Allahabad H.C : the Income-tax Appellate Tribunal erred in law in deciding the addition of Rs.1,33,09,149/- on account of deemed gift within the meaning of the provisions of Section 4(1)(a) of the Gift Tax Act by holding that the transfer of property was made for adequate consideration, while the price paid by the respondent for acquiring the shares of the closely held companies of the Sahara Group was much more than the value of these shares as worked out in the manner laid down in Schedule II of the Gift Tax Act

High Court Of Allahabad

CIT (Central) Vs. O.P. Srivastava

Section : 4(1)

Rajiv Sharma And Saeed-Uz-Zaman Siddiqi, Jj.

IT Appeal Nos. 30 To 34 Of 2006

May 30, 2013

ORDER

1. Heard Mr. D.D. Chopra, learned counsel for the appellants and Mr. P.J. Pardiwala, Senior Advocate appearing for respondent in Income-tax Appeal No.32 of 2006. In other appeals, Mr. Waseequddin Ahmad has adopted the arguments advanced by Mr. P.J. Pardiwala.

2. The afore-captioned appeals have been preferred by the Revenue questioning the correctness of the Judgment passed by the Tribunal dated 31st August, 2005, whereby the Tribunal has upheld the validity of the proceedings initiated under Section 16 of the Gift Tax Act, 1958 [hereinafter referred to as the ‘Act’ for the sake of brevity] but has deleted the charge to gift tax that was levied by the Assessing Officer.

3. While entertaining and admitting the appeal on 19.1.2006, the following two questions have been formulated:—

“(1) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal erred in law in deciding the addition of Rs.1,33,09,149/- on account of deemed gift within the meaning of the provisions of Section 4(1)(a) of the Gift Tax Act by holding that the transfer of property was made for adequate consideration, while the price paid by the respondent for acquiring the shares of the closely held companies of the Sahara Group was much more than the value of these shares as worked out in the manner laid down in Schedule II of the Gift Tax Act.
(2) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the transfer of property was made for adequate consideration within the meaning of the provisions of Section 4(1)(a) of the Gift Tax Act as according to the provisions of Section 79(1) of Indian Companies Act, the company whose shares were acquired by the respondent had no power to sell the shares at less than the face value, without appreciating that the transactions between the respondent and the closely held companies of the Sahara Group were collusive transactions in which shares of the said companies were acquired by the respondent by paying much more than the value of the shares as determined in the manner laid down in Schedule II of the Gift Tax Act and the funds for purchase of said shares were also provided to the respondent from the cash rich companies of the same group.”

4. A perusal of the record reveals that prior to Assessment Year 1994-95, the assessee acquired shares of seven companies, the particulars of which are set-out in para 2 of the assessment order. Except for the companies mentioned in item No.1 and item No.3 the shares in the balance five companies were acquired by subscribing to the shares at their face value which were allotted by the companies concerned pursuant to rights issue. Insofar as the companies at item No.1 and item No.4 are concerned, the shares were acquired at the prevailing market value. The assessee was of the view that he had not made any gift that was chargeable to gift tax and accordingly he did not furnish any gift tax return.

5. The Assessing Officer issued a notice under Section 16 of the Act dated 27.2.1998 and called upon the assessee to furnish his return of gift. According to the Assessing Officer, the assessee had purchased shares of certain companies of Sahara Group, the fair market value of which is equal to zero. The Assessing Officer was of the view that there is a transfer of money from the assessee to the company and of shares from the company to the assessee and as the fair market value of all the shares is NIL, there is a transfer of money from assessee to company without adequate consideration so as to bring the case within the scope of Section 4 (1) (a) of the Act. The Assessing Officer has completed the assessment by an order dated 30th March, 2000 computing the gross value of the taxable gift at Rs.1,33,09,149/-. According to Assessing Officer, the assessee had made a gift as contemplated by Section 4 (1) (a) and therefore, the difference between the amount paid by the assessee for subscribing to the shares and the value of the shares that was determined by him represented a gift that was chargeable to tax. According to the Assessing Officer, as the assessee had failed to furnish the balance sheet of all the companies in which he had acquired shares, the value of such shares was to be taken at NIL without making any further enquires with the said companies.

