TMI Blog1996 (12) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... also called upon to pay the total Salami amount immediately. 3. In the meantime, there was some rethinking and it was felt by the assessee-company that it would be expedient to have a subsidiary company registered which would undertake the construction of the building. It was felt that the time and energy of the assessee-company would be considerably saved if it did not itself undertake the construction work, so that they could be channelised towards further expansion of its consultancy business. It was also felt that the management of the properties already held by it in its name was considerably hampering their business activities and the company, if possible, wished to avoid such inconvenience in the interests of its business. Therefore, a hundred per cent subsidiary by name D.C. Properties Pvt. Ltd. was incorporated on 19-10-1981. The main object of the subsidiary was to acquire land, construct a building thereon and let out the same by way of lease, tenancy or in any other manner particularly to the assessee-company or its associates. 4. On 29-10-1981, i.e., immediately after the incorporation of the subsidiary company, the assessee-company wrote a letter to the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company and D.C. Properties, the subsidiary. After narrating the reasons which led to the formation of the subsidiary company and after broadly indicating the arrangement proposed to be made under the agreement, it was provided that the construction of the building should be undertaken by D.C. Properties either by themselves or by contractors, with the approval of the assessee. Clause (2) provided that the assessee shall have the right to inspect and approve the work done. It was provided by clause (4) that on completion of the building, D.C. Properties shall hand over possession of the same to the assessee and shall grant licence in its favour for use and occupation, subject to payment of reasonable, service charges. Clause (5) stipulated that the licence shall enure for the entire period of the lease. Clause (8) provided that in consideration of the terms and conditions contained in the agreement the assessee shall pay Rs. 1 crore to D.C. Properties towards the cost of the land and the cost of the building and shall pay further sums for the construction as may be found necessary. It was stipulated that this amount shall be treated by D.C. Properties as non-refundable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rplus. A resolution was accordingly passed. 8. The Gift-tax Officer took the view that there was an abandonment of the debt which should be treated as deemed gift under section 4(1)(c) and brought the sum of Rs. 1 crore to tax by order dated 25-3-1991. On appeal, the CIT(A), by order dated 25-2-1992 took the view that though the assessee's accounts indicated that the deposit was non-refundable, there were clauses in the agreement dated 2-1-1982 to show that in certain circumstances the deposit can be called back. He further observed that for the purpose of valuing its share, the assessee-company was still considering the deposit as an asset and that the amount was being shown by the subsidiary company as a liability. He further noted that though the companies are separate corporate entities, all the shares of the subsidiary company were held by the assessee-company and, therefore, for all practical purposes they were one and the same. According to him, in this view, it may be considered as a case of gift to oneself. For all these reasons, he concluded as under : "In view of the above discussion it is clear that the matter has to be considered not only from the narrow point of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent to which it has not been found to the satisfaction of the GTO to have been bona fide, it can be treated as a deemed gift and taxed as such in the hands of the assessee, as per section 4(1)(c). The question of bona fide assumes great importance in view of the clear words in the section. We would, therefore, assume for the sake of argument that there was an abandonment by virtue of the adjustment of the deposit or the write off of the same against the reserves and surplus of the assessee-company. But when we turn to the question as to whether the abandonment reflected by the write off was bona fide, we are unable to say that it was not. According to the Ld. D.R., the write off was not bona fide since the motive of the assessee was to divest itself of an asset, presumably to avoid wealth-tax. According to him, when the wealth of the assessee has been sought to be transferred by means of the book entry, the motives are highly questionable and cannot be stated to be bona fide. We are unable to accept the contention. The argument overlooks the business practicalities and the very reasons for which the subsidiary company came into existence. We had earlier referred to the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsidiary company to adhere to the terms of the agreement. It was further provided that in such an event the unspent amount will have to be refunded to the assessee. These terms, the true import of which have not been kept in view by the Gift-tax authorities belie their view, canvassed before us by Mr. Joshi on their behalf, that the abandonment was not bona fide. Clause (11) has nothing to do with the write off or in other words, it will have effect notwithstanding the fact that the assessee-company wrote off the amount against the reserves and surplus. The right of the assessee-company under this clause to ask for specific performance or to ask for refund of the unspent amount of the deposit remains intact notwithstanding the write off. This clause has been inserted obviously to ensure that the construction of the building proceeds in right earnest and that the subsidiary company does not take things lightly, having obtained the money. The entire documentation shows that right from the beginning the assessee-company was not in favour of undertaking the construction of a building by itself. At the same time it had to ensure that it had access to sufficient office space and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umented and disclosed to all the authorities concerned. There is no allegation of any fraud or oblique motive. Everything has been done in a straight-forward and open manner. 12. The Board issued Letter No. F. No. 1-59/GT, dated 27-2-1959 which is reproduced in Taxmann's Direct Taxes Circulars, 1988 Edn., Vol. 2, page 1940 which is as under : "85B. Whether clause (c) of sub-section (1) would be invoked only in cases where circumstances justify inference of collusion between person who makes discharge, etc., and person in whose favour discharge, etc., has been made. Section 4(c) has been enacted with the object of roping in so-called business transactions which are really gifts in a camouflaged form. It is not however, the intention to penalise cases where the release, discharge, surrender, forfeiture or abandonment has been made for bona fide reasons. For example, a debt may be abandoned because it is genuinely irrecoverable and the person may not have taken legal steps to recover the amount as it would have meant only throwing good money after bad. Such an abandonment will not be treated as gift. This provision would be invoked only in cases where the circumstances justify an ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
