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CASE NO.: Appeal (civil) 1934  of  1998

PETITIONER: REVA INVESTMENT PVT. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF GIFT TAX, GUJARAT II

DATE OF JUDGMENT:       02/05/2001

BENCH: S.P. Bharucha & D.P. Mohapatra

JUDGMENT:

D.P. MOHAPATRA, J. L...I...T.......T.......T.......T.......T.......T.......T..J

   This  appeal  filed by the assessee is directed  against the  judgment of the Gujarat High Court on a reference  made by  the  Appellate Tribunal under Section 26(1) of the  Gift Tax  Act, 1958 (hereinafter referred to as ’the Act’).   The question which was referred for opinion reads as follows:

   "Whether,  on the facts and in the circumstances of  the case,  the  Tribunal  was  right in law  in  coming  to  the conclusion  that  the difference of Rs.  8,21,950/-  on  the sale of the jewellery by the assessee to its 12 wholly owned subsidiary  companies  was not liable to gift tax under  the provisions of the Gift Tax Act, 1958."

   The  High  Court disposed of the reference by  answering the  question in the negative, in favour of the Revenue  and against the assessee.  Hence this appeal.

   The  factual  backdrop  of  the case  relevant  for  the present proceeding may be stated thus:

   The assessee is a private limited investment company and the  assessment relates to the assessment year 1976-77.  The assessee  transferred  jewellery to twelve  private  limited companies  which  were wholly owned subsidiary companies  of the  assessee  and  in  return the  twelve  private  limited companies  transferred  to  the assessee fully  paid  equity shares of the face value of Rs.100/- each, the face value of all  the  shares being Rs.  5,69,400/-.  The jewellery  thus transferred  became  the only asset of the twelve  companies and  the shares transferred to the assessee were the  entire share  holding  of  the twelve  private  limited  companies. Since  the  assessee  did not file any gift  tax  return,  a notice  under  Section 16(1) of the Act was served upon  the assessee  pursuant  to  which  the assessee  filed  a  ’nil’ return.   Thereafter a notice under Section 15(2) of the Act was issued and the proceeding for assessment was taken up.

   In the assessment proceeding the assessee took the stand

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that  it had transferred jewellery to the twelve  subsidiary companies  of  a book value of Rs.  5,69,400/- and  received shares  from  those  companies  of the  face  value  of  Rs. 5,69,400/-;  in the circumstances there was no gift involved in  the transaction.  The case of the Revenue, on the  other hand, was that the market value of the jewellery acquired by the  assessee  amounted to Rs.  13,91,350/- on the  date  of transfer,  therefore, there was a gift to the extent of  the amount  which  exceeded the face value of the shares,  i.e., Rs.  8,21,950/-.

   The  Gift Tax Officer by his order dated 12.9.1979  held that  there  was  a  ’deemed  gift’   to  the  tune  of  Rs. 8,21.950/- for which the assessee was liable to pay gift tax under the Act.

   On  appeal by the assessee, the Commissioner of Gift Tax (Appeals)  held  that inasmuch as the jewellery is the  only asset  of  the  subsidiary  companies   the  value  of   the consideration  was the value of the jewellery and no ’deemed gift’  can be attributed.  The Appellate Authority set aside the order of the Gift Tax Officer.

   Both  the assessee and the Revenue filed appeals  before the  Tribunal.   The Tribunal upheld the conclusion  of  the Appellate Authority and held that when the only asset of the purchasing  companies  is  jewellery   purchased  and  their capital  consists only of the shares issued to the  assessee company,  there  is  no  question of any  ’deemed  gift’  as whatever  will  be  the value taken for the  jewellery  will become  the  value  of fully paid up shares  issued  to  the assessee  on  the  break up method of valuing of  shares  of private  limited  companies.   The   Tribunal  rejected  the contention of the Revenue on this point.

   In  the  Reference Application filed by the Revenue  the question quoted earlier was referred to the High Court.  The High  Court  came  to the conclusion that the  Tribunal  had committed  an error in law in coming to the conclusion  that the  difference  of  Rs.   8,21,950/- on  the  sale  of  the jewellery  by  the  assessee  to  its  twelve  wholly  owned subsidiary  companies  was not liable to gift tax under  the provisions  of the Act and accordingly answered the question in  the  negative in favour of the Revenue.  The High  Court did  not accept the contention that in case of the  transfer of the entire paid up share holding of the twelve subsidiary companies  in  lieu  of  the jewellery  transferred  by  the assessee  the value of the jewellery must be taken to be the value of the shares transferred by the subsidiary companies. The High Court was of the view that the shares which were to be passed on for the purchase of property were different and independent  of such property and would have their valuation and  to  say  that the value of such consideration,  in  the instant  case  the  shares, should be read as  whatever  the value  of  property  intended to be purchased  would  be  to defeat  the very purpose underlying the provision in Section 4(1)(a) of the Act.

   The  term ’gift’ is defined in Section 2(xii) of the Act to  mean  the  transfer  by one person to  another  of  any existing  movable or immovable property made voluntarily and without  consideration  in  money  or  money’s  worth,   and includes the transfer or conversion of any property referred to  in  Section 4, deemed to be a gift under that  section. The  expression  ’taxable  gifts’ is defined  under  Section

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2(xxiii)  to  mean gifts chargeable to gift tax  under  the Act.   Section  3 which is the charging section  lays  down that  subject to the other provisions contained in the Act, there  shall be charged for every assessment year commencing on and from the Ist day of April, 1958, a tax referred to as gift  tax  in respect of gifts made by a person  during  the previous year at the rate or rates specified in Schedule I.

