Allahabad H. C : Whether the hon’ble Tribunal has erred in law in holding that there was no deemed gift within the meaning of section 4(1)(c) of the Gift-tax Act in respect of the interest amount of Rs. 1.70 crores surrendered/abandoned by the respondent in favour of its sister concerns ?

High Court Of Allahabad

CGT Vs. Sahara India (Firm)

Assessment Year : 1990-91

Section : 4

Rajiv Sharma And Dr. Satish Chandra, Jj.

It Appeal (G.T.) Nos. 103 & 104 Of 2005

August  27, 2013

JUDGMENT

Dr. Satish Chandra, J. – Both the appeals have been filed by the Department under section 26A of the Gift-tax Act, 1958, against the consolidated order and judgment dated February 28, 2005, passed by the Income-tax Appellate Tribunal, Lucknow, in G.T.A. Nos. 11 and 15/All./ 1998 (see Asstt. CGT v. Sahara India (Firm) [2005] 94 ITD 70, for the assessment year 1990-91.

2. On September 19, 2005, a co-ordinate Bench of this hon’ble court has admitted both the appeals on the following substantial questions of law :

“(i) Whether the hon’ble Tribunal has erred in law in holding that there was no deemed gift within the meaning of section 4(1)(c) of the Gift-tax Act in respect of the interest amount of Rs. 1.70 crores surrendered/abandoned by the respondent in favour of its sister concerns ?

(ii) Whether the hon’ble Tribunal was justified in law in holding that there was no deemed gift within the meaning of section 4(1)(c) of the Gift-tax Act as there was no contract, expressed or implied between the respondent and its sister concerns for charging of interest on the loans/advances lying with them, thus limiting the applicability of the provisions of section 4(1)(c) of the Gift-tax Act regarding charging of deemed gift to only those cases which are covered by the expressed or implied contract between the two parties ?”

3. Brief facts of the case are that for the assessment year under consideration, the assessees have filed the loss return and had shown nil taxable gifts, but the Assessing Officer on scrutiny, under section 15(3)/16 of the Gift-tax Act observed that the transferred interest-free amount in favour of the sister concern by the assessees constitute taxable gift, so he made the addition of Rs. 1.7 crores and Rs. 89,52,969, respectively, as gift respectively. However, the said additions were deleted by the first appellate authority as well as by the Tribunal, vide its impugned orders.

4. The assessees are registered firm and company respectively under the relevant Act. In both the appeals the facts and circumstances are identical except the date and amount. So, both the appeals are disposed of by a common judgment for the shake of brevity.

5. With this background, Sri D.D. Chopra, learned counsel for the Department, submits that the assessee is a partnership firm which came into existence on January 1, 1982, comprising seven partners. It had multifarious business activities as per the partnership deed. It had floated various schemes for encouraging the habit of savings amongst the public. In the past, the assessee-firm had taken over the business of M/s. Sahara Savings and Finance Pvt. Ltd., Gorakhpur and M/s. Sahara Investment India Ltd., Gorakhpur. The assessee-firm had collected the funds from the public through various outlets. In fact, there is an accumulation of funds by the firm through various schemes and their modus of investment within the concerns of its group, controlled by the partners or directors and share-holders. The transactions are interest-free. The firm has also advanced the loans to its subscribers on a discount basis. The firm is in fact getting more from the subscribers than it is paying to them as observed by the Assessing Officer.

6. During the assessment year under consideration, the assessee has the total fund of Rs. 18.5 crores. It has given the advances to a few sister concerns on interest at 18 per cent. The assessee has also paid the interest at 18 per cent. on borrowed funds. Being a finance company, the assessee should have earned the interest income of Rs. 3.3 crores but it had shown only Rs. 1.63 crores. The balance (3.3-1.63=1.7) interest amount of Rs. 1.70 crores in favour of the sister concerns of the Sahara group was not charged and the same was rightly brought under the purview of section 4(1)(c) of the Gift-tax Act.

7. Mr. Chopra further submits that the assessee has filed the return of “nil” income. The assessee has charged the interest from the sister concerns at 18 per cent. The assessee-firm itself has paid the interest at 18 per cent. to the sister concerns, namely, M/s. Sahara Savings and Finance Pvt. Ltd., Gorakhpur ; and M/s. Sahara Investment India Ltd., Gorakhpur. The assessees are engaged in financial activities and should have earned interest on the total funds available with them. The assessees have not charged the interest on the advance given to the sister concerns and it amounts “deemed gift”. The assessees have been increasing loss year after year. In the instant cases, the assessees-company abandoned/surrendered interest income in favour of sister concern. He further submits that section 4(1)(c) of the Gift-tax Act provides the “abandonment” which reads as under :

“4. (1) For the purposes of this Act,-

(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 Assessing Officer to have been bona fide shall be deemed to be a gift made by the person responsible for the release discharge, surrender, forfeiture or abandonment;”

8. The assessees-company advanced money to its sister concerns which is against the very basis of its business activities. Being a financial company, interest might have charged. So, the provisions of the Gift-tax Act are attracted.

