TMI Blog2001 (2) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... hari, K.L. Padmanabhasa and K.L. Swamy, who are the directors of the company. On 22-11-1985 the members of the family, floated the following seven investment companies: (a) Honeywell Investments Private Limited (b) Panchanganga Investments Private Limited (c) Vyjayanthi Investments Private Limited (d) Macdonald Investments Private Limited (e) Sri Gurunath Investments Private Limited (f) Pancha Kalyani Investments Private Limited (g) Peterescot Investments Private Limited. On 30-11-1985, in an extraordinary general body meeting of the company, additional equity shares of one lakhs were authorised the face value of which was Rs.10 each. On 1-12-1985, each of the seven investment companies purchased one share each from the existing shareholders of the family at the face value of Rs.10 per share. On 1-1-1986, in the meeting of the Board of Directors of the company, it was decided to allot one lakh shares to the seven investment companies. Accordingly, the first six companies mentioned above were allotted 14,500 shares each and the last mentioned company was allotted 13,000 shares. On 20-1-1986 the family members floated two other investment companies, viz, (i) M/s. Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was accordingly computed at Rs.5,06,33,970 on which a gift-tax demand of Rs.1,51,90,191 was raised. 14. Aggrieved by this order, the assessee-company went to the CIT(A) who in the impugned order upheld the levy of Gift-tax in respect of the right shares but deleted the levy in respect of the bonus shares. The assessee is aggrieved by the order of the CIT(A) upholding the levy of gift-tax in respect of the right shares. The department is also aggrieved by the order of the CIT(A) in deleting the levy of gift-tax in respect of bonus shares. This is how, the cross appeals under consideration have come up before us. 5. We have heard Shri S. Sukumar, the learned counsel for the assessee and Shri Ramesh, the learned DR. Shri Sukumar, vehemently objected to the gift-tax assessment made in this case. According to him, the allotment of shares by the company to its shareholders did not involve any element of gift because of the fact that the basic ingredients of section 2(xii) of the Gift-tax Act, defining the term 'Gift' are not satisfied in the present case. In this connection, he points out that there is no transfer of any existing property from one person to another. The allotment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within five months. Therefore, it is logical to hold that all this exercise was done with an intention to keep the hold of Khoday family over M/s. Khoday India Ltd. In other words this is a colourable transaction. By this method the assessee tried to evade taxes as the company's directly allotting shares to the Directors would have attracted the deeming provisions of section 2(22) of the IT Act, 1961. That is why the Khoday group floated the investment company. In the circumstances, I hold that the shares allotted by way of rights issue were without adequate consideration within the meaning of Section 4(1)(a) of Gift-tax Act. Accordingly the difference between the value of the shares on yield basis and the face value of Rs.10 at which the shares were allotted is brought to tax, as per the working below: --------------------------------------------------------------- The value (of a shares of face value at Rs. 10) according to yield basis vide Annexure A Rs. 235 Less: Consideration received per share Rs. 10 --------- Gift per share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., M/s. Karnataka Trading Investment Co. Ltd., and M/s. Five Brother Trading Co. (P.) Ltd., The Khoday family members first invested around Rs.20 lacs in these two investment companies who is turn raised some loans and made the investment in these seven investment companies. These seven investment companies purchased one share each from the family members and the entire rights shares of 1,00,000 shares of Rs.10 was issued to the seven investment companies. Simultaneously, the company also issued bonus shares in the ratio of 23:1. Thus, the seven investment companies became holders of 1,00,007 shares and the balance of 49,993 shares were held by the 27 original shareholders. After the bonus issue, the seven investment companies held 23,00,161 shares and the other shareholders had only 11,49,839. The whole series of transaction viz., the quick succession in which the nine investment companies were floated, 7 companies acquired one share each, rights and bonus shares, all the four brothers being common directors in all the companies reveal that there was a design to avoid payment of wealth-tax by the family members and this scheme is covered by the decision of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration in money or money's worth, shall be deemed to be a gift made by such person;" From the above definition it is clear that for a gift to attract levy of tax under the Gift-tax Act, 1958, the following ingredients must be satisfied: I. There should be a transfer from one person to another. II. The transfer should be of any existing movable or immovable property. III. The Transfer should be made voluntarily and without consideration in money or money's worth. IV. Gifts will also include a deemed gift under section 4 of the said Act. Section (4) of the GT Act particularly clause (a) of sub-section (1) on which has been invoked by the Assessing Officer reads as under: "Section 4(1)(a): For the purposes of this Act, - 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case as they had paid the consideration being the face value of the shares prior to the allotment. Thus it is a purely contractual obligation which was performed by the company while allotting the right shares. The question remains to be considered whether there is any element of gift in the allotment of bonus shares. It is true that bonus shares are issued to the existing shareholders without their contributing anything afresh to the share capital, as it is conversion of the accumulated profits by the company into share capital in the books of the company and offered to the existing shareholders. Even though bonus shares are treated as fully paid up, adjustment is made against the accumulated profits of the company and, therefore, it is tantamount to distribution of the capitalised undivided profits. The existing shareholders do not get anything more by way of their interest in the company. In other words, the intrinsic value of the original and bonus shares does not get enhanced by the issue of bonus shares. The learned CIT(A) herself in the impugned order has remarked that levy of gift-tax on bonus shares is not justified because the bonus shares have been allotted by virtue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the seven investment companies, but for reasons best known to the Revenue authorities, this matter was not pursued as evident from the narration in para 4 of the learned Commissioner (Appeals)'s order wherein she has mentioned that a remand report was called for and received from the Assessing Officer in this connection before the impugned appellate order was passed. This has to be seen in the light of the contention by the learned counsel for the assessee that the right to renounce is not applicable to deemed public company (vide page 776 of "Guide to the Companies Act", 14th Edition by A. Ramaiya) as the assessee was a deemed public company at the time of increase of its additional share capital and its allotment to several investment companies. 14. In view of the discussion above, we reverse the orders of the Assessing Officer and of the Commissioner (Appeals) with regard to the levy of Gift-tax on right shares. We also uphold the finding of the Commissioner (Appeals) to the effect that no gift-tax is chargeable on the bonus shares. In the result, we direct the Assessing Officer to delete the levy of GT on the assessee-company for the assessment year 1997-98. 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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