1980 (4) TMI 87 - HC - Income Tax

Summary

Issues:
Interpretation of Gift-tax Act provisions regarding deemed gifts and transfer of property in the context of loans advanced by a company to its shareholders at a lower interest rate.

Analysis:

The case involved a private limited company engaged in money-lending business, with its shares held by another company owned by individuals. The company had lent money to its shareholders at a lower interest rate than it borrowed, leading to a gift-tax assessment by the GTO. The primary issue was whether the company's actions constituted a transfer of property or a deemed gift under the Gift-tax Act.

The GTO contended that the company should have charged interest at a higher rate on the loans to its shareholders, treating the interest difference as a gift. However, the AAC and the Tribunal disagreed, stating that no element of gift was involved in the loan transactions. The Tribunal highlighted that there was no prohibition under the law for the company to lend money at a low interest rate, even if it borrowed at a higher rate.

The questions referred to the High Court revolved around whether the company's actions constituted a transfer of property or deemed gift under the Act. The revenue argued that the company's charging of a lower interest rate amounted to a surrender of interest, qualifying as a gift. However, the Court found that there was no transfer of debt by the company, as it only charged a concessional rate of interest, not involving a transfer of property.

Regarding the contention of surrender of interest as a gift, the Court emphasized the necessity of establishing a release or surrender of interest in property, which was not found to be non-bona fide by the GTO. As there was no indication of lack of bona fides in the charging of a lower interest rate, the Court held that the provisions of the Gift-tax Act regarding deemed gifts were not applicable in this case.

Ultimately, the Court upheld the Tribunal's decision, ruling in favor of the assessee company. It concluded that there was no gift involved when the company charged a lower interest rate on loans to its shareholders. The Court answered all questions in the affirmative, supporting the company's position and awarding costs to the assessee.