9911796707
TMI Blog2006 (12) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax proceedings, internal audit was taken and there was an audit objection dated August 17, 1995, to the Assessing Officer and the Assessing Officer issued a letter to the assessee. Reply was submitted. Details were provided. There was correspondence between the Department and the assessee. According to the appeal memo, the appellant satisfied the Department that there was no element of gift, and accordingly the then officer did not proceed with any gift-tax proceedings under the Gift-tax Act, 1958 (for short, "the Act"). Thereafter, in August 1998, a search was carried out under section 132 of the Income-tax Act. After search, the Deputy Commissioner of Gift-tax issued a notice under section 16 of the Gift-tax Act in the matter. The said letter was replied to by the appellant. Assessments were reopened. The assessing authority declined to accept the appellant's contention and rejected the submission of the appellant and concluded that there was a deemed gift under section 4(l)(a) and section 4(1)(b) of the Act to the extent of Rs. 69,78,49,800 and levied gift-tax along with interest under section 16B of the Act from July 1993 to January 2000 quantified at Rs. 54,01,12,525. An a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, consideration and the intrinsic value with a view to ascertain whether there was gift or deemed gift and having satisfied with the evidence and refrained from invoking the gift-tax proceedings while concluding the income-tax proceedings for the relevant year? 3. Whether there was fresh information on account of search proceedings in 1998 to justify the invoking of the gift-tax proceedings? 4. Whether the provisions of section 4(1)(a) of the Gift-tax Act were applicable to the share transfers made by the appellant to justify the determination of deemed gift for tax under the Act? 5. If the answer to question No. (d) is in the affirmative, whether the Tribunal was right in upholding the valuation of alleged quoted shares in lock-in period? 6. Whether in the light of the judgment of the Supreme Court in CIT v. Ranchi Club Ltd. [2001] 247 ITR 209, the levy of interest was justified especially when section 16B of the Act was in pari materia with section 234B of the Income-tax Act prior to its amendment vide Finance Act, 2001?" The matter is heard on several dates. Sri Aravind Datar, learned senior counsel, would argue that there was no gift at all for the purpose of gift-tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case law in support of his submission. Per contra, Sri Indra Kumar, learned senior counsel for the Department would with equal vehemence oppose every one of the submissions of the other side. He would say that the appellant has filed return of gift declaring nil gift chargeable to tax. The appellant has enclosed a letter along with the said declaration, and in the said letter several contentions are raised. The assessing authority negatived the contentions urged by the appellant and an order was passed under section 15(3) read with section 16 of the Act. The assessing authority after considering the material facts ordered payment of gift-tax by holding that the shares transferred by the appellant-company was for inadequate considerations, and that, therefore, section 4(1)(a) of the Act is attracted in the case on hand. The quantum of inadequate consideration provides for a right to the Department to initiate proceedings against the appellant. He would also refer to us an order of the Commissioner to say that the Commissioner has negatived the contentions with regard to jurisdiction in the case on hand. However, the appellate authority has chosen to reduce the gift-tax in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various provisions of the Gift-tax Act. The Gift-tax Act provides for gift escaping assessment. Section 16(1) of the Act would read as under: "16.(1) If the Assessing Officer has reasons to believe that the taxable gifts in respect of which any person is assessable under this Act (whether made by him or by any other person) have escaped assessment for any assessment year (whether by reason of underassessment or assessment at too low a rate or otherwise), he may, subject to the other provisions of this section and section 16A, serve on such person a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return in the prescribed form and verified in the prescribed manner, setting forth the taxable gifts made by him or by such other person during the previous year mentioned in the notice, in respect of which he is assessable, along with such other particulars as may be required by the notice, and may proceed to assess or reassess such gifts and also any other taxable gifts in respect of which such person is assessable, which have escaped assessment and which come to his notice subsequently in the course of the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l conclusion. At the stage where he finds a cause or justification to believe that such income has escaped assessment, the Assessing Officer is not required to base his belief on any final adjudication. In Saradbhai M. Lakhani v. ITO [1998] 231 ITR 779, the Gujarat High if Court holds that the validity or otherwise of the reasons for initiation of reassessment proceedings should be gone into on the basis of facts mentioned and the reasons recorded prior to such initiation. Thus, where the reasons recorded do not bring out any grounds for making out an objective satisfaction arrived at by the Assessing Officer, no reasons other than those recorded by the Assessing Officer can possibly be urged at the time of initiation. It is necessary that before any action is taken, the Assessing Officer should substantiate his