9. He further submits that in the case of Sir Padampat Singhania (HUF) v. CGT [1988] 172 ITR 292/37 Taxman 1 (All.), it was observed that (page 308) :

“Keeping in view the legislative background and the provisions of section 4(1)(c), it is clear that only such transactions of release, or surrender, etc., are caught within the mischief of the said provision, only if such transaction, resulting in release or surrender, etc. is not bona fide to the satisfaction of the Gift-tax Officer. In order that the trans-action is bona fide, it must be shown that everything was done in an open and straightforward manner without subterfuge or concealment of any kind or in an attempt to make the transaction appear other than what it was in reality. The object of inserting the words ‘bona fide’ in section 4(1)(c) was to provide for exemption from tax liability in respect of a transaction which is real and genuine.”

10. Lastly, he also relied on the ratio laid down in the following cases :

(i) CGT v. P. Gopinathan [1993] 204 ITR 324/[1995] 82 Taxman 466 (Ker.);

(ii) CGT v. Padampat Singhania [1979] 117 ITR 323/1 Taxman 232 (All.);

(iii) CGT v. Abraham Kochuthomman [1975] 98 ITR 394 (Ker.) ; and

(iv) CGT v. Gautam Sarabhai Ltd. [2003] 263 ITR 602/132 Taxman 315 (Guj.).

11. On the other hand, Sri P.J. Pardiwala, senior advocate duly assisted by Mr. Waseequddin Ahmad, learned counsel for the assessees, has justified the impugned order passed by the Tribunal. He read out the definition of section 2(xii) of the Act, which reads as under :

“2(xii) ‘gift’ means 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;”

12. He also submits that in view of the above provision, the Assessing Officer has wrongly made the additions of notional interest and the same is not tenable in the eye of law and cannot be added. He further read out section 2(xxiv), which on reproduction reads as under :

“‘transfer of property’ means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property.”

13. He submits that a reading of this section clearly shows that the word “disposition”, “conveyance”, “assignment”, “settlement”, “delivery” and ‘payment’ are used as some of the modes of transfer of property. He also relied on the ratio laid down by this hon’ble court, in the case of CIT (Central) v. O.P. Srivastava [2013] 357 ITR 1/[2014] 222 Taxman 55 (Mag.)/42 taxmann.com 306 (All.), where Departmental appeals were dismissed, vide judgment and order dated May 30, 2013, but on a specific query by the Bench, he admits that in the case of D.P. Srivastava (supra), the issue was relating to the shares at their face value which were allotted by the companies concerned pursuant to the rights issue. In the instant case, the share and rights issue are not involved.

14. It is also a submission of the learned counsel that even if one seeks to invoke the fiction that is created in section 4(1)(c), there can be no charge to gift-tax. The said provision contemplates a situation where there is a release, discharge, surrender, forfeiture or abandonment of either a debt, contract or other actionable claim or interest in property. In the present case, there is no transaction of the nature referred to therein, viz., release, discharge, surrender, forfeiture or abandonment and, therefore, on this ground alone section 4(1)(c) is not attracted. A release is a discharge of an existing obligation or right to action by a person in whom the obligation or right is vested to the person against whom it exists. A release, therefore, is the giving up or an abandoning of a claim or right to the person against whom the claim exists. A surrender on the other hand is of a nature directly opposite to a release. Therefore, a surrender is between the persons who have pre-existing mutual rights and obligations which terminate by reason of such surrender. An abandonment on the other hand means giving up of a thing, as observed in the case of CGT v. Sardar Wazir Singh [1975] 99 ITR 104 (All.). In the case of abandonment, the owner divests himself of his title but by the same transaction, no one else, who till then did not have any interest, in the property, becomes the owner thereof. Likewise, there is no discharge which term contemplates to free from liability whether the liability be in respect of monetary claims like tax or in respect of possession of property.

15. In the instant case, none of the transactions under section 4(1)(c) of the Gift-tax Act is in existence. Learned counsel has also distinguished the case law cited by the learned counsel for the Department. In support of his arguments, learned counsel submits that there should be no levy of gift-tax for the reason that there was no act in the nature of release, discharge, surrender, forfeiture or abandonment which has taken place during the previous year relevant to the assessment year 1990-91. The alleged gift, if any, can only be regarded as having been made in the year in which the interest-free loan was advanced by the respondent. This event took place in the earlier year and in fact no steps to assess any gift-tax in those years was taken up by the Revenue. On the other hand, if the Revenue was right in its view that the gift takes place from year to year when the interest for the particular year is not charged, then it may be pointed out that it is only for the assessment year 1990-91 that the Revenue has brought to tax such alleged gift. In fact, in none of the earlier years as also in the subsequent years, the Revenue took any steps to bring to tax pertaining to the aforesaid transactions. It is, therefore, submitted that the conclusion of the Commissioner of Income-tax (Appeals) and the Tribunal that the respondent-assessee was not liable to pay any gift-tax in terms of section 4(1)(c) of the Act is correct and must be sustained. It is also a submission of the learned counsel that there was no agreement for payment of the interest on the loans/advances given by the assessee to his sister concerns. It is, therefore, submitted that the present appeals may kindly be dismissed with costs.

