Punjab-Haryana High Court
Commissioner Of Gift Tax (Central) vs Om Parkash Munjal on 12 January, 2009
IN THE HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH
G.T.R. No. 1 of 1997
DATE OF DECISION: January 12, 2009
Commissioner of Gift Tax (Central), Ludhiana
...Applicant
Versus
Om Parkash Munjal
...Respondent
CORAM: HON'BLE MR. JUSTICE M.M. KUMAR
HON'BLE MR. JUSTICE H.S. BHALLA
Present: Mr. K.K. Mehta, Advocate,
for the applicant-revenue.
Mr. Akshay Bhan, Advocate,
for the respondent-assessee.
1. Whether Reporters of local papers may be yes
allowed to see the judgment?
2. To be referred to the Reporters or not? yes
3. Whether the judgment should be reported in yes
the Digest?
M.M. KUMAR, J.
This order shall dispose of G.T.R. No. 1 of 1997 and G.T.A. No. 5 of 1999 as common questions of law have been raised. However, the facts are being referred from G.T.R. No. 1 of 1997.
At the instance of the revenue the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for brevity, 'the Tribunal') has referred the following questions of law arising out of its order dated 25.11.1992 passed in G.T.A. No. 4/Chandi/89 in respect of G.T.R. No. 1 of 1997 2 assessment year 1981-82. Accordingly, the Tribunal has drawn the statement of the case and referred the following questions of law for the opinion of this Court:-
"1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the valuation of unquoted gifted equity shares of a private limited company be made on the basis of 'yield method' relying upon Hon'ble Supreme Court's findings given in 86 ITR 621, 122 ITR 38 and 170 ITR 144 as against 'break-up method' applied by the Gift-tax Officer under rule 10(2) of the Gift-tax Rules?
2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in deleting the addition made on account of value of deemed gifts on account of transfer of shares ignoring the legal position to the effect that as per rule 1-C of the Wealth-tax Rules read with Gift- tax Rules, market value is to be taken in respect of equity shares transferred?"
3. Brief facts of the case are that the assessee filed return of gift declaring taxable amount of Rs. 2,07,500/-. During the year (1981-82) the assessee has gifted a sum of Rs. 20,000/- to his daughter Mrs. Neeru Khanna on 19.12.1980 after withdrawing the said amount from his capital account with M/s Rockman Cycle Industries. He has also gifted 1100 equity shares of Rs. 25/- each of M/s Hero Cycles (P) Ltd. to Pankaj Munjal Family Trust and the G.T.R. No. 1 of 1997 3 value of taxable gift has been worked out by applying the rate of Rs. 175/- per share.
4. On 16.5.1985, the revenue pointed out to the assessee that the value of the gift arrived at by him is not in accordance with the principles laid down in Rule 10(2) of the Gift Tax Rules, 1958 (for brevity, 'the Rules'). The assessee vide his letter dated 17.1.1986 claimed that valuation of shares of a company can only be done on yield basis under the provisions of the Gift Tax Act, 1958 (for brevity, 'the Act') as per the law laid down by Hon'ble the Supreme Court in the case of Commissioner of Gift Tax, Bombay v. Smt. Kusumben Mahadevia, (1980) 122 ITR 38. The assessee was told that Hon'ble the Supreme Court did not consider the question as to whether the valuation of shares was to be made for the purposes of gift tax on the basis of 'break up method' as postulated by Rule 10(2) of the Rules. The Supreme Court had further held that since the question did not arise out of the order of the Tribunal, having not been raised before the Tribunal nor it could be decided by it.
5. It has come on record that the shares gifted belonged to a private company and the Articles of Association of this company contain restrictive provision with regard to the alienation of the shares. The Authorising Officer opined that the value of the shares is required to be determined in accordance with Section 6(3) of the Act and Rule 10(2) of the Rules, which postulate the application of what is known as break up method. Accordingly, the Assessing Officer worked out the value of the shares at Rs. 238/- per share.
6. The assessee is found to have sold 950 equity shares of M/s Hero Cycles (P) Ltd., Ludhiana to M/s Om Parkash Sudershan G.T.R. No. 1 of 1997 4 Kumari Family Trust at a sale consideration of Rs. 175/- per share. He had also sold 10125 preference shares of M/s Hero Cycles (P) Ltd., Ludhiana, for a sale consideration of Rs. 30/- per share to M/s Om Parkash Sudershan Kumari Family Trust. The value of equity shares has been worked out at Rs. 238/- per share. The Assessing Officer further observed that the market value of shares is certainly higher than the value at which these shares have been transferred. In support of the aforementioned observation he has placed reliance on the transfer of 8 equity shares of M/s Hero Cycles (P) Ltd. by M/s Munjal Synthetic Pvt. Ltd. for a sale consideration of Rs. 375/- per share. On that basis it was held that the sale consideration of Rs. 175/- per equity share is far less than adequate consideration. Accordingly, it was held that the amount by which the market value of these shares exceeds the shown value of consideration, is to be treated as a gift under Section 4(1A) of the Act. Likewise, the market value of the preference shares sold at the consideration of Rs. 30/- per share was assessed. The total taxable gift was assessed at Rs. 4,12,587/-.