satisfaction. CIT v. Prithviraj Maheshwari [2004] 266 ITR 402 is a Division Bench decision of the Rajasthan High Court. The court ruled that once the assessee declares fully and truly all material facts in income-tax proceedings for the assessment of that transaction, and value has been accepted by the same Assessing Officer, there is no justification to disturb that valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to escapement of the income of the assessee from the assessment. Formation of belief must be in "good faith" and it should not be a mere pretence. From the case law, it is clear that "satisfaction" has to be bona fide and there has to be reasonable nexus and has to be based on prima facie acceptable material. It is also ruled that it should be based on objective satisfaction arrived at reasonably and never be an outcome of change of opinion. From the case law, what is to be noticed by us is that reopening must be on acceptable grounds and it cannot be at the whims and fancy of the authorities in terms of the provisions. There has to be a reasonable nexus in terms of the law declared by the courts of law. It should be based on objective satisfaction arrived at by the Assessing Officer reasonably and can never be an outcome of change of opinion. Let us see as to whether this principle is followed in the case on hand. The Assessing Officer has issued notice and thereafter obtained a reply from the assessee. After obtaining reply, he has passed a very detailed order rejecting the contention of the assessee on the basis of the materials placed before him. He has ruled that there ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer were sufficient to form an honest view, i.e., to give "reason to believe" genuinely that taxable gift escaped assessment. The Tribunal has accepted this finding in its order. The Tribunal after noticing all relevant facts and also the case laws and the findings, has chosen to say that the question of change of opinion forming the sole basis for initiation of action under section 16 of the Act is totally strange to the facts of the case. The Tribunal accordingly held that the gift-tax proceedings were validly initiated in the facts and circumstances of the case. We are of the view that all the three authorities are justified in holding that the initiation of proceedings under section 16 of the Act is for a bona fide reason and it is objective in character. There is no change of opinion resulting in the assessment proceedings as argued by Sri Datar, learned senior counsel appearing for the assessee. We are unable to accept his submission in the given circumstances. From the material on record, it is seen that some correspondence was there between the parties in the matter of gift and that the correspondence did not end in any finality on the issue between the parties. Obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pening the matter in terms of the material available on record. Both the contentions were rightly considered and rejected on facts by all the authorities. We accept this finding as recorded by all three authorities. Findings are based on facts. The Rajasthan High Court judgment in CIT v. Prithviraj Maheshwari [2004] 266 ITR 402 would show that in that case, the Department has accepted the earlier valuation. It was in those circumstances, the Rajasthan High Court did not accept the plea of the Department. Similarly, the judgment of the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 is not available to the proceedings. In that case the court notices the previous assessment proceedings and thereafter it has accepted. The next contention is with regard to "satisfaction" on the part of the Additional Commissioner in the matter of section 16 proceedings. What is contended before us is that there is no acceptable satisfaction available on record in the matter of sanction in terms of section 16 of the Act. It is submitted before us that the Deputy Commissioner has sought for permission from the Commissioner under section 16 of the Act. He has referred to certain documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities. In the circumstances, we deem it proper to answer the questions of law in the matter of jurisdiction in favour of the Revenue. First three questions are therefore answered against the assessee. Re. Questions Nos. 4 and 5 : Question No. 4 deals with share transfer being a deemed gift for the purpose of tax under section 4(1) (a) of the Act. Question No.5 is with regard to the valuation of shares in lock-in period. Both the questions can be considered together. Before we touch upon the merits of the matter, we must say that the Assessing Officer in his order has considered the deemed gift for non-receipt of consideration under section 4(1)(b) of the Act to the extent of Rs. 13,90,64,563. A detailed order was passed. The Appellate Commissioner has chosen to hold that it was difficult to hold that the consideration was not intended to pass for the purpose of section 4(1)(b) of the Act. The Commissioner deleted the amount assessed under section 4(1)(b) in his order. The same is confirmed by the Tribunal. No further appeal is filed. Hence, deletion of deemed gift in terms of the order of the Commissioner has become final. What is now required to be considered by us is about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. The liabilities as on the date of transfer had a worth in money and was in effect quantified in terms of money. So, when the transferee, under the terms of the agreement, agreed to pay the liabilities attached to the business which was being transferred, it was paying as consideration money's worth of the liabilities. The balance consideration was agreed to be satisfied in shares of the face value of £ 998 