2018 (3) TMI 86 - HC - Wealth-tax

Wealth Tax Act provision applicability - question of attracting Deemed Gift provision under Section 4(1) of the Gift Tax Act - Given that M/s Dua Engineering Pvt. Ltd. merely held investments in the industrial plot, at a value that was at the book value, the CIT (A) felt that it needed to be treated as an industrial investment company and proceeded to do so. This approach was affirmed by the ITAT - Held that - In the opinion of this Court both the lower authorities and the AO fell into error in proceeding to apply III Schedule to the Wealth Tax Act (by reason of Rule 11), which is applicable to the investment company, when clearly the findings pointed out to the fact that the necessary pre-conditions of treating M/s Dua Engineering Pvt. Ltd., as an investment company did not exist. If rule was inapplicable, the other mechanism of applying the value of a non-investment company, was to apply. This meant that the book value of the share (Rs.6.86) had to be applied. Therefore, ₹ 10/- value at which the assessee sold her shares to her husband in 1993 could not be treated as inadequate consideration. The findings of the lower authorities are, therefore, in error of law. The question of law is answered in favour of the assessee.

Summary

Issues:
1. Interpretation of whether M/s. Dua Engineering Works Pvt. Ltd. was an investment company under the Wealth Tax Act.
2. Determination of deemed gift tax liability on the sale of shares at an allegedly inadequate consideration.

Issue 1: Interpretation of Investment Company Status
The case involved a dispute regarding whether M/s. Dua Engineering Works Pvt. Ltd. qualified as an investment company under Rule 2(6) of Schedule III of the Wealth Tax Act. The appellant, a shareholder in the company, argued that the revenue authorities erroneously considered the company as an investment company due to the valuation of an industrial plot owned by the appellant's husband. The appellant contended that since the company did not report income from specified sources, it should not be deemed an investment company. The court agreed with the appellant, stating that the lower authorities incorrectly applied the provisions of the Wealth Tax Act, and the company should have been treated as a non-investment company. The court held that the shares sold by the appellant were not transferred for inadequate consideration, as the book value of the company should have been considered, not the subsequent market value.

Issue 2: Deemed Gift Tax Liability
The dispute also revolved around the deemed gift tax liability imposed by the Gift Tax Officer on the sale of shares by the appellant to her husband. The Revenue authorities argued that the sale at a nominal value followed by a subsequent sale at a much higher price warranted gift tax liability. They contended that the value of the property and the lack of commercial or industrial activity by the company were relevant factors. However, the court found that the lower authorities erred in applying the provisions of the Wealth Tax Act to deem the transaction as a gift. The court ruled in favor of the appellant, stating that the sale of shares at face value to the husband did not constitute inadequate consideration, and the valuation based on subsequent market value was incorrect. The court allowed the appeals, holding that the findings of the lower authorities were flawed in law.

In conclusion, the High Court ruled in favor of the appellant, holding that M/s. Dua Engineering Works Pvt. Ltd. was not an investment company under the Wealth Tax Act and that the sale of shares did not attract deemed gift tax liability. The judgment emphasized the correct application of legal provisions and the consideration of relevant factors in determining tax liabilities related to share transactions.