2010 (4) TMI 791 - HC - Income Tax

Transfer of capital asset - Company was managed by 2 groups of shareholders. Some dispute is alleged to have cropped up between these 2 groups. & An arrangement has been made between and Shares transferred to each other. Whether these transfer was a Gift or family arrangement . - There was consideration for the alleged transfer by the applicant. or not. - Held that - Kantilal group relinquished and waived their right, title and interest in the property described in annex A & B and also consideration which the company was to receive out of the land transaction and in lieu thereof they got properties shown in annex C free from all liabilities on ownership basis. Nature of consideration is transfer of property shown in annex C in favour of the Kantilal group and in consideration thereof Kantilal group relinquished their rights over the properties shown in annex A and B. This consideration for the transaction in question can conveniently be spelt out from arbitration award of arbitrator. decided in favour of Assessee.

Issues Involved:
1. Whether the Tribunal erred in law in rejecting the applicant's contention that there was no 'transfer' and consequently no gift due to a 'family arrangement'.
2. Whether the Tribunal erred in holding that there was no consideration for the alleged transfer by the applicant.
3. Whether the Tribunal ought to have held that even if there was a gift by the applicant, such gift was exempt under section 5(1)(xiv) of the Gift-tax Act, 1958.

Issue-wise Detailed Analysis:

1. Family Arrangement and Transfer:
The Tribunal rejected the applicant's contention that the transaction was a family arrangement, and hence, there was no transfer and no gift. The Tribunal defined a family arrangement as an agreement among family members intended for the benefit of the family by compromising doubtful or disputed rights or preserving family property. It observed that the company is a distinct legal entity and its property cannot be equated with family property. The Tribunal noted that no cogent material was presented to show that the arrangement was made to secure peace and harmony among family members or that there was a family dispute. The Tribunal concluded that the transaction could not be considered a family arrangement and upheld the view that the transfer was voluntary and without consideration, making it exigible to gift-tax.

2. Consideration for Transfer:
The Tribunal held that there was no consideration for the alleged transfer by the applicant. The Tribunal emphasized that the company and its shareholders are distinct legal entities, and consideration accruing to shareholders cannot be deemed to accrue to the company. However, the High Court found that the arbitration award clearly indicated that there was consideration for the transaction. The Kantilal group relinquished their rights in certain properties and the balance price receivable by the company in exchange for properties described in annexure C. The High Court held that the Tribunal erred in dismissing the aspect of consideration and answered this question in favor of the applicant, stating that the Tribunal's view was incorrect.

3. Exemption under Section 5(1)(xiv) of the Gift-tax Act:
The Tribunal ruled that for a gift to be exempt under section 5(1)(xiv) of the Gift-tax Act, it must be shown that the gift was made on the grounds of commercial expediency or to facilitate the business. The Tribunal held that the applicant failed to prove that the transfer was in the interest of the business of the company. The High Court did not need to address this issue in detail because it had already answered the second question in favor of the applicant, rendering this issue academic.

Rival Submissions:
The applicant's counsel argued that the burden of proving the existence of a gift lies with the Revenue and that the transaction was not a gift as it involved consideration. The counsel also argued that if the transaction were considered a gift, it should be exempt under section 5(1)(xiv) of the Act. Additionally, it was argued that the same transaction could not be subjected to both capital gains tax and gift tax. The Revenue's counsel reiterated the findings of the Tribunal.

Consideration by the High Court:
The High Court reviewed the arbitration award and found that there was indeed consideration for the transaction. The Kantilal group relinquished their claims in certain properties and the balance price receivable by the company in exchange for other properties. The High Court held that the Tribunal's view on the lack of consideration was incorrect and answered question No. 2 in favor of the applicant. Consequently, the remaining questions were rendered academic and did not require further consideration.

Conclusion:
The High Court concluded that the Tribunal erred in holding that there was no consideration for the alleged transfer. The High Court answered question No. 2 in favor of the applicant, stating that the Tribunal's view was not correct. As a result, the remaining questions did not need to be addressed, and the reference was disposed of accordingly.

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