2001 (10) TMI 49 - HC - Income Tax

Summary

Issues Involved:
1. Whether the conversion of equity shares into preference shares constitutes a transaction under section 2(xxiv)(d) of the Gift-tax Act, 1958.
2. Whether the conversion resulted in a gift as per the Gift-tax Act.
3. Whether the Tribunal was correct in holding that the value of equity shares and preference shares would be the same as per rule 10(2) of the Gift-tax Rules.
4. Whether the value of the assessee's assets decreased 'in globo' due to the conversion.

Detailed Analysis:

1. Conversion of Equity Shares into Preference Shares as a Transaction:
The Tribunal held that the conversion of equity shares into preference shares did not amount to a transaction within the meaning of section 2(xxiv)(d) of the Gift-tax Act, 1958. The Tribunal emphasized that a gift under the Act is not brought about by the unilateral action of any person and requires the involvement of two persons-a donor and a donee. The conversion was seen as a unilateral action by the company, not involving a bilateral transaction that would attract gift-tax.

2. Conversion Resulting in a Gift:
The Tribunal concluded that no gift arose from the conversion of equity shares into preference shares. The conversion was considered a bona fide transaction for adequate consideration, given the valuable rights attached to the preference shares. The Tribunal noted that the conversion did not diminish the value of the assessees' assets in globo nor increase the value of the assets of the companies to whom equity shares were allotted. The Tribunal also referenced the Supreme Court decisions in Goli Eswariah v. CGT and CGT v. N.S. Getti Chettiar, which supported the view that a gift requires a bilateral transaction.

3. Valuation of Equity Shares and Preference Shares:
The Tribunal held that rule 10(2) of the Gift-tax Rules, which does not distinguish between the valuation of equity shares and preference shares, was applicable. The Tribunal observed that the Assessing Officer's valuation of the equity shares at Rs.1,773 per share was incorrect. The Tribunal pointed out that the Assessing Officer failed to consider the overriding charge in favor of Smt. Krishna Devi Dalmia and the share of unearned increase in the value of the land payable to the President of India. Additionally, the preference shares had a right to participate in the surplus assets in the event of liquidation, which was not factored into the valuation.

4. Decrease in Value of Assessee's Assets 'In Globo':
The Tribunal found no evidence that the conversion of equity shares into preference shares resulted in a decrease in the value of the assessee's assets in globo. The Tribunal reasoned that any decrease or increase in the value of the assets of the closely held companies would ultimately be reflected in the value of the interest of each of the assessees in such companies.

Conclusion:
The High Court concluded that the Tribunal's findings were erroneous. The court held that the conversion of equity shares into preference shares constituted a transfer of property amounting to a gift within the meaning of section 2(xii) of the Act. The court directed the Tribunal to redetermine the value of the shares, considering the aspects noted by the Tribunal itself. The reference petitions were disposed of accordingly.