16. In support of his submissions, he has relied on the ratio laid down in the following cases :

(i) CIT v. Dr. R.S. Gupta [1987] 165 ITR 36/30 Taxman 546A (SC);
(ii) Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC);
(iii) Jawala Prasad Radha Krishna v. CIT [1992] 198 ITR 415/62 Taxman 251 (All.);
(iv) Highways Construction Co. (P.) Ltd. v. CIT [1993] 199 ITR 702 (Gau.);
(v) India Finance & Construction Co. (P.) Ltd. v. B.N. Panda, Dy. Commissioner [1993] 200 ITR 710/67 Taxman 326 (Bom.);
(vi) Sardar Wazir Singh (supra);
(vii) Sir Padampat Singhania (supra);
(viii) P. Gopinathan (supra);
(ix) Padampat Singhania (supra);
(x) Abraham Kochuthomman (supra); and
(xi) Gautam Sarabhai Ltd. (supra).
17. We have heard both the parties at length and gone through the voluminous written submissions and case law.

18. Originally, in the erstwhile Gift-tax Act, section 2(xii) defines “gift”. The meaning of transfer of property or right was also defined as per section 2(xxiv). But it was found that some transactions do not fall within the definition of abovementioned provisions. To cover such types of transactions which confer an element of bounty or benefit but are passed of under camouflage, the deeming provisions under section 4(1) of the Gift-tax Act have been designed. Section 4(1)(c) has been inserted in the Act with the object of roping in the so-called business transactions which are really gifts in a camouflage form and were not covered by the abovementioned provisions. By inserting the deeming provisions of deemed gift, the idea was to plug the loopholes. This clause is a unilateral act and action such as release/discharge, surrender, forfeiture or abandonment, if not bona fide, is to be deemed gift. The owner of the right or interest merely releases, relinquishes or extinguishes his right or interest. Such an action enlarges the interest and confers an element of bounty and benefit on the transferee or others. A benefit may be conferred not merely by a transfer but by action or abstinence to right or interest in a property. Abandonment of the right or interest can be defined as a conscious renunciation of right of ownership.

19. The definition of “abandonment” means “give up of a thing or a right”. It is evident from the definition that “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.

20. It may be mentioned that the hon’ble apex court in the case of L. Alagusundaram Chettiar v. CIT [2001] 252 ITR 893/[2002] 121 Taxman 587 (SC), observed that the term “payment” must not be given a literal interpretation but it must be seen whether a jural relationship of debtor and creditor was created between the parties and it was not necessary that payment should have been made in cash or in specie to the assessee.

21. In the instant case, it is undisputed fact that the assessee has taken the advances/loans on the interest at 18 per cent. Equal interest was charged from some of the sister concerns. But no interest was charged from a few selected sister concerns. For this discrimination, neither any reason was given by the assessee nor the authorities below including the Tribunal have examined this aspect. Undoubtedly, the assessees are the financial concerns and their main object is to earn interest. Why the interest was not earned from a few selected sister concerns. This aspect has to be examined. The justice need not to be done but it appears that it has been done.

22. For this gracious act, on the part of the assessees, the balance-sheet shows that it is suffered with a heavy loss in the assessment year under consideration and also the past assessment years. How these loans were treated by the Department in the years when it were advanced and also in the subsequent assessment years. This aspect has not been examined by the Tribunal. How the sister concerns used the said interest-free advances, whether the same was given for the business purposes or in the individual benefit of partners/directors.

23. It may be mentioned that each assessment order is a separate assessment order as per the ratio laid down in the case of CIT v. Brij Lal Lohia and Mahabir Prasad Khemka [1972] 84 ITR 273 (SC) as well as in the case of J.K. Oil Mills Co. Ltd. v. CIT [1976] 105 ITR 53 (SC).

24. The above mentioned aspects need to be examined by the Tribunal being a final fact finding authority as per the ratio laid down in the case of Kamala Ganapathy Subramaniam v. Controller of Estate Duty [2002] 253 ITR 692/121 Taxman 615 (SC) as well as in the case of M. Janardhana Rao v. Jt. CIT [2005] 273 ITR 50/142 Taxman 722 (SC) to establish the bona fide action on the part of the assessee. When the facts are not clear as mentioned above, then we deem it fit to set aside the impugned judgments/orders and restore back the matter to the Tribunal to pass a fresh orders in the light of above discussions as per law. The matters are too old. The Gift-tax Act has also been abolished. Hence, it is expected that the Tribunal shall decide the same, on priority basis, preferably, within a period of four months.

25. In view of the above, the impugned orders are set aside and remit the matter to the Tribunal to pass a fresh order, as stated above, the answer to the substantial questions of law is not required and will be discussed in an appropriate case.

26. In the result, both the appeals filed by the Department are allowed for statistical purpose.

[Citation : 359 ITR 337]