2011 (9) TMI 40 - HC - Income Tax

Deemed gift - Section 2(xii) of the Gift Tax Act, 1958 - the assessee company had allotted 10,000 shares each at the face value of Rs.100/- to three individuals, viz., Shri. P. Govindasamy, Shri P. Palanisamy and Shri P. Kumarasamy. It is not in dispute that at the time of allotment of shares, the value of the share as per the market value was Rs.408.71 - The difference amount between the face value and the actual value was claimed as tax by the Department - The two essential requirements to bring the transaction within clause (a) of Section 4(1) of the Gift Tax Act are (1) there should be a property and (2) there should be a transfer. According to the assessee, the allotment does not involve transfer and therefore this clause is not attracted - On contra, according to the Revenue, it is a transfer as there was purchase of share from an existing shareholder i.e., the company - From the facts it is seen that the shares have been allotted to three individuals who were interested in the affairs of the company and the amount outstanding to the credit of account were adjusted against the face value of the share allotted to them - These shares were allotted as that of a new shareholder - It is quite understandable that when shares are allotted to a new shareholder, the value as on the date of the purchase should be taken into consideration and not the face value of the share - When the market value of the share is Rs.408.71, the assessee has transferred the share to a new shareholder, who is not an existing shareholder, at the face value of Rs.100/- that too the consideration for the said transfer was adjusted from the amount outstanding to the credit of the purchasers. It is not the case of the assessee that these shares were allotted as bonus or shares on rights basis as contemplated under Section 81 of the Companies Act - This transaction is said to be transfer of shares and not creation of shares - Therefore, it cannot be said that Section 2(xxiv)(d) of the Gift Tax Act would not apply to the present case - Decided in favour of Revenue.

Summary

Issues Involved:
1. Whether the allotment of shares at face value constitutes a gift under Section 4(1)(a) of the Gift Tax Act.
2. Whether the transaction falls under Section 2(xxiv)(d) of the Gift Tax Act, which defines transfer of property.

Issue-wise Detailed Analysis:

Issue 1: Allotment of Shares as a Gift
The primary issue revolves around whether the allotment of shares at face value to individuals interested in the company constitutes a gift under Section 4(1)(a) of the Gift Tax Act. The assessee argued that the allotment of shares does not involve any transfer of property and thus cannot be considered a gift. The Gift Tax Officer, however, concluded that since the shares were issued at a value significantly lower than the market value, the difference should be deemed a gift. The appellate authority and the Tribunal initially ruled in favor of the assessee, relying on the Supreme Court's decision in Khoday Distilleries Ltd., which distinguished between renunciation and allotment of shares, concluding that allotment does not constitute a transfer of existing property.

Issue 2: Definition of Transfer of Property
The second issue concerns whether the transaction falls under Section 2(xxiv)(d) of the Gift Tax Act, which includes any transaction intended to diminish the value of one's own property and increase the value of another's property. The Revenue argued that by allotting shares at face value, the assessee diminished the value of its property, thereby increasing the value of the shares held by the new shareholders. The Tribunal and the appellate authority initially rejected this argument, again relying on the Khoday Distilleries case, which held that allotment of shares does not constitute a transfer of property.

Court's Analysis and Decision:
The High Court carefully analyzed the definitions of "gift" and "transfer of property" under Sections 2(xii) and 2(xxiv) of the Gift Tax Act. The Court emphasized that the terms like "disposition," "conveyance," "assignment," and "settlement" should be understood in the context of their use in the statute. It noted that the words imply giving away something of value without consideration, which aligns with the concept of a gift.

The Court distinguished the present case from the Khoday Distilleries case, noting that in Khoday, the allotment was part of a rights issue where existing shareholders had the option to subscribe. In contrast, the present case involved the allotment of shares to new shareholders at face value, significantly below the market value, without any such option being exercised by existing shareholders.

The Court concluded that the transaction in question did indeed involve a transfer of property as defined under Section 2(xxiv)(d) because the allotment of shares at face value diminished the value of the company's property and increased the value of the new shareholders' property. As such, the difference between the market value and the face value of the shares constituted a deemed gift under Section 4(1)(a) of the Gift Tax Act.

Conclusion:
The High Court reversed the findings of the appellate authority and the Tribunal, ruling in favor of the Revenue. It held that the allotment of shares at face value constituted a transfer of property and a deemed gift under the Gift Tax Act. The substantial questions of law were answered against the assessee, and the Tax Case Appeal was allowed.