High Court Of Punjab & Haryana
Commissioner Of Gift Tax vs. Rockman Cycle Industries (P) Ltd.
Section GT 4(1)(a)
Asst. Year 1986-87
Ashutosh Mohunta & Mehinder Singh Sullar, JJ.
GT Appeal No. 2 of 1999
27th January, 2010
Counsel Appeared :
Krishan Mehta, for the Appellant : Akshay Bhan, for the Respondent
Judgment
Mehinder Singh Sullar, J. :
As common questions of law and facts are involved, therefore, we propose to dispose of all the above-mentioned four appeals, by this judgment, in order to avoid repetition of facts. However, for facilitation, the facts have been extracted from GT Appeal No. 2 of 1999, titled “CGT (Central), Ludhiana vs. Rockman Cycle Industries (P) Ltd., Ludhiana”.
2. The brief facts, relevant for disposal of present appeals and emanating from the record, are that during the period of asst. yr. 1986-87, the assessee purchased redeemable non-cumulative preference shares of Rs. 100 each for Rs. 50,00,000 of Hero Investments (P) Ltd., Ludhiana. The shares purchased were 4 per cent non-cumulative preference shares even if the dividend was declared in any year, the yield from these shares was only 4 per cent. The market value of the shares did not exceed Rs. 30 per share and the assessee paid Rs. 70 per share in excess of the market value. Therefore, the assessing authority treating it to be a case of escaped assessment of taxable gift, issued notice under s. 16(1)(a) of the GT Act, 1958 (for brevity “the Act”).
3. In the wake of notice, the assessee filed the return, declaring the value of taxable gift as nil. However, in a note accompanying the return, it was explained that the company was allotted 50,000—4 per cent redeemable non- cumulative preference shares @ Rs. 100 each at par of M/s Hero Investment (P) Ltd. and since the shares could not be issued by the company below their face value as per s. 69 of the Companies Act, 1956, so no taxable gift was involved. The explanation put forth by the assessee did not find favour and the assessing authority accordingly imposed the gift-tax, vide order dt. 27th Dec., 1990 (Annex. A2).
4. The appeal filed by the assessee was accepted by the CGT(A) (Central), vide order dt. 13th Dec., 1991 (Annex. A3).
5. Aggrieved by the order Annex. A3, the appeal filed by the Revenue was also dismissed by the Tribunal, vide order dt. 28th Oct., 1998 (Annex. A1).
6. The Revenue still did not feel satisfied with the impugned order (Annex. A1) and filed the instant appeal.
7. The following question arose for determination in this matter : “Whether on the facts and circumstances of the case the Tribunal was right in law in confirming the order of the CGT(A) (Central), Ludhiana and holding that the transaction of 50,000—4 per cent non-cumulative preference shares at the face value of Rs. 100, the market value of which did not exceed Rs. 30 per share, did not involve any gift ?”
8. We have heard the learned counsel for the parties and have gone through the material on record and relevant provisions of law with their valuable help.
9. Above being the position, now the core question, that arises for determination is, whether the transaction of 50,000—4 per cent non-cumulative preference shares at the face value of Rs. 100 each, the market value of which, did not exceed Rs. 30 per share, would involve any gift-tax under s. 4(1)(a) of the Act or not. Thus, it be seen that the facts of the case are neither intricate nor much disputed. Assailing the impugned order, the learned counsel for the Revenue has contended with some amount of vehemence that since the worth of the shares acquired by the assessee was not more than Rs. 30 per share and the investment of balance amount would be deemed to be a gift and liable to gift-tax. Hailing the impugned order, on the contrary, the learned counsel for the assessee has urged that the assessee was the original buyer of shares directly from the company and as per s. 69 of the Companies Act, no allotment shall be made of any share of the company on discount. In that eventuality, the question of element of gift, during the period of relevant assessment year, did not arise at all. In order to support his contention, he has placed reliance on the judgment of Hon’ble Supreme Court in case of Khoday Distilleries Ltd. vs. CIT & Anr. (2008) 220 CTR (SC) 228 : (2008) 15 DTR (SC) 126 : (2008) 307 ITR 312 (SC).
After hearing the learned counsel for the parties, we are of the view that as element of gift is lacking, therefore, the transaction in question is not liable to gift-tax. Sec. 3 of the Act postulates the liability to charge gift-tax and s. 2(xii) of the Act defines “gift” means the transfer by any 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 s. 4, deemed to be a gift under that section”. Explanation to this clause is that “a transfer of any building or part thereof referred to in cl. (iii), cl. (iiia) or cl. (iiib) of s. 27 of the IT Act by the person who is deemed under the said clause to be the owner thereof made voluntarily and without consideration in money or money’s worth, shall be deemed to be a gift made by such person”. Sequelly, s. 2(xxiv) of the Act posits that “transfer of property” means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes—(a) the creation of a trust in property; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; (c) the exercise of a power of appointment (whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made) of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and (d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.
