1968 (4) TMI 3 - HC - Income Tax

Gift Tax Act 1958 - right shares - chargeability as gifts within the meaning of section 2(xii)

Summary

Issues Involved:
1. Whether the amounts representing the value of right shares renounced in favor of Willys were chargeable as gifts within the meaning of section 2(xii) of the Gift-tax Act as being without consideration in money or money's worth.
2. If the answer to the first question is in the affirmative, whether the amounts in question were exempt from Gift-tax under section 5(1)(xiv) of the Gift-tax Act.

Detailed Analysis:

Issue 1: Chargeability of Right Shares as Gifts
The primary issue was whether the renounced right shares in favor of Willys constituted a gift under section 2(xii) of the Gift-tax Act, which defines a gift as a transfer made voluntarily and without consideration in money or money's worth.

Facts and Context:
The Mahindra brothers, who were shareholders and directors/officers in Mahindra & Mahindra Ltd., renounced their rights to shares in favor of Export, a sister concern of Willys Motors Inc. This renunciation was part of a broader agreement involving the supply of vehicles and financial assistance to the company. The Gift-tax Officer deemed these transfers as gifts since they were made without direct consideration to the assessees.

Legal Arguments and Tribunal Findings:
The Tribunal confirmed the Gift-tax Officer's view, stating that there was no direct consideration moving from Willys to the Mahindras. The Tribunal found that:
1. There was neither a promisor nor a promisee as defined in the Contract Act.
2. There was no agreement between the Mahindras and Willys to do anything in particular.
3. The agreement between the company and Willys was not useful to the assessees since a company is a separate legal entity.
4. Willys did not do anything at the desire of the Mahindras.

Court's Analysis:
The Court disagreed with the Tribunal's findings, emphasizing that:
- The consideration need not flow directly from the promisee to the promisor. The benefit to a third party (the company) can be considered valid consideration for the promisor.
- The Mahindras, owning a significant portion of the company, had a vested interest in its success. The benefits conferred upon the company under the agreement dated 9th October 1957, were sufficient consideration for the Mahindras.
- The letter dated 9th October 1957, explicitly stated that the renunciation of rights was in consideration of the agreement of the same date, which involved substantial benefits to the company.

Conclusion on Issue 1:
The Court concluded that the renunciation of right shares was not without consideration. The Mahindras received valid consideration in the form of benefits to the company, which they controlled and from which they stood to gain financially. Therefore, the transfer of right shares did not constitute a gift under section 2(xii) of the Gift-tax Act.

Issue 2: Exemption from Gift-tax
Since the answer to the first question was in the negative, the second issue regarding exemption under section 5(1)(xiv) of the Gift-tax Act became moot and did not require an answer.

Final Judgment:
The amounts representing the value of right shares renounced in favor of Willys were not chargeable as gifts within the meaning of section 2(xii) of the Gift-tax Act. Consequently, no answer was necessary for the second question regarding exemption under section 5(1)(xiv). The Commissioner was ordered to pay the costs of the assessees.