   (Emphasis supplied).

   Section  4  makes provisions for gifts to  include  some transfers.   Sub-section  (1) clause (a), which is  relevant for the purpose of the case, reads as under:

   "  4(1) For the purpose of this Act- (a) where  property is  transferred  otherwise than for adequate  consideration, the  amount  by which the [value of the property as  on  the date  of the transfer and determined in the manner laid down in Schedule II] exceeds the value of the consideration shall be deemed to be a gift made by the transferor.

   [Provided  that  nothing contained in this clause  shall apply  in any case where the property is transferred to  the Government  or where the value of the consideration for  the transfer is determined or approved by the Central Government or the Reserve Bank of India]"

   Ordinarily,  a  gift is a transfer of  property  without consideration;   but  for the purpose of the Act a  transfer for  inadequate  consideration is to be deemed to be a  gift under  section  4(1)  (a).  By the inclusive  definition  in section  2(xii)  of the Act a ’deemed gift’ is also a  gift. The  provision  of  deemed  gift in section  4  (1)  (a)  is intended  to  bring  within  the purview  of  the  tax  such transactions  which are entered between the parties to evade the tax.

   The question which arises for determination in this case is  whether the transaction made by the assessee can be said to be a ’deemed gift’ under Section 4(1)(a) of the Act.  For invoking  the  deeming provisions of section 4(1)(a) of  the Act  inquiries have to be made regarding - (i) the existence of a ’transfer of property’ (ii) the extent of consideration given  i.e.   whether the consideration is adequate.  It  is necessary  for  the  assessing  officer  to  show  that  the property  has  been transferred otherwise than for  adequate consideration.    The  finding  as  to  inadequacy  of   the consideration  is the essential sine-qua-non for application of  the provisions of ’deemed gift’.  The provision is to be construed  in  a broad commercial sense and not in a  narrow sense.   In order to hold that a particular transfer is  not for  adequate  consideration the difference between  a  true value of the property transferred and the consideration that passed  for  the same must be appreciated in context of  the facts  of the particular case.  If the transaction  involves transfer  of  certain  property  in lieu  of  certain  other property  received then the process of evaluation of the two items  of property should be similar and on such  evaluation if  it is found that there is appreciable difference between the value of the two properties then the transaction will be taken  as  a ’deemed gift’ to the extent as provided in  the Section.   It  is  to be found that the transaction  was  on inadequate consideration and the parties deliberately showed the  valuation  of the two properties as the same  to  evade tax.   Such  a  conclusion cannot be  drawn  merely  because

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according  to the assessing officer there is some difference between  the  valuation of the property transferred and  the consideration received.

   In the present case, as noted earlier, the face value of the  shares of the 12 fully paid subsidiary companies of the@@             JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ assessee  was Rs.5,69,400/- which was taken to be the  value@@ JJJJJJJJJJJJJ of  the  jewellery that was transferred in exchange  by  the assessee  to  the  subsidiary   companies.   The  subsidiary companies had no other asset.  The value of the jewellery as determined by the assessing officer being Rs.13,91,350/- the real  value of the shares may be said to be  Rs.13,91,350/-, but  there was thus no gift involved in the transaction  for whatever  is the value of the jewellery is infact the  value of   the  shares  transferred  in  consideration.   In   the circumstances  the  assessing officer committed an error  in treating  the  transaction between the parties as a  deemed gift.

   At this stage we may notice a few decisions of different High  Courts to which our attention was drawn.  In the  case@@       JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ of Bireswar Sarkar vs.  Gift Tax Officer [(1997) 223 ITR 404@@ JJJJJJJJJJJ (Cal)]  the High Court allowed the writ petition and quashed the  notice under section 16 of the Act, inter alia, on  the ground  that  as  far as the question of inadequacy  of  the consideration  is concerned no answer could be given by  the respondent  authorities  as  to the  adoption  of  different standards  for  the purpose of evaluating the value  of  the assets  transferred  and  for evaluating  the  consideration received.

   The  Madras High Court in the case of C.G.T.  vs.   Indo Traders  &  Agencies (Madras) P.  Ltd.  [(1981) 131 ITR  313 (Mad)]  observed  that  the provision is designed  to  check evasion  of  tax  by  persons  transferring  properties  for inadequate  consideration;  If a person had effected a  gift which  would be without consideration, he would be liable to be  taxed  under the Act;  the same person may, in order  to avoid   the   tax,   transfer   properties  for   a   paltry consideration  so as to get out of the operation of the  Act then  he  can be made liable under section 4(1)(a) .  It  is this  attempt at evasion which was sought to be thwarted  by enacting S.  4(1)(a).

   A similar view was taken by the Kerala High Court in the case  of  Commissioner  of Income-Tax vs.  Jacobs  (P)  Ltd. (1999) 237 ITR 433.

   The  High Court of Madras in the case of Commissioner of Gift-Tax  vs.   D.Surendranath  Reddy   (1998)  233  ITR  21 observed  that  adequate consideration is  not  necessarily, what  is  ultimately determined by some-one else  as  market value;  unless the price was such as to shock the conscience of  the  court,  it would not be possible to hold  that  the transaction is otherwise than for adequate consideration.

   In  view of the discussions in the foregoing paragraphs, it is clear that the High Court was in error in holding that in  the facts and circumstances of the case the  transaction could  be  held to be a ’deemed gift’ within the purview  of Section  4(1)(a)  of  the Act and in  holding  the  assessee

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liable  for  the tax.  Accordingly, the appeal  is  allowed; the  judgment of the High Court under challenge is set aside and  the  order of the Tribunal is confirmed.   There  will, however, be no order as to costs.