Investment Pvt. Ltd. Vs. Commissioner of Gift Tax, Gujarat II  Insc 266 (2 May 2001)
Bharucha & D.P. Mohapatra D.P. Mohapatra, J.
appeal filed by the assessee is directed against the judgment of the Gujarat
High Court on a reference made by the Appellate Tribunal under Section 26(1) of
the Gift Tax Act, 1958 (hereinafter referred to as 'the Act'). The question
which was referred for opinion reads as follows:
on the facts and in the circumstances of the case, the Tribunal was right in
law in coming to the conclusion that the difference of Rs. 8,21,950/- on the
sale of the jewellery by the assessee to its 12 wholly owned subsidiary
companies was not liable to gift tax under the provisions of the Gift Tax Act,
1958." The High Court disposed of the reference by answering the question
in the negative, in favour of the Revenue and against the assessee.
factual backdrop of the case relevant for the present proceeding may be stated
is a private limited investment company and the assessment relates to the
assessment year 1976-77. The assessee transferred jewellery to twelve private
limited companies which were wholly owned subsidiary companies of the assessee
and in return the twelve private limited companies transferred to the assessee
fully paid equity shares of the face value of Rs.100/- each, the face value of
all the shares being Rs. 5,69,400/-. The jewellery thus transferred became the
only asset of the twelve companies and the shares transferred to the assessee
were the entire share holding of the twelve private limited companies.
the assessee did not file any gift tax return, a notice under Section 16(1) of
the Act was served upon the assessee pursuant to which the assessee filed a
'nil' return. Thereafter a notice under Section 15(2) of the Act was issued and
the proceeding for assessment was taken up.
assessment proceeding the assessee took the stand that it had transferred jewellery
to the twelve subsidiary companies of a book value of Rs.5,69,400/- and
received shares from those companies of the face value of Rs.5,69,400/-; in the
circumstances there was no gift involved in the transaction. The case of the
Revenue, on the other hand, was that the market value of the jewellery acquired
by the assessee amounted to Rs.13,91,350/- on the date of transfer, therefore,
there was a gift to the extent of the amount which exceeded the face value of
the shares, i.e., Rs.8,21,950/-.
Gift Tax Officer by his order dated 12.9.1979 held that there was a 'deemed
gift' to the tune of Rs.8,21.950/- for which the assessee was liable to pay
gift tax under the Act.
appeal by the assessee, the Commissioner of Gift Tax (Appeals) held that
inasmuch as the jewellery is the only asset of the subsidiary companies the
value of the consideration was the value of the jewellery and no 'deemed gift'
can be attributed. The Appellate Authority set aside the order of the Gift Tax
assessee and the Revenue filed appeals before the Tribunal. The Tribunal upheld
the conclusion of the Appellate Authority and held that when the only asset of
the purchasing companies is jewellery purchased and their capital consists only
of the shares issued to the assessee company, there is no question of any
'deemed gift' as whatever will be the value taken for the jewellery will become
the value of fully paid up shares issued to the assessee on the break up method
of valuing of shares of private limited companies. The Tribunal rejected the
contention of the Revenue on this point.
Reference Application filed by the Revenue the question quoted earlier was
referred to the High Court. The High Court came to the conclusion that the
Tribunal had committed an error in law in coming to the conclusion that the
difference of Rs. 8,21,950/- on the sale of the jewellery by the assessee to
its twelve wholly owned subsidiary companies was not liable to gift tax under
the provisions of the Act and accordingly answered the question in the negative
in favour of the Revenue. The High Court did not accept the contention that in
case of the transfer of the entire paid up share holding of the twelve
subsidiary companies in lieu of the jewellery transferred by the assessee the
value of the jewellery must be taken to be the value of the shares transferred
by the subsidiary companies.
High Court was of the view that the shares which were to be passed on for the
purchase of property were different and independent of such property and would
have their valuation and to say that the value of such consideration, in the
instant case the shares, should be read as whatever the value of property
intended to be purchased would be to defeat the very purpose underlying the provision
in Section 4(1)(a) of the Act.
term 'gift' is defined in Section 2(xii) of the Act to mean the transfer by one
person to another of any existing movable or immovable property made
voluntarily and without consideration in money or money's worth, and includes
the transfer or conversion of any property referred to in Section 4, deemed to
be a gift under that section.
expression 'taxable gifts' is defined under Section 2(xxiii) to mean gifts
chargeable to gift tax under the Act. Section 3 which is the charging section
lays down that subject to the other provisions contained in the Act, there
shall be charged for every assessment year commencing on and from the Ist day
of April, 1958, a tax referred to as gift tax in respect of gifts made by a
person during the previous year at the rate or rates specified in Schedule I.