irrespective of the value of assets already vested in the transferee. The transferee-company had shown the excess value in share premium account and accepted the liabilities in respect of such share premium in favour of V. F. Ltd. as its shareholders as a result of increase of assets. The amount thus stood as liability for the entire excess value of assets along with the share capital while for the transferor the excess value had been shown in investment in the subsidiary. The entire assets were fully accounted for in the accounts of both companies under the requirements of the Companies Act" The Calcutta High Court ultimately ruled that there is no deemed gift in the light of transfer of assets by parent to subsidiary companies. In Bireswar Sarkar v. GTO [1997] 223 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y enacting section 4(1)(a). In Polestar Electronic P. Ltd. v. Addl. Commissioner, Sales Tax [1978] 41 STC 409, the Supreme Court observed reading as under (headnote) : "A statutory enactment must ordinarily be construed according to the plain natural meaning of its language and no words should be added, altered or modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. This rule of literal construction is firmly established and it has received judicial recognition in numerous cases." The Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77, observed that it is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs; that the court is not to be satisfied with the form and leave well alone the substance of a transaction; that avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ekar 100 shares As on the date of transfer of shares i.e., on March 2, 1993, the share-holding pattern of M/s. Celestial Finance Limited stood as under: (a) Mrs. Thankam Nambiar 200 shares (b) Mrs. Meena Nambiar 100 shares (c) Alpha Securities Ltd. 700 shares From these figures, the Assessing Officer ruled that M/s. Celestial Finance Limited was also not a wholly owned subsidiary of M/s. Alpha Securities Limited. The Assessing Officer also notices that the shareholders did not consist of only the family members of Mr. T. P. G. Nambiar, but some outside shareholders are also available. He has given details in his order. The Assessing Officer further notices that the declarations were filed in terms of section 187 of the Companies Act, 1956 after three years and three months from the scheduled date of acquisition of the beneficial interest. He noticed that it was only after the gift-tax issue was raised by the Assessing Officer in Trichur in February 1996, that the assessee-company had made necessary changes in the share-holding patterns of the group companies to make them subsidiary companies. He has also noticed that M/s. Alpha Securities Limited and M/s. Celestial Finance L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Sri Datar, learned senior counsel for the assessee-company, we are not inclined to accept his submission. In the light of the acceptable bundle of facts, if read as a whole, would indicate a "deemed gift" in terms of section 4(1)(a) of the Act. We must also see as to whether there is an inadequate consideration in terms of the material on record. All the three authorities have noticed that the assessee has chosen to transfer shares for a lesser consideration. The argument of the assessee is that there is no gift at all and that the gift has been made by a holding company to a subsidiary company, which would mean that the company has transferred shares to itself. Section 45 of the Act would not cover transactions of this nature. The authorities have considered the "subsidiary" issue by reference to various material facts available on record. The Assessing Officer has chosen to refer to the material facts. After referring to the material facts he would hold that none of the two companies was a wholly owned subsidiary of the assessee as on the date of transfer, and that the statutory obligations under the Companies Act were not fulfilled. It is also noticed that the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial on record, we are of the view that the contention of transfer effected to itself, on the plea of such transfer having been made by a holding company and a subsidiary company, does not appeal to us. The assessee however would rely on several judgments in support of his submission. GTO v. Venesta Foils Ltd. [1980] 124 ITR 660 is the judgment of the Calcutta High Court. In the said case, the Calcutta High Court has noticed deemed gift and also the principle of transfer from holding company to subsidiary company. A reading of the said judgment would show that the said judgment is clearly distinguishable on the facts. It was not a case of transfer of shares to a single family, and it was also not a case of inadequate consideration as in the present case. Though the Calcutta High Court has ruled in favour of the assessee in that case, the same cannot be made automatically applicable to the facts of this case unless the bundle of facts of this case would show no gift in terms of section 4(1)(a) of the Act. So long as the bundle of facts is staring against the assessee, the judgment of the Calcutta High Court cannot be made applicable to the assessee. Bireswar Sarkar v. GTO [1997] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s valued at Rs. 5.06 crores. The same has been enhanced by the Tribunal at Rs. 16.76 crores. Before we touch upon the merits of the matter in this regard, let us see the relevant rules as applicable to the facts of this case. Rule 2 of Schedule II to the Gift-tax Act reads as under: "2. The value of an equity share or a preference share in any company or a debenture of any company which is a quoted share or a quoted debenture shall be taken as the value quoted in respect of such share or debenture on the date on which the gift was made or where there is no such quotation on such date, the quotation on the date closest to such date and immediately preceding such date. Explanation.