1997 (11) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Validity of reassessment under section 16(1)(b) of the Gift-tax Act, 1958.
2. Applicability of rule 10(2) of the Gift-tax Rules, 1958, for valuation of shares.
3. Jurisdiction of the Gift-tax Officer to reopen the assessment based on new information or suspicion.

Issue-wise Detailed Analysis:

1. Validity of Reassessment under Section 16(1)(b) of the Gift-tax Act, 1958:
The primary issue was whether the Appellate Tribunal was correct in canceling the reassessment made under section 16(1)(b) of the Gift-tax Act, 1958, for the assessment year 1964-65 as bad in law. The Gift-tax Officer initially assessed the value of shares based on rule 1D of the Wealth-tax Rules, 1957, following a circular from the Central Board of Direct Taxes dated March 26, 1968. Later, a different circular dated October 29, 1974, directed the use of rule 10(2) of the Gift-tax Rules for valuation. The reassessment was initiated because the Gift-tax Officer believed the original valuation did not comply with rule 10(2). However, the Appellate Tribunal found that there was no new information to justify the reassessment and that the officer acted on mere suspicion.

2. Applicability of Rule 10(2) of the Gift-tax Rules, 1958, for Valuation of Shares:
Rule 10(2) states that if the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of the shares should be estimated based on what they would fetch in an open market sale. The Tribunal noted that the Gift-tax Officer did not record any finding that it was impossible to ascertain the value of the shares by reference to the value of the total assets of the company. The Tribunal concluded that the officer's failure to establish this precondition invalidated the use of rule 10(2) for reassessment.

3. Jurisdiction of the Gift-tax Officer to Reopen the Assessment Based on New Information or Suspicion:
The Tribunal found that the Gift-tax Officer had no information to form a reasonable belief that there was an underassessment of the taxable gift amount. The officer's actions were based on suspicion rather than concrete evidence. The Tribunal emphasized that mere suspicion is insufficient to reopen an assessment. The Tribunal also noted that the Gift-tax Officer must consider all relevant factors, including sundry debts and liabilities, before concluding underassessment. The reassessment was deemed invalid as it was not based on any new information or evidence.

Conclusion:
The Tribunal concluded that the Gift-tax Officer did not have valid grounds to reopen the assessment under section 16(1)(b) of the Gift-tax Act. The officer failed to demonstrate that the value of the shares could not be ascertained by reference to the total assets of the company, a prerequisite for applying rule 10(2) of the Gift-tax Rules. The Tribunal also found that the officer acted on suspicion without any concrete information, invalidating the reassessment. Consequently, the Tribunal's decision to cancel the reassessment was upheld, and the common question of law was answered in the affirmative, against the Revenue.