TMI Blog1998 (10) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... ft for the assessment year 1986-87. The reasons recorded by the GTO for issuing the impugned notice were as under : "During the relevant previous year ie., A.Y. 1986-87 the assessee purchased 50,000 4% redeemable non-cumulative preference shares of Rs. 100 each for Rs. 50,00,000 of Hero Investments (P.) Ltd., Ludhiana. The shares purchased are 4% non-cumulative preference shares even if the dividend is declared in any year, the yield from these shares is only 4%. Keeping in view the possibility that dividend may not be declared in some years. The market value of the share cannot be more than Rs. 30 per share. Keeping in view the market rate of interest obtaining in investment even in Government securities. Whereas the assessee has purchased the same @ Rs. 100 per share. Therefore, the assessee has paid Rs. 70 per share in excess of the market value without any consideration. I have therefore, reason to believe that the taxable gift has escaped assessment. Issue notice under section 16(1)(a) of the G.T. Act, 1958." In response to the notice the assessee filed return declaring value of taxable gifts at nil and in a note accompanying the return it was mentioned that the company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m business profits and adding thereto the notional depreciation and investment allowance the total working out to Rs. 83 lacs and odd. For the aforesaid submission the assessee placed reliance on certain judgments of the Hon'ble Calcutta High Court but these were distinguished by the CIT(A) on the ground that there was no similarity between the two cases. According to the CIT(A) it was a case of diversion of income for non-business consideration. In the final analysis, the CIT(A) in the income-tax proceedings upheld the view taken by the Assessing Officer further rejecting the alternative submission of the assessee regarding the quantification of interest and he also held that the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 / 22 Taxman 11 was applicable. 4. Before the GTO, in respect of the present appeal, the arguments raised on behalf of the assessee were to the following effect : 1. The shares could not be issued below their face value of Rs. 100. 2. There was "group consideration" for purchasing the shares of M/s. Hero Investments (P.) Ltd. who were the co-promoters of M/s. Hero Honda Motors Ltd. Further, the collabor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than Rs. 30 per share and the balance i.e., 70% of Rs. 50 lacs invested was a gift liable to gift tax. In this way of the value of the gift was worked out at Rs. 35 lacs and after allowing standard deduction of Rs. 5,000, the taxable gift was computed at Rs. 34,95,000. 5. Being aggrieved, the assessee came up in appeal before the CGT(A) and at which stage the arguments advanced were more or less identical to those tendered before the GTO. It was reiterated that the assessee was the original buyer of shares from the company and no element of gift was involved much less a deemed gift. The Assessing Officer also sought representation from the first appellate authority and filed written submissions reiterating the same line of reasoning as adopted in the assessment order. He also referred to certain other cases of the group where similar type of shares were purchased below the face value. The GTO further argued that no prudent businessman would invest for a return of 4% when the bank rate was more and in this view of the matter the element of gift was quite apparent. 6. In the reply the assessee's counsel contended that the point of time at which the transaction took place shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertained to the provisions of section 4(1)(c) of the Gift-tax Act whereas in the present appeal the case fell under section 4(1)(a). According to the ld. D.R., each case had to be considered on its own facts and in support of this argument he placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 / 64 Taxman 442. We may mention at this stage that one of the submissions made by the ld. D.R. on behalf of the revenue was that in the present case the GTO had made an observation about the nexus existing between the funds borrowed by the assessee company at 18% and their investment in the purchase of the non-cumulative preference shares in question, the return being 4%. On being confronted, the ld. counsel for the assessee admitted the nexus pointed out by the GTO and now by the d. D.R. before the Tribunal. 9. The ld. counsel for the assessee in his arguments strongly supported the order passed by the CGT(A) contending that gift tax proceedings were not applicable as the assessee had made a direct purchase of the shares from the company and not from any individual. According to him, a subscriber to the share cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In a short reply the ld. D.R. contended that section 4(1)(a) nowhere prescribed that a person acting as a prudent businessman or a transaction being bona fide could come out of the purview of the said section. According to him, the decisions relied upon by the ld. counsel were distinguishable. It was further contended that there was a transfer of property as soon as the shares were issued. 