2018 (2) TMI 353 - HC - Income Tax

Gift in pursuance of a family settlement - Whether a transaction involving transfer of shares can constitute a gift under section 2(xii) r.w.s. 4 of the Gift Tax Act in cases where the price paid for such transfer is proved to be in excess of the actual market price of the shares so transferred? - Held that - The provisions of gift tax would ordinarily not apply to share transfers or transfer of property, as part of it is to effectuate a settlement, the questions of law framed in this appeal are answered against the revenue and in favour of the assessee. See Gawahati High Court in Ziauddin Ahmed vs. Commissioner of Gift Tax 1975 (8) TMI 40 - GAUHATI High Court

Summary

Issues:
1. Whether a transaction involving transfer of shares can constitute a gift under the Gift Tax Act if the price paid is in excess of the market price?
2. Whether a transfer in pursuance of a family settlement will not constitute a gift?

Issue 1:
The case involved the purchase of shares in a company through a family settlement, resulting in a transfer of shareholding and controlling rights. The Assessing Officer contended that the excess amounts paid over the face value were taxable under the Income Tax Act and the Gift Tax Act. However, the CIT (A) and ITAT ruled in favor of the assessee, stating that the transactions did not attract the provisions of the Gift Tax Act. The key contention was whether the excess amounts paid constituted a taxable gift under Section 4(1)(a) of the Gift Tax Act. The court analyzed the definition of "transfer of property" under Section 2(24) and the definition of "gift" under Section 2(xii) of the Gift Tax Act. It considered the provisions of Section 4, which deem certain transfers as gifts. The court referred to the judgment of the Gauhati High Court in Ziauddin Ahmed vs. Commissioner of Gift Tax, where it was held that transfers made pursuant to a family settlement were not taxable under the Gift Tax Act.

Issue 2:
The court further examined the principle established in the Ziauddin Ahmed case, where shares transferred as part of a family settlement were not deemed gifts under the Gift Tax Act. The court emphasized that for a case to fall under Section 4(1)(a) of the Gift Tax Act, there must be a transfer for consideration, which is found to be inadequate. The court reiterated that the provisions of the Gift Tax Act would not apply to transactions made as part of a family settlement to resolve disputes and maintain family harmony. It cited previous judgments by various High Courts approving the principle that share transfers or property transfers as part of a settlement are not taxable under the Gift Tax Act. Consequently, the court dismissed the appeal, ruling in favor of the assessee based on the consistent judicial opinion that gift tax provisions do not typically apply to transfers made in the context of family settlements.