2013 (8) TMI 244 - HC - Income Tax

Deemed gift under Gift Tax Act - Difference between the market value and the actual consideration of shares - Tribunl set aside assessment on deemed gift - Held that - assessee had only 30 days time to sell all these rights. It is equally true that the stockbroker, in his letter dated 07.8.1993, had expressed his doubt about selling the rights in the open market at the best possible price, but the apprehension expressed by the stockbroker, by itself cannot be taken as a piece of evidence to accept the case of the assessee that the price charged by the assessee can be taken as the best price. In the circumstances, the volume of rights and the time factor, by itself, cannot be presumed as providing good reasons to accept the plea of the assessee that these constraints was in the way of selling these rights at the best possible price in the open market - The Tribunal pointed out that the Revenue had not disputed that the assessee was given the limited period of 30 days for selling the rights, yet, this apart, the assessee had not placed any material before the Court or before any of the Authorities below as regards the steps taken with due diligence to sell these rights in the open market; that ultimately faced with time constraint and the volume of rights to be disposed of, it had to sell the rights at Rs.5/- as against the prevailing market price of Rs.21.50/- each - Decided against Revenue.

Summary

Issues:
Assessment of deemed gift on relinquished rights of Partially Convertible Debentures (PCD) by the assessee for inadequate consideration below market value. Evaluation of evidence presented by the assessee regarding the sale of rights in the open market and determination of the appropriate valuation for tax assessment.

Analysis:
The judgment by the Madras High Court involved two Tax Case (Appeals) relating to the assessment year 1994-95. In the first case, the assessee relinquished 3,75,815 rights of PCD of a company below market value, leading to an assessment of deemed gift by the Revenue. The Assessing Officer treated the difference between market value and actual consideration as deemed gift, which was upheld by the Commissioner of Income Tax (Appeal). However, the Income Tax Appellate Tribunal set aside the assessment, considering the limited time and volume of rights available for sale. The Tribunal accepted the stockbroker's letter as evidence of the assessee's efforts to sell the rights at the best possible price within the constraints. The Revenue appealed this decision, arguing that the Tribunal should not have solely relied on the stockbroker's letter and that the Second Schedule of the Act should have been applied to determine the value of share transfer.

In the second case, the assessee sold rights of PCD to a sister concern below market value, leading to another appeal. The Tribunal allowed the assessee's appeal based on similar grounds as the first case. However, the High Court set aside the Tribunal's order in this case, following the decision made in the first case. The Court emphasized the lack of substantial evidence presented by the assessee to justify the sale price below market value, other than the stockbroker's letter. The Court held that the stockbroker's apprehension alone was insufficient to support the assessee's claim of selling at the best possible price, especially when no additional material was provided to substantiate the circumstances leading to the sale at a lower price.

In conclusion, the High Court set aside the Tribunal's decision in the second case, aligning it with the judgment made in the first case. The Court emphasized the importance of substantial evidence and due diligence in justifying transactions involving inadequate consideration below market value for tax assessment purposes.