6. In appeal, the Commissioner of Gift Tax (Appeals)/First Appellate Authority, vide its order dated 31.8.2001, upheld the challenge of the assessee to the validity of the re-assessment proceedings as according to the Commissioner of Gift Tax (Appeals), the Assessing Officer was not in possession of any information to the effect that the market value of the shares or break-up value of the shares was less than the price paid by the assessee for acquisition of the shares. The Commissioner of Gift Tax (Appeals) held that the provisions of Section 4 (1) (a) would not be applicable where the assessee had paid consideration in excess of the market value, in view of the provisions of Section-79 of the Companies Act and concluded that unless the requirements specified in sub-section (2) thereof are complied with, a company cannot issue shares at a discount.

7. Feeling aggrieved by the order of the First Appellate Authority, the Revenue preferred appeals against the order dated 31.8.2001 passed by the Commissioner of Gift Tax (Appeals)-III, Lucknow. The Tribunal, by the impugned order, consolidated the appeals and decided the same by a common judgment and order 31.8.2005. As regard to the challenge of re-assessment, the Tribunal recorded a finding that the Assessing Officer prima facie should have a reasonable belief for reaching to the conclusion that there was a deemed gift. Insofar as the merits of the addition is concerned, the Tribunal concluded that there was a transfer of property by the assessee to the Company. According to the Tribunal, since consideration has specific value and does not require any valuation, Schedule II starts with opening words “other than cash”, hence this implies that transfer of cash is very much contemplated under the Act.

8. As regard the meaning to be given to the term ‘adequate consideration’, the Tribunal held that the same is to be considered in a broad sense and merely because there may be some difference between the conclusion for the transfer and the true value of the property transferred, the same would not attract the applicability of Section 4 (1) (a). The expression ‘adequate consideration’ could not be considered with precision but the same was not equivalent to the market value and the adequacy of consideration has to be determined with reference to the circumstances keeping in view the nature of transaction, whether it is bona fide and whether consideration stated was the whole amount of the consideration. The Tribunal has recorded a categorical finding that in the case of assessee’s shares were sold on face value of Rs. 10 per shares. The company has no power to sell shares at less than the face value. Therefore, the learned Commissioner rightly concluded that the assessee had not made any gift.

9. Being aggrieved by the impugned order, the revenue has preferred appeals.

10. On behalf of the department, it has been contended that the Tribunal erred in not taking into consideration that the value of the shares of closely held companies of the Sahara Group as determined in the manner laid down in Schedule II of the Gift Tax Act was much lower than face value of the said shares. Therefore, the respondent had paid much more for acquiring the said shares and in view of this, the transfer was clearly made for inadequate consideration within the meaning of provisions of Section 4 (1) (a) of the Gift Tax Act.

11. It has been contended that the Tribunal while disposing of the appeals has laid too much emphasis on Section 79 (1) of the Indian Companies Act overlooking the very vital fact that the transactions between the respondent and the closely held companies of the Sahara Group were collusive transaction in which shares of the said companies were acquired by the respondent by paying much more than the value of those shares as determined in the manner as laid down in Schedule II of the Gift Tax Act. Furthermore, the funds for purchasing the said shares were also made available to the respondent by certain cash rich companies of the same group.

12. Lastly, it has been submitted that the ratio laid down in the case of Khoday Distilleries Ltd. v. CIT [2008] 307 ITR 312/[2009] 176 Taxman 142 (SC), which has been relied upon by the respondents, is not applicable as the facts and issue involved in the present appeals are quite different than that involved in the aforesaid case.

13. Section 3 of the Gift Tax Act is the charging provision. Sub-section (2) thereof provides that subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1987, Gift-tax in respect of the gifts, if any, made by a person during the previous year, at the rate of thirty percent on the value of all taxable gifts. The term ‘gift’ in turn, is defined in Section 2 (xii) in an exhaustive manner. For the purposes of the present appeal, it means a 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 transfer or conversion of any property referred to in Section 4, deemed to be a gift under that Section. It is thus clear that Section 4, by a fiction, deems certain transactions to be gifts, which in general connotation of the said term, are not so. Therefore, as it gives an artificial definition to the term and extends its meaning, it must be strictly construed, as has been held in CIT v. C.P. SarathyMudaliar [1972] 83 ITR 170 (SC).

14. As the present appeals give rise to the interpretation of Section 4 (1) (a), the same is extracted hereinafter:—

“Where property is transferred otherwise than for adequate consideration, the amount by which the value of the property as on the date of 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 the transferor; Provided 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.”

15. It is apparent from a perusal of the said section that certain conditions have to be fulfilled before any charge under Section 4 (1) (a) can be sustained. The conditions are that one property (other than cash) is transferred; and secondly, the said transfer should be otherwise than for adequate consideration. If these conditions are fulfilled, then the question of the gift is to be calculated as the difference between the value of the property transferred determined in the manner laid down in Schedule II and the consideration for the transfer.

