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TMI Blog1997 (12) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... stified in relying on the decision of the High Court rendered under the Income-tax Act in the case of the assessee in connection with an assessment of the assessee completed under the Gift-tax Act, invoking section 4(1)(a) ?" The relevant facts are as follows : The assessee, a closely held company, is engaged in purchasing latex and selling the same after centrifuging it. In the process of centrifuging, the assessee gets a by-product known as "skim crepe". Till the assessment year 1971-72, the assessee-company was selling skim crepe directly to customers. From the year 1971-72, it entered into an agreement with a firm, Padinjarekkara Corporation, owned by the wives and daughters-in-law of the directors of the assessee-company, for sale of the entire production of skim crepe to the firm. The firm in its turn sold the material to different consumers. While finalising the assessment under the Income-tax Act for the assessment years 1970-71 and 1971-72 the assessing authority took the view that the firm, Padinjarekkara Corporation, was a sham unit and, therefore, the profits earned by the firm on the sale of skim crepe really belonged to the assessee-company. The above view was affir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 637 and following the same, the Tribunal held that the transactions between the assessee-company and the firm are genuine and valid and there was no gift involved, which was assessable to tax in this case. It is contended by learned standing counsel for the Revenue that the Tribunal has committed a grave error in coming to the conclusion that sales made by the assessee-company in favour of the firm would not come within section 4(1)(a) of the Gift-tax Act. According to learned counsel, the Tribunal should have found that the sales in favour of the firm were for inadequate consideration and that the decision of this court in Padinjarekara Agencies (P.) Ltd. v. CIT [1988] 173 ITR 637 has no relevance in deciding the issue before the Tribunal. Since admittedly the price at which skim crepe was sold by the firm was at a higher rate than the price it paid to the company, it has to be taken that the sale by the company to the firm was for inadequate consideration. Section 4(1)(a) of the Gift-tax Act, 1958, as it stood during the relevant period, reads as follows : "4. Gifts to include certain transfers.---(1) For the purposes of this Act,--- (a) where property is transferred othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it a concept of profits. We have a chain of manufacturing and retailing organisations before a manufactured product reaches finally a consumer. In between manufacturer and the consumer, there are persons like an agent, a distributor, a wholesaler and retailer who obtain commodities in normal course with an idea of dealing in them and making a profit. If the Gift-tax Officer's view in this regard were to be accepted, then the profits made by each of these units would have to be treated as a gift by the manufacturer to each one of them. That would be a very unreal and an absurd situation, for it will totally ignore the basic concepts of trade. Each one of these functionaries has a separate role to play. In the present case, the determination of the gift as the difference between the sale price and the purchase price in the hands of the firm also ignores the costs of operation and the costs of sale which the firm has incurred. The computation totally ignores the selling expenses, the distribution expenses and the expenses of the godown charges and other commitments which the firm had incurred in dealing with this commodity. Since the transaction which has been subjected to a gift-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on business. From the year 1964-65 it began to buy goods from the assessee-company. The firm had its own capital and its profits were assessed in its hands and it was granted registration by the Department. While making the assessment for the year 1971-72 in respect of the firm, the Income-tax Officer had allowed salary and allowances to the personnel of the firm as also provident fund contributions of its employees. There was also a finding that there was no regular market price for skim crepe. Even though the question considered in the above decision was whether the firm was genuine and not sham, the observations made by this court regarding the nature of the transaction between the company and the firm are relevant for deciding the question whether the sale by the company to the firm was for adequate consideration. The reasons given by the first appellate authority in its detailed order are justified in the facts and circumstances of this case. Apart from stating that the firm had sold the skim crepe at a higher rate than the purchase price paid to the company, the Revenue had not adduced any material to show that the transfer by the assessee in favour of the firm was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price obtained by it on sale to the firm was very huge. The' increase was to the extent of 145 per cent., 368 per cent. and 307 per cent. for the abovementioned three years. It was under these circumstances, the assessing authority in that case came to the conclusion that there was an element of gift in the sale by the assessee to the trust. Coming to the facts of the present case, we find that the difference in the price is not so substantial. In the year 1973-74, skim crepe was purchased by the firm from the assessee for an amount of Rs. 20,36,082 and when the same quantity was sold to the different consumers the firm obtained Rs. 22,13,820. In the assessment year 1974-75, the purchase amount would come to Rs. 13,22,097 and the sale amount Rs. 14,78,668. In 1980-81, the price obtained by the assessee from the firm would come to Rs. 20,16,923 where the sale consideration obtained by the firm would be Rs. 25,58,220. The above would show that the difference between the purchase price and the sale price would come to in increase to the extent of 8.72 per cent., 10 per cent. and 26.8 per cent., respectively, for the three years. It was under these circumstances, the first appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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