1998 (10) TMI 84 - AT - Income Tax

Issues Involved:
1. Whether the transaction of purchasing non-cumulative preference shares at Rs. 100 each, when the market value was deemed to be Rs. 30, constituted an indirect gift under section 15(3) of the Gift-tax Act.
2. Whether the provisions of section 4(1)(a) of the Gift-tax Act were applicable to the transaction.
3. The applicability of section 79 of the Companies Act in issuing shares at face value.
4. The relevance of the market value of shares and the adequacy of consideration.
5. The legitimacy of the transaction being a bona fide business decision.
6. The impact of the Tribunal's previous income-tax assessment on the current gift-tax proceedings.
7. The applicability of the proviso to section 4(1)(a) of the Gift-tax Act regarding the approval of the transaction by the Central Government or the Reserve Bank of India.
8. The status of shares prior to their issue and the concept of transfer upon allotment.

Detailed Analysis:

1. Indirect Gift under Section 15(3) of the Gift-tax Act:
The department contended that the assessee indirectly gifted money by purchasing non-cumulative preference shares at Rs. 100 each when the market value was Rs. 30. The GTO issued a notice under section 16(1) of the Gift-tax Act, 1958, stating that the assessee paid Rs. 70 per share in excess of the market value without any consideration, thereby constituting a taxable gift.

2. Applicability of Section 4(1)(a) of the Gift-tax Act:
The GTO and the department argued that the transaction attracted gift tax under section 4(1)(a) due to inadequate consideration. The department emphasized that some group members transferred similar shares at Rs. 30 per share, indicating that the market value was not more than Rs. 30. The CGT(A) disagreed, stating that the shares were purchased at face value, and the provisions of sections 4(1)(c) and 4(1)(d) were not applicable.

3. Section 79 of the Companies Act:
The assessee argued that shares could not be issued below their face value as per section 79 of the Companies Act, and therefore, there was no taxable gift involved. The CGT(A) supported this view, stating that the shares were issued at face value, and the transaction did not attract gift tax.

4. Market Value and Adequacy of Consideration:
The GTO determined the market value of the shares to be Rs. 30 based on transactions by other group members. The CGT(A) disagreed, stating that the shares were purchased at face value, and the market value should be considered at the time of the transaction. The Tribunal noted that the department did not provide material evidence to support the market value of Rs. 30 per share.

5. Bona Fide Business Decision:
The assessee argued that the purchase of shares was a bona fide business decision and not a gift. The Tribunal in the income-tax proceedings held that the transaction was bona fide and not sham, and the interest payable on loans was incidental and wholly for business purposes. This finding undermined the basis for initiating gift-tax proceedings.

6. Impact of Tribunal's Previous Income-tax Assessment:
The Tribunal's previous decision in the income-tax assessment favored the assessee, stating that the transaction was bona fide and not aimed at evading tax. This decision invalidated the basis for the gift-tax proceedings, as the GTO heavily relied on the income-tax authorities' observations.

7. Proviso to Section 4(1)(a) of the Gift-tax Act:
The assessee argued that the transaction did not attract gift tax under section 4(1)(a) as the consideration was approved by the Central Government. The CGT(A) accepted this argument, but the Tribunal disagreed, stating that the approval of the Memorandum of Association by the Registrar of Companies did not constitute approval within the meaning of the proviso to section 4(1)(a).

8. Status of Shares and Concept of Transfer:
The Tribunal did not decide on the status of shares prior to their issue, as the appeal could be disposed of based on other arguments. The Tribunal focused on the bona fide nature of the transaction and the lack of material evidence to support the department's claim of inadequate consideration.

Conclusion:
The Tribunal upheld the CGT(A)'s decision that the transaction did not give rise to any taxable event under the Gift-tax Act, and the provisions of section 4(1)(a) were not applicable. The appeals filed by the revenue were dismissed, and the transactions were deemed bona fide business decisions without any element of gift.

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