2013 (6) TMI 18 - HC - Income Tax

Validity of proceedings initiated u/s 16 of the Gift Tax Act, 1958 - reopening of assessment - addition on account of deemed gift deleted by Tribunal by holding that the transfer of property was made for adequate consideration - Held that - The fact that the property that is transferred has to be other than cash is borne out by computation provision in the latter part of the said clause. The computation provision contemplates that the property that is transferred must be capable of being valued in the manner laid down in Schedule II of the Act. A perusal of Rule 1 of Schedule II further makes it clear that the said Schedule prescribed the methodology for determining the value of properties other than cash. A fortiori, property referred to in the opening words of Section 4 (1) (a), is capable of being evaluated in terms of Schedule II and hence, as the subject matter of the alleged transfer in the present case is cash, section 4 (1) (a) can have no application whatsoever. In view of the legal proposition laid down in Reva Investment Pvt. Ltd. versus CGT 2001 (5) TMI 49 - SUPREME Court , CGT versus Indo Traders & Agencies (Madras) Pvt. Ltd. 1979 (6) TMI 8 - MADRAS High Court and CGT v. A. Hafsa Banu 1998 (9) TMI 31 - MADRAS High Court , it is imminently clear beyond doubt that the burden lies on the revenue to establish that the conditions of Section 4 (1) (a) are complied with. In favour of assessee.

Summary

Issues Involved:
1. Validity of the proceedings initiated under Section 16 of the Gift Tax Act, 1958.
2. Determination of whether the transfer of property was made for adequate consideration under Section 4 (1) (a) of the Gift Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Proceedings Initiated Under Section 16 of the Gift Tax Act:

The Tribunal upheld the validity of the proceedings initiated under Section 16 of the Gift Tax Act, 1958. The Assessing Officer issued a notice under Section 16 dated 27.2.1998, calling upon the assessee to furnish his return of gift. The Tribunal recorded that the Assessing Officer should have a reasonable belief for concluding that there was a deemed gift. The Commissioner of Gift Tax (Appeals) found that the Assessing Officer lacked information indicating that the market value of the shares was less than the price paid by the assessee. The Tribunal consolidated the appeals and decided that the reassessment proceedings were valid.

2. Determination of Adequate Consideration Under Section 4 (1) (a) of the Gift Tax Act:

The Tribunal and the First Appellate Authority concluded that the transfer of property was made for adequate consideration. The Tribunal emphasized that 'adequate consideration' should be considered in a broad sense and not merely as the market value. The Tribunal held that the expression 'adequate consideration' is not equivalent to market value and must be determined with reference to the circumstances of the transaction. The Tribunal found that the shares were sold at face value, and the company had no power to sell shares below face value, thus no gift was made.

The Tribunal's decision was based on the interpretation of Section 4 (1) (a) of the Gift Tax Act, which requires that property transferred should be other than cash and the transfer should be otherwise than for adequate consideration. The Tribunal found that since the shares were subscribed at face value and not below it, the transaction did not constitute a gift. The Tribunal's view was supported by the Supreme Court's judgment in CIT vs. B.C. Srinivasa Setty, which held that the transfer of cash does not fall under Section 4 (1) (a).

The Tribunal also referred to the judgments in Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Limited and Khoday Distilleries Limited vs. C.I.T., which held that the creation of shares does not amount to a transfer. The Punjab & Haryana High Court in Commissioner of Gift Tax vs. Rockman Cycle Industry Limited also supported this view, stating that subscribing to shares does not constitute a gift as there is no transfer involved.

The Tribunal concluded that the subscription to shares at face value by the assessee, who are the promoters of the company, cannot be regarded as inappropriate in a commercial sense. The Tribunal found no evidence of inadequate consideration and upheld the First Appellate Authority's decision that the assessee had not made a gift.

Conclusion:

The High Court confirmed the Tribunal's judgment, finding no grounds to interfere. Both substantial questions of law were answered in favor of the assessee and against the Revenue, leading to the dismissal of all appeals.