planning is permissible in law, evasion of tax is not permissible in law."

To support this distinction, the Court extensively quoted the landmark Supreme Court judgment in M/s McDowelland Company Limited V. Commercial Tax Officer; (1985) 3 SCC 230 .

Key Excerpts from M/s McDowelland Company Limited :

The judgment referenced the concurring opinion of CHINNAPPA REDDY , J. in McDowell :

"17. We think that time has come for us to depart from the Westminster [1936 AC 1 : 1935 All ER Rep 259] principle... The evil consequences of tax avoidance are manifold... It is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a Welfare State whose financial needs, if backed by the law, have to be respected and met... In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally... but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it."

"18. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax... to expose the devices for what they really are and to refuse to give judicial benediction."

The court also cited the majority judgment in McDowell delivered by RANGANATH MISRA , J. :

"45. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."

Final Decision

Concluding that "the device adopted by the petitioner was not an effort at tax planning; it was clearly an attempt to evade tax," Justice Gopinath P. held that the petitioner was not entitled to the reliefs sought.

The writ petition was accordingly dismissed, upholding the continued liability for luxury tax despite the internal transfer of property.