16. In the backdrop of the aforesaid legal position, it has been vehemently contended by the respondents that the aforesaid two conditions are not fulfilled hence the charge levied by the Assessing Officer must necessarily fail. The fact that the property that is transferred has to be other than cash is borne out by computation provision in the latter part of the said clause. The computation provision contemplates that the property that is transferred must be capable of being valued in the manner laid down in Schedule II of the Act. A perusal of Rule 1 of Schedule II further makes it clear that the said Schedule prescribed the methodology for determining the value of properties other than cash. A fortiori, property referred to in the opening words of Section 4 (1) (a), is capable of being evaluated in terms of Schedule II and hence, as the subject matter of the alleged transfer in the present case is cash, section 4 (1) (a) can have no application whatsoever. Our view is fortified by the judgment of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.

17. In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. AIR 1964 SC 250 and Khoday Distilleries Ltd.’s (supra), the Apex Court held that there is a vital difference between the creation of shares and the transfer thereof. An allotment of shares by a company results in creation of shares by appropriation out of the un-appropriated share to a particular person and hence, such creation does not amount to a transfer. In the later decision, the Supreme Court held that when shares were allotted by a company pursuant to a rights issue to the existing shareholders, there was no transfer of the share by the company so as to fall within the ambit of Section 4(1)(a). The view expressed by the Hon’ble Supreme Court in the aforesaid cases has subsequently been followed by the Punjab & Haryana High Court in CGT v. Rockman Cycle Industry Ltd. [2010] 325 ITR 18/194 Taxman 485 (Punj. & Har.) where the Court held that when an assessee subscribes to shares, there can be no gift by the assessee to the company as there is no transfer as alleged by the revenue when an allotment of shares is made. In that case, the allegation of the revenue was that the assessee subscribed to the share at a face value of Rs.100/- while the market value of the share was only Rs.30/- and therefore, the assessee had made a gift of Rs.70/- to the company which is the allegation akin to the one as has been made in the present case.

18. The Court inter alia held that a subscriber to the share capital of the company acquires no interest in the property because at that stage, no transfer was involved but the share became property only after allotment, particularly when, as per the specific prohibition contained in Section 69 of the Companies Act, a company could not issue shares at a discount. If when a company issues shares there is no transfer of property but only a creation of property as enunciated by the Apex Court it must follow that when a person subscribes to shares the transaction does not give rise to transfer of property. This would mean that the first condition required to be fulfilled before Section 4 (1) (a) can be invoked is not complied with and, therefore, the Tribunal was in error in holding that when the assessee subscribes to shares there was a transfer of property.

19. The second condition which is necessarily to be observed by the authorities is that the transfer must be otherwise than for adequate consideration, which in the instant case has also not been complied with. In order to attract the aforesaid provision, it is not necessary that the transfer must be otherwise for a consideration which is less than the market value. What has to be seen is that the transfer is not for adequate consideration. As to what is meant by the term ‘adequate consideration’ was considered by the Madras High Court.

20. In CGT v. Indo Traders & Agencies (Madras) (P.) Ltd. [1981] 131ITR 313 (Mad.) the High Court observed as under:—

‘…The market value of the stock-in-trade has been taken to the price subsequently realised. There is no information on record to show that even in May or June, 1964, the goods shown in the books commanded a higher market value. Merely because, subsequently, the prices realised were higher, it does not follow that on the date when the transaction took place there was a higher price for them, and that it should be taken into account as adequate consideration. The relevancy of the market price as shown by the provision is only to fix the quantum of the value of the gift after it is found that the transaction was for inadequate consideration. When once the GTO assumes jurisdiction and is in a position to establish that the property has been transferred otherwise than for adequate consideration, then there is no option for him but to take the market value of the property as on the date of the transfer and compare it with the value of the consideration as shown by the parties. The difference will be deemed to consideration as shown by the transferor. If the Legislature had contemplated as a universal rule that the market value should alone be the criterion for testing the adequacy of consideration, the provision would have been differently worded. The working would then have been, “where the property is transferred for less than its market value, then the difference between the market value and the consideration stipulated, shall be deemed to be the gift made by the transferor”. Parliament not having made any such provision, it would not be for us to take the market value of the property for determining the adequacy of consideration in all events.’

