1976 (3) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice issued under Section 16(1) of the Gift-tax Act, 1958.
2. Whether the transfer of shares was a gift assessable to gift-tax.
3. Adequacy of consideration in the transfer of shares.
4. Applicability of double taxation principles.

Issue-Wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 16(1) of the Gift-tax Act, 1958:
The petitioner challenged the validity of the notice issued on 29th March 1967, under Section 16(1) of the Gift-tax Act, 1958. The notice was issued by the Gift-tax Officer, intimating that the gift made by the petitioner for the assessment year 1962-63 had escaped assessment. The petitioner responded with a nil return, asserting no gift had escaped assessment. The court examined whether the notice was issued lawfully and validly.

2. Whether the Transfer of Shares was a Gift Assessable to Gift-tax:
The petitioner, a subsidiary of ICI Ltd., UK, transferred shares valued at Rs. 19,55,93,621 to ICI in repayment of a loan of Rs. 5,25,30,720. The Gift-tax Officer added a sum of Rs. 14,40,62,901 as notional capital gains, claiming the transfer was without adequate consideration and thus a gift. The court had to determine if the transfer constituted a gift under the Gift-tax Act, 1958.

3. Adequacy of Consideration in the Transfer of Shares:
The court scrutinized whether the transfer was for adequate consideration. The petitioner argued that the transfer was part of a pre-existing arrangement with ICI, involving loans for acquiring shares, which were to be transferred at par value upon ICI's demand. The court noted that the arrangement was discussed and approved at high levels, including the Reserve Bank of India, and was not intended to avoid capital gains tax. The Tribunal and the Supreme Court had previously upheld the arrangement as valid and for adequate consideration.

4. Applicability of Double Taxation Principles:
The court considered whether the same transaction could be taxed under both the Income-tax Act and the Gift-tax Act. The revenue argued that double taxation is permissible if distinctly enacted by the legislature. The court referenced the Madras High Court's decision in Commissioner of Gift-tax v. B. Sathiar Singh, which allowed for dual taxation under different acts. However, the court found that in this case, the transfer was not without adequate consideration, thus no gift-tax liability arose.

Conclusion:
The court concluded that the notice issued under Section 16(1) of the Gift-tax Act, 1958, was invalid as there were no materials to believe that the transfer of shares was a gift. The transfer was part of a legitimate arrangement for adequate consideration. The court quashed the impugned notice and restrained the respondents from giving effect to it. If any assessment had been made pursuant to the notice, it was also quashed. The rule was made absolute, and there was no order as to costs. The operation of the order was stayed for six weeks.