Value of shares is equal to value of asset transferred

Khanderao b dabke

The Supreme Court had to consider the nature & scope of “deemed gift” in section 4(1)(a) of the Gift Tax Act in Reva Investment Pvt Ltd v Comm of Gift Tax Gujarat (2001 AIR SCW 1946). The facts of the case were as follows:

	To hold that a particular transfer is not for adequate consideration, difference between true value of asset transferred and consideration received must be seen in the context of facts of the case
	Khanderao b dabke Chartered Accountant, Mumbai

The assessee was a private limited investment company & the assessment relates to assessment year 1976-77. The assessee transferred jewellery to twelve private limited companies which were wholly owned subsidiaries and in return the twelve private limited companies transferred to the assessee fully paid equity shares of the face value of Rs 100 each totalling to to 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 shareholding of the twelve private limited companies. The assessee did not file gift tax return. A notice under section 16(d) of the Gift Tax Act was served and the assessee filed nil return.

In the assessment proceedings the revenue pointed out that the market value of jewellery was Rs 13,91,350 on the date of transfer. There was a gift to the extent of the amount which exceeded the face value of the shares ie Rs 8,21,950. The gift tax officer considered it as “deemed gift” to the tune of Rs 8,21,950 for which assessee was liable for payment of gift tax.

The matter went in appeal & the tribunal upheld the conclusion of the appellate authority and held that the only asset of the purchasing company 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 became 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 revenue on this point.

In an appeal filed by the revenue, 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 own valuation. To say that the valuation 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 Supreme Court examined in detail the relevant provisions of the Gift Tax Act and in particular section 2(XII) which defines “gift” and also “taxable gift” in section 2(XXIII). It noted that a transfer for inadequate consideration is to be deemed to be gift under section 4(1)(a) of Gift Tax Act. By the inclusive definition in section 2(XII) of the Act, a “deemed gift” is also gift.

The court observed that 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 payment of tax.

For invoking the deeming provisions of section 4(1)(a) of the Act inquiries have to be made regarding
(i) the existence of transfer of property &
(ii) The extent of consideration given ie whether consideration is adequate. The finding as to inadeqacy of the consideration is the essential sine qua non for application of the provision of “deemed gift”. The provision is to be construed in broad commercial terms & not in a narrow sense. In order to hold that a particular transfer is not for adequate consideration, the difference between the true value of the property transferred and the consideration that passed for the same must be appreciated in the 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 a appreciable difference between the values of the two properties then the transaction will be taken as a “deemed gift” to the extent as provided in that section.

The conclusion that parties valued two properties deliberately to evade tax cannot be drawn merely because according to the assessing officer there is some difference between the valuation of the property transferred and consideration received. In the present case jewellery was transferred to 12 subsidiary companies in exchange of shares issued to the company of same value. Further the subsidiary companies did not have any asset except jewellery. The value of jewellery as determined by assessing officer was Rs 13,91,390, 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 in fact the value of the shares transferred. The court concluded that the assessing officer committed an error in treating the transaction between the parties, as a “deemed gift”.

The Supreme Court quoted with approval the observation of Madras high court in Comm of Gift Tax v D Surendranat Reddy (1998 233 ITR 21) 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”.

The Supreme Court held that high court was in error in holding on the facts & circumstances of the case that the transaction could be held to be a “deemed gift” within the purview of section 4(1)(a) of Gift Tax Act. The judgement of the high court was set aside & the order of tribunal was upheld.