- The words and expressions used in this rule and rules 3 to 7 but not defined and defined in rule 2 of Schedule III to the Wealth-tax Act shall have the meanings respectively assigned to them in rule 2 of that Schedule." There is a reference to rule 2 of Schedule III to the Wealth-tax Act in rule 2, Schedule II to the Gift-tax Act. Hence we must also notice rule 2 of Schedule III to the Wealth-tax Act for the purpose of valuation. Sub-rules (9) and (11) of rule 2 and rule 13 of the Wealth-tax Rules wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate in Ref. No. 03/B-28 dated March 24, 2000, pertaining to M/s. BPL Sanyo Technologies Ltd. (3) Xerox copy of certificate in Ref. No. B-32/03 dated March 23,2000, pertaining to M/s. BPL Refrigeration Ltd. (4) Another certificate dated March 29, 2000, issued by the same authority. The Commissioner has accepted these additional documents. He notices two other certificates in Form No. O-11 in paragraph 42.4 of his order, and as against columns 4, 5 and 6 this is what is stated: "4. Number of occasions the Nil share/debenture has been transacted during the year in ordinary course of business of the business of the stock exchange 5. Value of the share/debenture Nil as quoted on the 31 of day of March of the year 6. If the share/debenture is not quoted on the date mentioned in column 5, the value as quoted on a date immediately preceding the date mentioned in that column. As per SEBI Guidelines the shares allotted to the promoters of the company are not transferable for a period of three years from the date of allotment and the same are not tradable on the stock exchanges. The price quoted in the stock exchange are applicable only to shares which are tradable in the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave not prevented the shares from being transferred. Only when it comes to the taxability, the assessee is trying to take the benefit of the restrictive clauses that are contained in terms of the issue of shares. The assessee has no doubt obtained the certificates subsequently from the BSE authorities, which were issued on the assessee's request. The shares of the company were listed securities in the stock exchange and they were all actively traded. The Tribunal has also ruled that it is only the promoters' quota of shares which were in the lock-in period; and that however, merely there being a bar on trading does not mean that the shares themselves were unquoted shares. In that view of the matter, he approved the action of the Assessing Officer and set aside the finding of the Commissioner. After hearing, we have carefully seen all the three orders. Admittedly, certain additional materials were placed before the Commissioner. The Commissioner noticing those materials has chosen to hold in favour of the assessee. The Tribunal has set aside the same by holding that the assessee obtained a certificate subsequently from the BSE authorities. The Tribunal has ruled that merely there b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question were not traded and were not tradable. If that is so, in our opinion, the Commissioner is right in holding that the lock-in-period is a factor that would go in favour of the assessee. After noticing the lock-in-period, the Commissioner has chosen to accept the amount of Rs . . . as the amount that warrants gift-tax. We accept his findings. Therefore, on the facts, we are satisfied that the Commissioner is right in holding that the lock-in period is a factor that would go in favour of the assessee. We accept these findings. We therefore answer section 4(1)(a) question in favour of the Revenue. However, on the question of valuation, we deem it proper to accept the order of the Commissioner. Several judgments have been cited by the Revenue in this regard. Bharat Hari Singhania v. CWT [1994] 207 ITR 1 is a judgment of the apex court. That is a case in which the court was considering the valuation aspect of the matter. The facts in that case would show that it was prior to the amendment of the Act in terms of the Wealth-tax Act. CWT v. Purshottam N. Amersey [1969] 71 ITR 180 (Bom) ; Purushottam N. Amarsay v. CWT [1973] 88 ITR 417 (SC) and Ahmed G. H. Ariff v. CWT [1970] 76 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court, this question is answered in favour of the assessee. Before concluding, we deem it proper to observe that the authorities are not powerless in reassessing in the case of tax evaders. Deemed provisions are provided to arrest this tendency of tax evasion. But the evasion proceedings has to be done strictly in accordance with the statute. Valuation methodology has to be based on the statutory rules dealing with income in terms of law. However, it should not be irrational, arbitrary or unreasonable valuation. We also deem it proper to say that the authorities are to value the facts carefully to arrest the tax evasion, but at the same time, valuation has to be in accordance with law. This twin principles of arresting tax evasion with acceptable valuation is a factor that has to be borne in mind in gift-tax proceedings while considering the deemed gift in terms of section 16 of the Act. In the result, the first three questions are answered in favour of the Revenue. In so far as questions Nos. 4 and 5 are concerned, we deem it proper to answer that section 4(1)(a) of the Act is applicable to the share transfers made by the appellant. However, in so far as the valuation is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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