2010 (1) TMI 364 - HC - Income Tax

Gift tax - The market value of the shares did not exceed Rs. 30 per share and the assessee paid Rs. 70 per share in excess of the market value. Therefore, the assessing authority treating it to be a case of escaped assessment of taxable gift. Commissioner (Appeals) and Tribunal held the case in favour of assessee. Held that-assessing officer fell in error, because neither was there was there any material on record nor specific finding that the assessee had purchased the shares as colourable device to reduce the tax liability. The assessee could not be prevented from making such investment in certain shares only on the ground that the return from shares was very low. Thus transaction not liable to gift tax.

Summary

Issues:
1. Determination of whether the transaction of purchasing 50,000-4 per cent. non-cumulative preference shares at face value of Rs. 100 each, with a market value not exceeding Rs. 30 per share, involved any gift-tax liability.

Analysis:
The judgment by the High Court addressed the issue of whether the transaction of purchasing 50,000-4 per cent. non-cumulative preference shares at face value of Rs. 100 each, with a market value not exceeding Rs. 30 per share, attracted gift-tax liability. The court examined the provisions of the Gift-tax Act, 1958, specifically sections 2(xii), 2(xxiv), 3, and 4(1)(a), to determine the applicability of gift-tax in the case. The court highlighted the definition of "gift" as per the Act, emphasizing the transfer of property without adequate consideration. The judgment discussed the distinction between creation and transfer of shares, citing relevant case laws such as Khoday Distilleries Ltd.'s case and Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd. The court emphasized that allotment of shares does not constitute a transfer and, therefore, does not attract gift-tax liability.

The court considered the argument presented by the Revenue that the worth of the shares acquired did not exceed Rs. 30 per share, implying a gift element in the transaction. However, the court rejected this argument, noting that the purchase of shares directly from the company, in compliance with the Companies Act, did not involve any element of gift. The court emphasized that the shares became property only after allotment, and the transaction was a bona fide business activity. The judgment highlighted the absence of evidence suggesting a colorable device to reduce tax liability or non-business considerations in the purchase of shares. The court concluded that the transaction did not involve any gift element and was covered by the proviso to section 4(1)(a) of the Act, exempting it from gift-tax liability.

In conclusion, the court dismissed the appeals, ruling in favor of the assessee, and held that the transaction of purchasing non-cumulative preference shares did not attract gift-tax liability. The judgment provided a detailed analysis of the legal provisions, case laws, and factual circumstances to support its decision, ensuring a comprehensive examination of the issues involved.