2004 (9) TMI 86 - HC - Income Tax

Gift Tax Act, 1958 - 1. Whether, Gift-tax Officer was legally correct in initiating proceedings under section 16(1) of the Gift-tax Act, 1958, against the deceased assessee, Nabi Shah, for the assessment year 1976-77 on the basis of the report of the internal audit party? - As in the present case, the report of the internal audit party on a question of law was the basis, the same did not constitute information so as to clothe the Gift-tax Officer with any jurisdiction to initiate proceedings under section 16(1) of the Act Thus, we answer the question referred to us in the negative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues:
1. Validity of initiating proceedings under section 16(1) of the Gift-tax Act, 1958 based on an internal audit report.
2. Taxability of a deemed gift in the hands of a deceased assessee upon retirement from a partnership firm.

Analysis:
The High Court of ALLAHABAD was presented with two questions of law referred by the Income-tax Appellate Tribunal, Delhi, under section 26(1) of the Gift-tax Act, 1958. The first issue pertained to the legality of initiating proceedings under section 16(1) of the Act against the deceased assessee for the assessment year 1976-77 based on an internal audit report. The second issue involved determining the taxability of a deemed gift in the hands of the deceased assessee following his retirement from the partnership firm of M/s. Amjad Ali and Co. on September 30, 1974.

The deceased assessee, a partner in the firm, retired during the assessment year 1976-77 without charging anything for his share of goodwill. The Gift-tax Officer initiated proceedings under section 16(1) of the Act upon receiving an internal audit report suggesting a deemed gift due to the absence of charges for goodwill. Subsequently, the taxable gift was assessed at Rs. 69,870, which was contested by the legal heirs of the deceased. The Appellate Assistant Commissioner of Gift-tax canceled the assessment, a decision upheld by the Tribunal.

The High Court emphasized that the initiation of assessment proceedings based solely on an internal audit report concerning a question of law was not valid. Citing the precedent set by the apex court in a similar income tax case, it was established that a report of the internal audit party on a legal matter does not constitute actionable information for initiating proceedings. Therefore, the Court ruled in favor of the assessee, holding that the internal audit report did not provide the Gift-tax Officer with the jurisdiction to proceed under section 16(1) of the Act.

Consequently, the High Court answered the first question in the negative, favoring the assessee and rejecting the Revenue's appeal. As the resolution of the first question rendered the second question moot, no costs were awarded in the matter.