4 makes provisions for gifts to include some transfers. Sub-section (1) clause
(a), which is relevant for the purpose of the case, reads as under:
For the purpose of this Act- (a) where property is transferred otherwise than
for adequate consideration, the amount by which the [value of the property as
on the date of the transfer and determined in the manner laid down in Schedule
II] exceeds the value of the consideration shall be deemed to be a gift made by
that nothing contained in this clause shall apply in any case where the
property is transferred to the Government or where the value of the
consideration for the transfer is determined or approved by the Central
Government or the Reserve Bank of India]" Ordinarily, a gift is a transfer
of property without consideration; but for the purpose of the Act a transfer
for inadequate consideration is to be deemed to be a gift under section 4(1)
(a). By the inclusive definition in section 2(xii) of the Act a 'deemed gift'
is also a gift.
provision of deemed gift in section 4 (1) (a) is intended to bring within the
purview of the tax such transactions which are entered between the parties to
evade the tax.
question which arises for determination in this case is whether the transaction
made by the assessee can be said to be a 'deemed gift' under Section 4(1)(a) of
the Act. For invoking the deeming provisions of section 4(1)(a) of the Act
inquiries have to be made regarding –
existence of a 'transfer of property'
extent of consideration given i.e. whether the consideration is adequate. It is
necessary for the assessing officer to show that the property has been transferred
otherwise than for adequate consideration. The finding as to inadequacy of the
consideration is the essential sine-qua-non for application of the provisions
of 'deemed gift'. The provision is to be construed in a broad commercial sense
and not in a narrow sense. In order to hold that a particular transfer is not
for adequate consideration the difference between a true value of the property
transferred and the consideration that passed for the same must be appreciated
in context of the facts of the particular case. If the transaction involves
transfer of certain property in lieu of certain other property received then
the process of evaluation of the two items of property should be similar and on
such evaluation if it is found that there is appreciable difference between the
value of the two properties then the transaction will be taken as a 'deemed
gift' to the extent as provided in the Section. It is to be found that the
transaction was on inadequate consideration and the parties deliberately showed
the valuation of the two properties as the same to evade tax. Such a conclusion
cannot be drawn merely because according to the assessing officer there is some
difference between the valuation of the property transferred and the
present case, as noted earlier, the face value of the shares of the 12 fully
paid subsidiary companies of the assessee was Rs.5,69,400/- which was taken to
be the value of the jewellery that was transferred in exchange by the assessee
to the subsidiary companies. The subsidiary companies had no other asset. The
value of the jewellery as determined by the assessing officer being
Rs.13,91,350/- the real value of the shares may be said to be Rs.13,91,350/-,
but there was thus no gift involved in the transaction for whatever is the
value of the jewellery is infact the value of the shares transferred in
consideration. In the circumstances the assessing officer committed an error in
treating the transaction between the parties as a deemed gift.
this stage we may notice a few decisions of different High Courts to which our
attention was drawn. In the case of Bireswar Sarkar vs. Gift Tax Officer
[(1997) 223 ITR 404 (Cal)] the High Court allowed the writ petition and quashed
the notice under section 16 of the Act, inter alia, on the ground that as far
as the question of inadequacy of the consideration is concerned no answer could
be given by the respondent authorities as to the adoption of different
standards for the purpose of evaluating the value of the assets transferred and
for evaluating the consideration received.
Madras High Court in the case of C.G.T. vs. Indo Traders & Agencies
(Madras) P. Ltd. [(1981) 131 ITR 313 (Mad)] observed that the provision is
designed to check evasion of tax by persons transferring properties for
inadequate consideration; If a person had effected a gift which would be
without consideration, he would be liable to be taxed under the Act; the same
person may, in order to avoid the tax, transfer properties for a paltry consideration
so as to get out of the operation of the Act then he can be made liable under
section 4(1)(a) . It is this attempt at evasion which was sought to be thwarted
by enacting S. 4(1)(a).
similar view was taken by the Kerala High Court in the case of Commissioner of
Income-Tax vs. Jacobs (P) Ltd.(1999) 237 ITR 433.
High Court of Madras in the case of Commissioner of Gift-Tax vs. D.Surendranath
Reddy (1998) 233 ITR 21 observed that adequate consideration is not
necessarily, what is ultimately determined by some-one else as market value;
unless the price was such as to shock the conscience of the court, it would not
be possible to hold that the transaction is otherwise than for adequate
view of the discussions in the foregoing paragraphs, it is clear that the High
Court was in error in holding that in the facts and circumstances of the case
the transaction could be held to be a 'deemed gift' within the purview of
Section 4(1)(a) of the Act and in holding the assessee liable for the tax. Accordingly,
the appeal is allowed; the judgment of the High Court under challenge is set
aside and the order of the Tribunal is confirmed. There will, however, be no
order as to costs.