15. Sec. 4(1)(a) of the Act reads as under : “4. Gifts to include certain transfers.—(1) For the purposes 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 Sch. 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 RBI.”
The combined reading of these provisions would reveal that only that property (transaction), which is transferred otherwise than for adequate consideration, the amount of which, exceeds the value of the consideration at the relevant time, would be liable to gift-tax. As per proviso to s. 4(1) (a), even transfer of such property/transaction where the value of the consideration for the transfer is determined or approved by the Central Government or the RBI, is not leviable to gift-tax. It means, actually the value of transferred property had to be considered on the relevant date and s. 4(1)(a) would not apply where the consideration for the transfer is approved by Central Government.
An identical question arose before the Hon’ble apex Court in case of Khoday Distilleries Ltd. (supra). In that case, the assessee-company allotted all the rights shares to other shareholders. The AO held that the allotment of the rights shares was without adequate consideration and there was deemed gift under s. 4(1)(a) of the Act, of the difference between the value of the shares on yield basis and their face value. On appeal, the CIT(A) was of the view that gift-tax proceedings ought to have been initiated against those shareholders who had renounced their rights, but he upheld the assessment against the assessee-company. On further appeal, the Tribunal reversed the decision, holding that the allotment of rights shares did not constitute “transfer” and there was no element of gift as there was no “transfer” under s. 2 (xxiv). On appeal, the High Court held in favour of the Department.
In the wake of further appeal by the assessee, having considered the relevant provisions of s. 4(1)(a) vis-a-vis s.
2(xii) and (xxiv) of the Act, Hon’ble apex Court ruled that “it was only an allotment that the share came into existence, and the words ‘allotment of shares’ were used to indicate the creation of shares by appropriation out of unappropriated share capital to a particular person. It was observed that there was a vital difference between
‘creation’ and ‘transfer’ of shares. The allotment by the assessee of all the rights shares was not a “transfer” and, therefore, s. 4(1)(a) was not applicable.” It was also held that “allotment is not transfer. There is no element of existing right in the case of allotment as required by s. 2(xii)”. Again, the Hon’ble Supreme Court in case Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd. AIR 1964 SC 250 has held that “in company law allotment means the appropriation, out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.” The ratio of Hon’ble apex Court “mutatis-mutandis” is applicable to the facts of the present case.
It is not a matter of dispute that in the instant case, during the period of asst. yr. 1986-87, the assessee purchased redeemable non-cumulative preference shares at the face value of Rs. 100 each with a return of 4 per cent, directly from M/s Hero Investment (P) Ltd. The memorandum of association had been approved by the RoC. Thus, a subscriber to the share capital of the company acquired no interest in the property, because at that stage, no transfer was involved but the shares became property only after allotment, particularly when as per the specific prohibition contained in s. 69 of the Companies Act that such company could not issue the shares at a discount.
21. Therefore, purchase of the shares by the assessee directly from the company in view of bar of discount under s. 69 of the Companies Act and the amount was a bona fide transaction relatable to its business. The AO has drawn a speculative consideration that the assessee would not adopt a losing proposition, which no prudent businessman would enter into and that means that non-business considerations were involved. Here, the AO appears to have fallen in error, because neither there is any material on record nor specific finding that the assessee has purchased the shares as colourable device to reduce the tax liability. At the most, it may be a measure of commercial expediency and prudence. The assessee could not be prevented from making such investment in certain shares only on the ground that the return from shares was very low. No one can lose sight of the fact that the assessee was not dealing in the shares and investments have been made as incidental activity of commercial expediency/prudence of the business. So, question of element of deemed gift did not arise at all @ Rs. 100 per share at the relevant time. Not only that, as the value has been fixed by the Government under the company law, therefore, proviso to s. 4(1)(a) of the Act is fully attracted in the obtaining circumstances of the case.
22. In the light of the aforesaid reasons, it is held that the value of the transaction/transfer of the shares did not involve the element of gift at the relevant time and is fully covered by the proviso to s. 4(1)(a) of the Act. Therefore, the gift-tax is not leviable on the indicated transaction of the assessee and the question of law is accordingly answered in favour of the assessee.
23. For the reasons recorded above, the present appeals are dismissed with no order as to costs.
[Citation : 325 ITR 18]