21. The High Court after observing that in order to attract the provisions of Section 4 (1) (a), it is necessary for the Assessing Officer to show that the property is transferred otherwise than for adequate consideration and relying on several English decisions, concluded at page 320 of the judgment that ‘adequate consideration’ is not necessarily what is ultimately determined by someone else as market value and held that if the consideration that passed between the parties can be considered to be reasonable or fair, it cannot be considered to be inadequate. The Court is further of the view that ‘if the Legislature had contemplated as a universal rule that the market value should alone be the criterion for testing the adequacy of consideration, the provision would have been differently worded and would have been, “where the property is transferred for less than its market value, then the difference between the market value and the consideration stipulated, shall be deemed to be the gift made by the transferor”.

22. The aforesaid view was reiterated by the Madras High Court in CGT v. Nelson & Co. [2000] 245 ITR 347/[2001] 116 Taxman 206 and subsequently in CGT v. Dr. (Mrs.) Malini Krishnan [2002] 258 ITR 414/[2003] 133 Taxman 88, where the High Court observed that it is only in cases where the difference in price is abnormal, the conclusion that the vendor has consciously given away to the buyer a valuable thing at a much lesser value only to favour the buyer can be reached and the question of deemed gift would arise.

23. It may be mentioned that the First Appellate Authority while observing that the Assessing Officer has misapplied the provisions of the Gift Tax Act observed that “Section 79 (1) of the Indian Companies Act states that a company shall not issue shares at a discount except as provided in this Section. Sub-Section 2 of Section 79 prescribes various conditions under which shares can be issued on a discount authorized by resolution of the Board of Directors of the company and sanctioned by Company Law Board. In the case of the appellant, shares were sold on face value of Rs.10 per share. A Company has no power to sell shares at less than face value. If the appellant has purchased shares or has subscribed to right issue of closely held companies at face value of shares, it cannot be said that the appellant has made any gift.”

24. The Appellate Tribunal while rejecting the appeal of the Department endorsed the above view taken by the First Appellate Authority.

25. In the case of Reva Investment (P.) Ltd. v. CGT [2001] 249 ITR 337/116 Taxman 498, the Apex Court held that for invoking the provisions of Section 4 (1) (a) inquiries have to be made regarding – (i) the exercise of a ‘transfer of property’; (ii) the extent of consideration given, i.e. whether the consideration is adequate. It is imperative upon the Assessing Officer to show that the property has been transferred otherwise than for adequate consideration. The finding as to the 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 the true value of the property transferred and the consideration that passed for the same must be appreciated.

26. Applying the aforesaid principles, it is apparent that the subscription to the shares at the face value by the assessees, who are the promoters of the company whose shares are subscribed for cannot, in a commercial sense, be regarded as inappropriate. A company to carry on its business requires funds. Such funds could be raised either by way of equity or by way of debt. If the company seeks to raise funds by way of equity, it can only do so by way of issuing shares at a value which is not less than the face value in view of section 79 (1) of the Companies Act. If the company desires to issue shares at a discount, then, it can do so only by complying with the conditions provided for in sub-section (2) Section 79, it is not the case of the revenue that the conditions provided for in Section 79 (2) were complied with by any of companies whose shares the assessee has subscribed for. We find force in the submissions of the respondent’s Counsel that the act of subscribing to the shares at the face value cannot be said to be one which shocks the conscience of the Court so as to justify the transaction as falling within the parameters of Section 4 (1) (a). Applying a broad commercial sense approach the only conclusion that can be reached is that there are no inadequate considerations. The conclusion of the Tribunal to that effect is essentially a question of fact and does not give rise to any question of law much less a substantial question of law. (see: CGT v. Naganathan [1999] 239 ITR 822 (Mad.).

27. In view of the legal proposition laid down in Reva Investment (P.) Ltd.’s case (supra), Indo Traders & Agencies (Madras) (P.) Ltd. case (supra) and CGT v. A. Hafsa Banu [2000] 241 ITR 462/[2001] 117 Taxman 378 (Mad.), it is imminently clear beyond doubt that the burden lies on the revenue to establish that the conditions of Section 4 (1) (a) are complied with.

28. For the reasons aforesaid, together with the findings recorded by both the Appellate Authorities, we find no good ground to interfere with the impugned judgment and the same is confirmed. Both the answers of the substantial questions of law are in favour of the assessee and against the department order passed by the Tribunal. The same is hereby sustained alongwith the reasons mentioned therein. The answer to both the substantial questions of law is in favour of assessee and against the Revenue.

29. All Appeals stand dismissed accordingly.

[Citation : 357 ITR 1]