1987 (3) TMI 153 - AT - Income Tax

Issues Involved:
1. Applicability of Section 4(1)(b) or Section 4(1)(c) of the Gift-tax Act.
2. Existence of a deemed gift due to the reduction in shareholding.
3. Valuation of the deemed gift.
4. Adjustments for remuneration and interest in the valuation process.

Issue-wise Detailed Analysis:

1. Applicability of Section 4(1)(b) or Section 4(1)(c) of the Gift-tax Act:
The primary contention revolved around whether Section 4(1)(b) or Section 4(1)(c) was applicable. The Appellate Assistant Commissioner (AAC) referenced Section 4(1)(b), but both the assessee's representative and the departmental representative agreed that this was a mistake. It was presumed to be a clerical error, and the correct provision to be considered was Section 4(1)(c). The Tribunal concluded that the case should be examined under Section 4(1)(c).

2. Existence of a Deemed Gift Due to the Reduction in Shareholding:
The Tribunal examined whether the reduction in shareholding and subsequent release of rights constituted a deemed gift. The assessees argued that no gift was made, as the firms did not possess significant self-generated goodwill. However, the Tribunal disagreed, noting that the reduction of shares by 50% in the first year and the complete relinquishment in the second year amounted to a transfer of property. The Tribunal referenced the Madras High Court decision in CGT v. V.A.M. Ayya Nadar, which held that a redistribution of profit shares among partners constitutes a transfer of property amounting to a gift. Therefore, the Tribunal concluded that there was a deemed gift in both 1979-80 and 1980-81.

3. Valuation of the Deemed Gift:
The Tribunal noted that the Gift-tax Officer's (GTO) assessments lacked a clear basis for valuation. The Tribunal directed that the valuation should be based on the capitalisation of super-profits, using the assessed income of the firms from the past four or five years. The Tribunal referred to the CBDT Circular No. 219, which recommends using the average annual income of the five accounting years preceding the valuation date. The Tribunal instructed the GTO to determine the super-profits considering the firms' assessed income and to make necessary adjustments for non-recorded items.

4. Adjustments for Remuneration and Interest in the Valuation Process:
The Tribunal addressed the adjustments for remuneration and interest in the valuation process. It directed a 20% deduction towards remuneration for working partners, based on the nature and size of the business. Regarding interest, the Tribunal found the claim of 18% to be excessive and directed that interest should be allowed at 12%, as per the Board's circular. The Tribunal also specified that the super-profits should be capitalised at three years' purchase, considering the nature of the business.

Conclusion:
The Tribunal remitted the matter of valuation to the GTO with specific guidelines for computing the value of the deemed gift. The appeals were allowed for statistical purposes, directing the GTO to compute the taxable gift for all assessments in accordance with the Tribunal's observations and the Board's circular.

← Previous Next →