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Issues: Valuation of shares for capital gains tax, interpretation of Wealth-tax Rules, object of avoidance of income tax, applicability of Income-tax Act provisions
In this judgment, the court addressed various issues arising from the transfer of shares by the assessee and the valuation thereof for capital gains tax purposes. The assessee had transferred shares of a company to his relations, valuing them at Rs. 1,19,500, while the Income Tax Officer (ITO) valued each share at Rs. 1,045, resulting in a higher capital gains tax liability. The Additional Commissioner of Income Tax (AAC) initially upheld the ITO's valuation. Subsequently, the Tribunal considered questions referred by both the assessee and the Revenue, including the fair market value of the shares, interpretation of Wealth-tax Rules, and the object of avoidance of income tax. The Tribunal had to determine whether the fair market value of the shares should be based on Rule ID of the Wealth-tax Rules, 1957. Additionally, it had to interpret the provisions of Explanation II to Rule ID regarding the deductibility of liabilities in determining the market value of the shares. The Tribunal also examined whether the transfer of shares was done with the object of avoiding or reducing income tax liability, which could attract the provisions of section 52(2) of the Income-tax Act, 1961. The court considered the decisions of various High Courts and the Full Bench decision of the Kerala High Court in ITO v. Varghese, which was overruled by the Supreme Court in Varghese v. ITO. The Supreme Court held that, under section 47 of the Income-tax Act, the amount subjected to gift tax was exempt from income tax. Consequently, the question referred by the Revenue was answered against them and in favor of the assessee. As the other questions were not pursued by the assessee, the court returned the reference unanswered, with no order as to costs.
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