2001 (5) TMI 49 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the difference of Rs. 8,21,950 on the sale of the jewellery by the assessee to its 12 wholly owned subsidiary companies was not liable to gift-tax under the provisions of the Gift-tax Act, 1958 ? Held that - In the present case, the face value of the shares of the 12 fully paid subsidiary companies of the assessee was Rs. 5,69,400 which was taken to be the value of the jewellery that was transferred in exchange by the assessee to the subsidiary companies. The subsidiary companies had no other asset. The value of the jewellery as determined by the Assessing Officer being Rs. 13,91,350 the real value of the shares may be said to be Rs. 13,91,350, but there was thus no gift involved in the transaction for whatever is the value of the jewellery is in fact the value of the shares transferred in consideration. In the circumstances, the Assessing Officer committed an error in treating the transaction between the parties as a deemed gift. The High Court was in error in holding that in the facts and circumstances of the case the transaction could be held to be a deemed gift within the purview of section 4(1)(a) of the Act and in holding the assessee liable for the tax. Accordingly, the appeal is allowed - the judgment of the High Court under challenge is set aside and the order of the Tribunal is confirmed. In favour of assessee.

Summary

Issues: Determination of whether the transaction constitutes a "deemed gift" under section 4(1)(a) of the Gift-tax Act, 1958 based on the transfer of jewellery by the assessee to its wholly owned subsidiary companies.

Analysis:
The case involved an appeal against the judgment of the Gujarat High Court regarding the liability of the assessee to pay gift tax under the Gift-tax Act, 1958. The core issue revolved around whether the transfer of jewellery by the assessee to its twelve wholly owned subsidiary companies constituted a "deemed gift" under the Act. The factual background included the transfer of jewellery by the assessee to the subsidiary companies in exchange for fully paid equity shares. The Revenue contended that there was a gift involved based on the market value of the jewellery exceeding the face value of the shares received. The Gift-tax Officer held that there was a "deemed gift" of Rs. 8,21,950, leading to a tax liability for the assessee.

Upon appeal, the Commissioner of Gift-tax (Appeals) overturned the Gift-tax Officer's decision, emphasizing that the value of the consideration was the value of the jewellery, and no "deemed gift" could be attributed. The Tribunal also upheld this conclusion, stating that in such transactions, where the only asset of the purchasing companies is the jewellery purchased, there is no question of a "deemed gift." The High Court, however, disagreed with this interpretation, ruling in favor of the Revenue and holding the assessee liable for gift tax.

The Supreme Court analyzed the provisions of the Gift-tax Act, particularly section 4(1)(a), which deems a transfer of property without adequate consideration to be a gift. The court emphasized that for a transaction to be considered a "deemed gift," it must involve an inadequacy of consideration, which is a crucial factor in determining tax liability. The court highlighted that the provision aims to prevent tax evasion through transactions with inadequate consideration.

In this case, the Supreme Court found that the transaction between the assessee and its subsidiary companies did not constitute a "deemed gift" as the value of the jewellery transferred was equivalent to the value of the shares received. The court reasoned that since the subsidiary companies had no other assets and the value of the jewellery matched the value of the shares, there was no inadequacy of consideration warranting a tax liability. The court referred to decisions from various High Courts supporting this interpretation and concluded that the High Court erred in holding the transaction as a "deemed gift." Consequently, the court allowed the appeal, set aside the High Court's judgment, and confirmed the Tribunal's order, absolving the assessee from gift tax liability.