1974 (8) TMI 51 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the consideration for the transfer of 20 buses.
2. Adequacy of the consideration for the transfer of 20 buses.
3. Applicability of the doctrine of substance over form in tax matters.
4. Compliance with the provisions of the Indian Companies Act regarding the allotment of shares.
5. Determination of the real value of shares allotted.

Detailed Analysis:

1. Determination of the Consideration for the Transfer of 20 Buses:
The primary issue was whether the consideration for the transfer of 20 buses by the assessee to the company comprised 900 fully paid-up shares of Rs. 100 each plus a cash consideration of Rs. 1,83,133, or whether the transfer was for a cash consideration of Rs. 2,58,604. The Tribunal accepted the assessee's contention that the consideration included the allotment of 900 shares and a cash credit of Rs. 1,83,133. However, the court noted that the company's accounts showed a credit entry of Rs. 2,58,604, which was later debited by Rs. 90,000 for the shares, indicating two separate transactions. The court concluded that the transfer of buses and the allotment of shares were independent transactions.

2. Adequacy of the Consideration for the Transfer of 20 Buses:
The Tribunal's view that the real value of the 900 shares should be taken as 90% of the fair market value of the buses was challenged. The court highlighted that the fair market value of the buses was Rs. 5,28,840, while the actual consideration credited was Rs. 2,58,604. The Tribunal's calculation did not account for the debt of Rs. 1,83,133 and other liabilities of the company. The court held that the transfer was prima facie for inadequate consideration, leading to a potential charge under section 4 of the Gift-tax Act.

3. Applicability of the Doctrine of Substance over Form in Tax Matters:
The revenue argued that the form of the transaction should be considered, not its substance. The court referred to several precedents, including Duke of Westminster v. Commissioners of Inland Revenue, which established that in tax matters, the legal form of the transaction is paramount. The court emphasized that rights and liabilities cannot be disregarded in favor of the substance of the transaction. The Tribunal's reliance on the substance over form was thus deemed incorrect.

4. Compliance with the Provisions of the Indian Companies Act Regarding the Allotment of Shares:
The court examined whether the allotment of shares complied with section 75(1) of the Indian Companies Act. The Act requires a contract in writing for shares allotted otherwise than for cash. The court noted that no such contract was produced, and the company's books showed the shares as allotted for cash. The court concluded that the shares were allotted for cash, and the transaction was not in compliance with section 75(1)(b).

5. Determination of the Real Value of Shares Allotted:
The Tribunal's method of determining the real value of the shares by taking 90% of the fair market value of the buses was questioned. The court stated that the real value should consider all liabilities and assets of the company, potentially using the break-up method. However, since the transactions were treated as independent, the real value of the shares was deemed irrelevant for the case.

Conclusion:
The court answered the referred question in the negative, holding that the transfer of 20 buses was not for adequate consideration under section 4(2) of the Gift-tax Act. The revenue was entitled to its costs from the assessee, with counsel's fee set at Rs. 250.