1982 (7) TMI 79 - HC - Income Tax

Summary

Issues:
Interpretation of provisions of s. 9(1) and s. 27(1) of the Estate Duty Act, 1953 in a case involving the sale of shares at an undervalue and its implications on estate duty liability.

Detailed Analysis:

The case involved a reference on a case stated under s. 64(1) of the E.D. Act, 1953, regarding the estate of a deceased individual who sold shares at an undervalue before his death. The Income Tax Officer invoked provisions of the Indian I.T. Act, 1922, for assessment, but a Division Bench previously held that tax cannot be levied on fictional capital gains. The question arose whether the provisions of section 9(1) read with section 27(1) of the Estate Duty Act, 1953, are applicable in this case.

The first argument presented was that the deceased made a gift of shares to the children of his partner by selling them at an undervalue. However, the court rejected this contention, stating that a gift is a transfer without consideration, and selling shares at an undervalue does not qualify as a gift under s. 9 of the Act. The alternative argument was that the sale amounted to a disposition in favor of relatives, triggering estate duty liability. This argument was based on the concept of indirect transfer through cross-transfer of shares.

The court analyzed the provisions of s. 27(1) and s. 9 of the Act and found no indication of covering cross-gifts or cross-transfers. It was emphasized that the case law cited in support of the argument did not align with the specific provisions of the Act. Additionally, the application of Expln. 2 to s. 2(15) of the Act was deemed inapplicable as there was no extinguishment of debt or right by the deceased in the sale of shares at an undervalue.

The court distinguished a previous Supreme Court decision related to partition of property from the current case of selling shares at an undervalue. The judgment concluded that the provisions of s. 9(1) and s. 27(1) of the Estate Duty Act, 1953, did not apply in the case of the sale of shares at an undervalue, ruling in favor of the assessee. The Commissioner was directed to pay the costs of the reference to the assessee.

In summary, the judgment clarified the application of estate duty provisions in cases involving sales of assets at undervalue, emphasizing the distinction between gifts and sales, and the absence of provisions for cross-transfers in the relevant sections of the Act.