1994 (9) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the show-cause notice issued under section 24(2) of the Gift-tax Act, 1958.
2. Jurisdiction of the Commissioner of Gift-tax in setting aside the assessment orders.
3. Appropriate method for valuing unquoted shares for gift-tax purposes.
4. Maintainability of the writ petition given the existence of an alternative remedy.

Detailed Analysis:

1. Legality of the Show-Cause Notice Issued Under Section 24(2) of the Gift-tax Act, 1958:
The petitioner contended that the show-cause notice issued by the Commissioner of Gift-tax, West Bengal IV, was "wholly illegal and without any basis." The notice proposed to set aside the assessment orders for the assessment years 1976-77 and 1978-79, stating that the Gift-tax Officer should have valued the gifted shares under rule 10(2) of the Gift-tax Rules, 1958, rather than rule 1D of the Wealth-tax Rules, 1957. The petitioner argued that the conclusions in the notice were based on a "misconstruction of statutory language" and ignored relevant materials.

2. Jurisdiction of the Commissioner of Gift-tax in Setting Aside the Assessment Orders:
The petitioner argued that the Commissioner of Gift-tax acted "illegally and without jurisdiction" in setting aside the assessment orders completed by the Gift-tax Officer under section 15(3) of the Gift-tax Act after making all necessary and proper inquiries. The petitioner contended that section 24(2) of the Act could only be invoked if the assessment order was "erroneous in law and prejudicial to the interests of the Revenue." The petitioner maintained that none of these conditions were satisfied in this case.

3. Appropriate Method for Valuing Unquoted Shares for Gift-tax Purposes:
The petitioner valued the shares based on guidelines provided in rule 1D of the Wealth-tax Rules, 1957, and this valuation was accepted by the Gift-tax Officer. The Commissioner of Gift-tax, however, argued that the shares should have been valued under rule 10(2) of the Gift-tax Rules, 1958. Rule 10(2) provides that the value of shares in a private company with restrictive provisions on alienation should be estimated based on what they would fetch in the open market. The petitioner cited multiple judgments to support the use of the break-up method prescribed in rule 1D, including decisions from the Supreme Court and various High Courts, which consistently favored this method for valuing unquoted shares.

4. Maintainability of the Writ Petition Given the Existence of an Alternative Remedy:
The respondent argued that the writ petition should not be entertained as the petitioner had an alternative remedy by way of appeal under section 25 of the Gift-tax Act. However, the court noted that the writ petition was filed in January 1983, and more than 18 years had passed. The court referenced the Supreme Court's decision in L. Hirday Narain v. ITO, which held that the existence of an alternative remedy does not justify dismissing a writ petition that has been entertained and heard on merits.

Court's Conclusion:
The court found that the Commissioner of Gift-tax "patently lacked jurisdiction" to initiate proceedings under section 24(2) of the Gift-tax Act, 1958, as the conditions precedent for invoking this section were not satisfied. The court quashed and set aside the proceedings, decisions, and order passed by the Commissioner of Gift-tax under section 24(2) of the Gift-tax Act. The court also held that the objection regarding the alternative remedy could not be raised at the final hearing stage after several years had passed since the rule was issued.