1993 (2) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 4(1)(a) of the Gift-tax Act, 1958.
2. Adequacy of consideration for the sale of shares.
3. Bona fide nature of the transaction.
4. Valuation method for shares.
5. Burden of proof on the revenue authorities.
6. Alternative ground regarding the referral to the Valuation Officer under Section 15(6)(b)(i) of the Gift-tax Act.

Detailed Analysis:

1. Applicability of Section 4(1)(a) of the Gift-tax Act, 1958:
The primary issue was whether the provisions of Section 4(1)(a) of the Gift-tax Act, 1958, were applicable. The section states, "where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor." The Tribunal emphasized that this section creates a fiction for taxing deemed gifts and requires the revenue to prove the inadequacy of consideration before invoking it.

2. Adequacy of Consideration for the Sale of Shares:
The assessee sold shares at Rs. 12 per share, which the Gift-tax Officer (GTO) deemed inadequate, calculating the deemed gift based on a higher break-up value. The Tribunal noted that adequate consideration does not necessarily mean market value and should be considered in a broad sense. The Tribunal referenced the Madras High Court's decision in Indo Traders & Agencies (Madras) (P.) Ltd., which stated that unless the inadequacy of price shocks the conscience, it is not a sufficient ground for invoking Section 4(1)(a).

3. Bona Fide Nature of the Transaction:
The Tribunal found that the GTO did not provide specific findings on the inadequacy of consideration or the bona fide nature of the transaction, which are prerequisites for invoking Section 4(1)(a). The assessee provided evidence of bona fide transactions, including advertisements and third-party sales at similar prices, which were accepted by the revenue in other cases.

4. Valuation Method for Shares:
The GTO used the break-up value method under Rule 1D of the Wealth-tax Rules to value the shares at Rs. 149 each. The Tribunal noted that in the absence of specific rules in the Gift-tax Act, the valuation should follow the yield method as per the Supreme Court's decisions in CWT v. Mahadeo Jalan and CGT v. Smt. Kusumben D. Mahadevia. The Tribunal found that the GTO's reliance on Rule 1D was misplaced.

5. Burden of Proof on the Revenue Authorities:
The Tribunal reiterated that the burden of proving inadequacy of consideration lies on the revenue. The Tribunal referenced the Supreme Court's decision in K.P. Varghese v. ITO, which stated that the revenue must prove understatement of value. The Tribunal found that the GTO did not provide sufficient evidence to prove that the consideration was inadequate.

6. Alternative Ground Regarding Referral to the Valuation Officer:
The assessee argued that the revenue's failure to refer the valuation to the Valuation Officer under Section 15(6)(b)(i) of the Gift-tax Act rendered the assessment null and void. However, since the Tribunal concluded that Section 4(1)(a) was not validly invoked, this alternative ground was not considered.

Conclusion:
The Tribunal concluded that the revenue authorities erred in invoking Section 4(1)(a) of the Gift-tax Act for the valuation of shares. The evidence provided by the assessee demonstrated that the transactions were bona fide and the consideration was adequate. The Tribunal set aside the orders of the CIT(A) and allowed the appeals.