1979 (4) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice under Section 16 of the Gift-tax Act, 1958.
2. Whether the transaction constituted a taxable gift under the Gift-tax Act, 1958.
3. Adequacy of consideration for the transfer of assets.
4. Jurisdiction of the Gift-tax Officer (GTO) to issue the notice.
5. Timing of the alleged gift and its relevance to the assessment year.

Detailed Analysis:

1. Validity of the Notice under Section 16 of the Gift-tax Act, 1958:
The first issue concerns whether the conditions precedent were in existence for the assumption of jurisdiction by the GTO to issue the notice under Section 16(1). The GTO must have a basic reason to believe that any taxable gift has escaped assessment. The notice issued to the respondent stated: "I have reason to believe that the gift made by you chargeable to tax for the assessment year 1961-62 has escaped assessment within the meaning of section 16 of the Gift-tax Act."

The respondent argued that there was no material before the GTO on which he could have reasons to believe that a gift chargeable to tax had escaped assessment. The court noted that the affidavit of Debi Dayal, the officer who issued the notice, did not explicitly state that a taxable gift escaped assessment due to the failure to file a return. However, it was clear from the notice and the affidavit that the GTO believed the transfer was for inadequate consideration, thus constituting a taxable gift.

2. Whether the Transaction Constituted a Taxable Gift:
The respondent contended that it had made no taxable gift under Section 13 of the Gift-tax Act, 1958, during the previous year relevant to the assessment year 1961-62. The GTO argued that the assets were transferred for inadequate consideration, thus constituting a deemed gift under Section 4(1)(a) of the Act.

The court examined the transaction and noted that the sale of assets by Venesta Foils Ltd. to India Foils Ltd. involved the transfer of assets worth Rs. 2,17,78,348.51 for the issuance of 998 shares of lb1 each, which was considered nominal. The court held that the consideration was highly inadequate, and the excess amount should be deemed a gift.

3. Adequacy of Consideration for the Transfer of Assets:
The court noted that the consideration for the sale was the allotment of 998 shares of lb1 each in the transferee-company, India Foils Ltd., to the seller, Venesta Foils Ltd. The court observed that the balance value of assets vested in the transferee was much more than the face value of the shares, making the consideration inadequate.

The court referred to the principles of share premiums and noted that the excess value of assets over the nominal value of shares should be accounted for in the share premium account. The court concluded that the assets were fully accounted for in the accounts of both companies, and the transaction could not be considered a gift for inadequate consideration.

4. Jurisdiction of the Gift-tax Officer (GTO) to Issue the Notice:
The court examined whether the GTO had the jurisdiction to issue the notice under Section 16(1)(a) of the Gift-tax Act, 1958. The court noted that the GTO must have a reason to believe that a taxable gift had escaped assessment due to the failure to file a return. The court found that the GTO had stated in his affidavit that the gift was for no consideration or inadequate consideration, and thus a gift within the meaning of the Gift-tax Act for which a return should have been submitted.

The court held that the GTO had the jurisdiction to issue the notice, as the conditions precedent for the assumption of jurisdiction were satisfied.

5. Timing of the Alleged Gift and Its Relevance to the Assessment Year:
The respondent contended that the alleged gift was not made during the previous year relevant to the assessment year 1961-62. The court noted that the transaction was accepted by the assessee as having taken place on December 31, 1960, and was considered in the assessment order under the Income-tax Act for the assessment year 1961-62.

The court rejected the respondent's contention, noting that the transaction was accepted as having taken place within the accounting period ending on December 31, 1960, and was relevant to the assessment year 1961-62.

Conclusion:
The court dismissed the appeal and affirmed the judgment and order under appeal. The court held that the notice issued by the GTO under Section 16 of the Gift-tax Act, 1958, was valid, and the transaction constituted a taxable gift for inadequate consideration. The court also held that the GTO had the jurisdiction to issue the notice and that the timing of the alleged gift was relevant to the assessment year 1961-62. The parties were directed to bear their own costs in the appeal.