Can You Gift Without Giving?

What is Gifting without Giving?
This is a simple way of defining the legal phrase of “retaining a life-interest benefit”. For instance, say a father wants to gift his residential flat to his son instead of under his Will so as to avoid any bequest related challenges. However, at the same time, he wants to reside in the flat in his lifetime and ensure that the flat passes to the son only upon his death. Can he achieve both the objectives? Would it not be great to kill two birds with one stone – ensuring smooth succession on death thereby avoiding Probate related challenges and at the same residing in the flat in one’s lifetime?

An answer to the above challenge would lie in creating a gift deed in favour of the son wherein the father retains the possession of the flat during his lifetime and the same would pass to the son only upon the father’s death. Is this too good to be true, is the question one would ask? The Larger Bench of the Supreme Court in its decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445 has said this is possible. Hence, a donor can gift without actually giving possession of the property.

What does the Law Provide?
The law in respect of Gifts, whether immovable or movable, is enshrined in Chapter VII of the Transfer of Property Act, 1882. Section 122 of this Act defines a gift as follows:

It is the transfer of certain existing movable or immovable property

It is made voluntarily and without consideration

By one person, called the donor, to another, called the donee

It must be accepted by or on behalf of the donee during the lifetime of the donor and while he is still capable of giving

If the donee dies before acceptance, the gift is void.

Section 123 of this Act lays down the manner in which the transfer of a gift may be made:

Gift of Immovable Property – the transfer must be made by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses
Gift of Movable Property – the transfer may be effected:

• either by a registered instrument signed as aforesaid or
• by delivery of the movable property

For gift of an immovable property only one mode of transfer is permissible, i.e., by a registered gift deed. However, the Act provides two alternative modes for transfer in case of gift of a movable property, i.e., either by a registered gift deed or by delivery and possession. If the first mode, i.e., registered gift deed is selected, for a movable property then section123 does not mandate that delivery and possession of the movable property must be given. Similarly, in the case of immovable property section123 does not mandate that delivery and possession of the immovable property must be given.

Another important provision is section 6(d) of the Act which states that if the enjoyment of any property is restricted to the owner personally, then he cannot transfer the same. Thus, if a person is not the absolute owner of a property he cannot transfer the same.

Judicial History
The reason for the matter to be referred to a Three Member Bench of the Apex Court was that there were two conflicting decisions of the Division Bench of Supreme Court. In Narmadaben Maganlal Thakker vs. Pranjivandas Maganlal Thakker, (1997) and 2 SCC 255 K. Balakrishnan vs. K Kamalam, (2004) 1 SCC 581.

In the earlier case of Narmadaben Maganlal Thakker, a conditional gift of an immovable property was made by the donor without delivering possession and there was no acceptance of the gift by the donee. There was no absolute transfer of ownership by the donor in favour of the donee. The gift deed conferred only limited right upon the donee and gift was to become operative after the death of the donor. The donor reserved permanently his rights to collect the mesne profit of the property throughout his lifetime. After the gift deed was executed, the donee violated certain conditions under the deed.

Hence, the Supreme Court held that the donor had executed a conditional gift deed and retained the possession and enjoyment of the property during his lifetime. Since the donee did not satisfy the conditions of the gift deed, the gift was void.

In the latter Supreme Court case of K. Balakrishnan, the donor gifted her share in land and a school building. However, the gift deed provided that the management of the school and income from the property remained with the donor during her lifetime and thereafter would be vested in the donee. The Supreme Court upheld the gift without possession and held that it was open to the donor to transfer by gift title and ownership in the property and at the same time reserve its possession and enjoyment to herself during her lifetime. There is no prohibition in law that ownership in a property cannot be gifted without its possession and right of enjoyment. It examined section 6(d) of the Transfer of Property Act, 1882 which states that an interest in property restricted in its enjoyment to the owner personally cannot be transferred by him. However, the Supreme Court held that Clause (d) of Section 6 was not attracted to the terms of the gift deed being considered by the Court because it was not merely an in property property, the enjoyment of which was restricted to the owner personally. The donor, in this case, was the absolute owner of the property gifted and the subject matter of the gift was not an interest restricted in its enjoyment to herself. The Court held that the gift deed was valid even though the donor had reserved to herself the possession and enjoyment of the property gifted.

Rajamma’s Case
Coming to the facts of the three Member Bench decision of the Supreme Court in Rajamma, in this case, the donor made a gift of an immovable property by way of a registered gift deed which was duly attested. However, she (the donor) retained the possession of the gifted property for enjoyment during her life time and she also retained the right to receive the rents of the property. The question before the Court was that since the donor had retained to herself the right to use the property and to receive rents during her life time, whether such a reservation or retention or absence of possession rendered the gift invalid?

The Supreme Court upheld the validity of the gift. It held that a conjoint reading of sections 122 and 123 of the Transfer of Property, 1882 Act made it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required was not a sine qua non for the making of a valid gift under the provisions of the Transfer of Property Act, 1882. Section 123 has overruled the erstwhile requirement under the Hindu Law/Buddhist Law of delivery of possession as a condition for making of a valid gift. The law today protects only the rules of Muhammadan Law from the provisions of Chapter VII relating to gifts.

In so far as the transfer of movable property by way of gift is concerned the same can be effected by a registered instrument or  by  delivery.  Transfer  by  way of gift of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. Absence of any such requirement led the Court to the conclusion that delivery of possession was not an essential prerequisite for the making of a valid gift in the case of immovable property.

The Court also distinguished on facts, the earlier Supreme Court decision in the case of Narmadaben Maganlal Thakker. It held that in that case, the issue was of a conditional gift whereas the current case dealt with an absolute gift. The Court accepted the ratio laid down in the latter case of K. Balakrishnan.

Thus, the Supreme Court established an important principle of law that a donor can retain possession and enjoyment of a gifted property during his lifetime and provide that the donee would be in a position to enjoy the same after the donor’s lifetime.

How  is  This  principle  helpful? The principle laid down would be very helpful in case    of gifts amongst  family  members. The  donor  can  gift a property and retain possession during his lifetime thereby quelling any succession disputes post his demise which are typical in the case of a Will. Added to this is the recent relaxation under the  Maharashtra  Stamp  Act, 1958 whereby any residential property gifted to a spouse, children or grand children would attract a duty of Rs. 200 only. The Income-tax Act also exempts from taxation gifts received from certain defined relatives. If the gifted immoveable property is yielding income by way of rent, one needs to consider in whose hands such income will be taxed since the recipient of income will not be the owner of the property.

Thus, a person can have a simple, low-cost succession solution at least qua his residential property which often is a big asset for several families.

So the Moral of the Story is Gift Away But Don’t Give Away (for now)!!