11. We have examined rival submissions and also perused the orders passed by the tax authorities. The decisions cited at the Bar have also been considered. It is quite apparent that proceedings under section 16(1) of the Gift-tax Act were initiated taking recourse to the observations of the Assessing Officer and thereafter by the CIT(A) in the income-tax assessment of the respondent for assessment year 1986-87. The GTO has quoted extensively from the orders of the aforesaid two authorities in paras 3 and 4 of the assessment order which is presently in appeal before the Tribunal. Much stress has been laid on the transaction being a device primarily with a view to divert the income of the company and there is also a reference to the prudency involved in the transaction with the ultimate conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in another company of the group and consequently the value of the shares held by M/s. Hero Investments (P.) Ltd. as compared to the value of the shares purchased by the assessee and which are the subject-matter of the present appeal. As already noted by us, the stress is on 'a colourable device' to reduce the tax liability. We have already mentioned that gift-tax proceedings were primarily initiated by reference to the findings given by the tax authorities in the income-tax proceedings but when the orders were passed by the GTO and the CGT(A) in the present case, they did not have the benefit of the order of the Tribunal in the income-tax proceedings the appeal in respect of which was decided on 19-1-1995 in I.T.A. Nos. 70 93/Chandi./90 (cross-appeal) since the order of the CGT(A) in the present case was passed on 13-12-1991, the order of the GTO being much earlier. A perusal of the order of the Tribunal in the income-tax proceedings shows that the Assessing Officer disallowed interest amounting to Rs. 4,82,153 being the difference between 18% which was payable on the loan obtained and the 4% which was attached to the shares in question. In paras 7 and 8 of the order of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as a result of the order of the Tribunal the very basis for initiating the gift-tax proceedings has come to a nought as we have already observed that the GTO heavily relied on the observations by the tax authorities in the income-tax proceedings. In the light of the finding of the Tribunal in the income-tax proceedings, it becomes quite irrelevant as to what happened to the money in the hands of M/s. Hero Investments (P.) Ltd. who issued the shares to the assessee. Then again, there is no material on record available with the department to show what the market value of the shares was as the GTO has gone entirely by the transfer at Rs. 30 by some of the persons of the "group". The further submission on the part of the assessee which has been completely ignored by the tax authorities is that the shares were redeemable at par after 10-7-1977 and this means that the entire sum of Rs. 50 lacs would revert back to the company. 13. Another argument raised by the department is to the effect that bona fide business transactions do not come out of the purview of section 4(1)(a). We are unable to agree to this proposition as there is adequate case law on the subject and we refer to so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in determining the question whether the expenditure ought to be allowed as a deduction." In the decision of the Hon'ble Gauhati High Court in the case of Prafulla Chandra Goswami (supra), the matter although was remanded back to the Tribunal, their Lordships took the view that the GTO had to find out the value of the property for purposes of assessing gift-tax on the basis of material. Referring to certain judgments of the Tribunal, the Indore Bench in the decisions reported in Manoharlal Anand's case (supra) and Smt. Achla Tikku's case (supra), while dealing with the provisions of section 4(1)(a) took the view that where there was nothing on record to show that the transaction was not bonafide or aimed at evasion of tax and the GTO had not recorded any independent finding about the sale consideration being inadequate, the charge of gift-tax under section 4(1)(a) was not justified. The decision of the Chandigarh Bench of the Tribunal in the case of Rattan Chand Oswal (supra), also considered the provisions of section 4(1)(a) and it was opined that the same were not applicable where there was no attempt to evade tax and where the transaction was bona fide and the Bench also took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A reading of the judgment shows that there is a categorical reference to the income-tax assessment where the ITO had determined the market value of the buses transferred to the company at a higher figure and assessed capital gains and which assessment was subsequently confirmed. At page 317 in the head note of the judgment, the following observation is relevant:- "Once there was a sale the question arises as to whether the sale was for adequate consideration so as to attract the charge under section 4 of the Gift-tax Act, 1958. On the basis of the income-tax assessment, the transfer of buses was for inadequate consideration and hence the transaction was liable to gift-tax." In the present case the income-tax asstt. favours the respondent. 16. Before we part with this appeal we would like to refer to proviso to section 4(1)(a) of the Gift-tax Act which reads as under :- "Provided that nothing contained in this clause shall apply in any case whether 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." The ld. counsel for the assessee argued ..... X X X X Extracts X X X X X X X X Extracts X X X X
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