2015 (1) TMI 878 - HC - Income Tax

Deemed gift - mode or manner of valuation of unquoted share - Interpretation of Section 4(1)(a) of the Gift Tax Act 1958 read with Rule 10(2) of the corresponding Gift Tax Rules - proceedings u/s.144B read with Section 144(3) by the IAC accepted - Held that - Tribunal ought not to have considered it as Gift and should have accepted the valuation put forth by the assessee. In view of the above the question no.1 as to whether the Tribunal is right in law in its interpretation of Section 4(1)(a) of the Gift Tax Act 1958 read with Rule 10(2) of the corresponding Gift Tax Rules is answered in favour of the assessee. Tribunal has erred in applying the Gift Tax Rules for the purpose of assessment of deemed Gift under the Gift Tax Act in spite of the fact that Wealth Tax Rules are meant for notional depressed valuation in certain situations whereas the Gift Tax provision pertaining to deemed Gift has direct nexus with the under-valuation of the market value of the property sought to be transferred. When the mode or manner of valuation of unquoted shares has undergone changes from time to time on the basis of judicial pronouncement and / or legislative changes can it be said that appellant had made deemed gift with a view to avoiding tax when the sale effected by the appellant is at a value higher than that worked out by approved registered valuer but accepted under the Income-tax proceedings u/s.144B read with Section 144(3) by the is concerned the same is answered in favour of the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 4(1)(a) of the Gift Tax Act, 1958 read with Rule 10(2) of the corresponding Gift Tax Rules.
2. Whether a deemed gift was made to avoid tax when the sale value was higher than the approved valuation under Income-tax proceedings.

Analysis:

Issue 1: Interpretation of Gift Tax Act and Rules
The appeal was filed against the order of the Income Tax Appellate Tribunal, where the assessee's appeal was treated as allowed for statistical purposes. The dispute arose when the Departmental Valuation Officer valued shares differently from the assessee's valuation. The Gift Tax Officer assessed a total gift amount under the deeming provision of Section 4(1)(a) of the Gift Tax Act. The CIT(A) partially allowed the appeal by adopting a different valuation rate. The Tribunal allowed the appeal for statistical purposes. The High Court held that the Tribunal erred in applying Gift Tax Rules for deemed gift assessment, emphasizing that Wealth Tax Rules are for notional valuation, while Gift Tax provisions are for under-valuation of property to be transferred.

Issue 2: Deemed Gift and Tax Avoidance
The court analyzed whether the appellant made a deemed gift to avoid tax when the sale value was higher than the approved valuation under Income-tax proceedings. The court referred to an intra-departmental communication accepting the fair market value estimated by a registered valuer. The court concluded that the appellant's valuation should have been accepted, and the Tribunal should not have considered it a gift. Consequently, the court ruled in favor of the assessee on both issues, stating that the Tribunal's interpretation of the Gift Tax Act and Rules was incorrect. The appeal was disposed of accordingly, favoring the assessee and against the Revenue.