7. On appeal to the Commissioner, the order of the Assessing Officer was upheld, vide his order dated 2.12.1987. The assessee further challenged the order before the Tribunal. The Tribunal set aside the order passed by the Assessing Officer as well as the Appellate Authority and concluded that 'yield method' should have been adopted by the Assessing Officer as there was no material on record to show that the assessee had attempted to evade tax by selling shares at the value at which he did. The operative part of the order in paras 6 and 7 reads thus:-
G.T.R. No. 1 of 1997 5
"6. We have carefully considered the rival submissions as also the facts on record. The Madras High Court in the case of CIT vs. Indo Traders and Agencies (Madras) P. Ltd. (131 I.T.R. 313) has held that investigation to be made u/s 4(1)(a) of the Gift-tax Act can only be to see whether there is any attempt at evasion of tax or whether the relevant transaction is born fide (bona fide?). If the consideration which passed between the parties can be considered to be reasonable or fair, it cannot be considered to be inadequate. 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.
7. In the instant case, the Revenue has not brought any material on record to show that the assessee attempted evasion of tax by selling the shares at the value as he did and that the price charged was such that it would shock the conscience of the court. On yield method, the value of these shares would certainly be less than what has been adopted by the Assessing Officer and confirmed by the first appellate authority. We, therefore, hold that no case has been made out by the Revenue for assessing 'deemed gift' in the hands of the assessee in respect of the sale of the above mentioned shares. As regards 10125 preference shares, we find that for working out the capital gains the Assessing Officer in Income-tax assessment has adopted the value at Rs. 30/- G.T.R. No. 1 of 1997 6 per share and not hiked or disturbed it. Taking into consideration the entire facts and circumstances of the case, we hold that there was no justification for assessing 'deemed gift' of Rs. 59,850/- and Rs. 75,937/- in the hands of the assessee. These gifts are directed to be excluded from the gift-tax assessment of the assessee."
8. Mr. K.K. Mehta, learned counsel for the revenue has vehemently argued that the break up method as adopted by the Assessing Officer is fully supported by the judgment of Hon'ble the Supreme Court in the case of Kusumben Mahadevia (supra) as also by a Division Bench judgment of this Court rendered in the case of Commissioner of Gift Tax v. Satyanand Munjal, (2002) 19 Indian Taxation Report 9 (P&H). According to Mr. Mehta, if Rule 10(2) of the Rules authorises the application of break up method then no fault can be found with the order passed by the Assessing Officer as affirmed by the Appellate Authority. He has insisted that the order of the Tribunal suffers from inherent illegality because it has adopted the yield method as against the break up method in accordance with Rule 10(2) of the Rules.
9. Mr. Akshay Bhan, learned counsel for the assessee on the other hand has submitted that Rule 10(2) of the Rules would be applicable only in a case where the value of the shares is not ascertainable by reference to the value of the total assets of the company, which is required to be estimated by referring to what price such shares would fetch if on the date of the gift such shares could be sold in the open market. Learned counsel has maintained that there is not even a shred of evidence on record to prove that the value of the G.T.R. No. 1 of 1997 7 shares was not ascertainable by reference to the value of the total assets of the company. He has maintained that there is, in fact, no material on record to suggest that the Assessing Officer has made any attempt to work out the value of the shares as per the provisions of Rule 10(2) of the Rules. Accordingly, he has canvassed that the order of the Tribunal is consistent with the provisions of Section 6(1) of the Act read with Rule 10(2) of the Rules and has requested that the question be answered in favour of the assessee.
10. In order to appreciate the controversy raised in this reference, it would be pertinent to notice Section 6 of the Act and Rule 10 of the Rules which read thus:
" (6) Value of gifts, how determined- (1) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of sub-Sections (2) and (3), be estimated to be the price which in the opinion of the Assessing Officer it would fetch if sold in the open market on the date on which the gift was made.
(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalized value of the income from the property gifted during the period for which the gift is not revocable.
(3) Where the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner."
G.T.R. No. 1 of 1997 8
10. A perusal of clause (1) would show that the value of the property transferred by way of gift was to be estimated as the price "it would fetch if sold in the open market on the date when the gift was made". So far as the provisions of Clauses (2) and (3) are concerned, these do not relate to the controversy.
11. Another relevant provision is Rule 10 of the Gift Tax Rules, 1958. At the relevant time, Rule 10 (2) provided as under:-
"(2) Where the articles of association of a private company contain restrictive provision as to the alienation of share the value of, the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded."
11. A perusal of Clause 1 of Section 6 of the Act makes it clear that the value of the property transferred by way of gift is to be estimated as the price which in the opinion of the Assessing Officer it would fetch if it is sold in the open market on the date when the gift was made. However, the aforesaid provision has been made subject to the provisions of sub-Sections 2 and 3. Clause 2 of Section 6 of G.T.R. No. 1 of 1997 9 the Act deals with a gift which has been made for a specific period and the same is not revocable for that period. The value of such a gifted property is to be the capitalized value or the income from the property gifted during the period for which the gift is not revocable. However, Clause 3 of Section 6 deals with still another situation namely where the value of any property cannot be estimated under sub-Section 1 because it is not saleable in the open market than the value has to be determined in the prescribed manner.
12. When we read Rule 10 (2) of the rules it becomes evident that the value of the shares has to be primarily determined by reference to the value of the total assets of company. In case, it was not ascertainable by this method than the value had to be estimated on the basis of the price that the share would fetch if on the date of the gift they were to be sold in the open market. It is thus clear that under the Rule the value had to be primarily determined with reference to the total assets of the company.
13. It has come on record that no effort was made to ascertain the value of the share by reference to the value of the total assets of the company, which is required to be estimated before adopting the formula as to what price such share would fetch if on the date of the gift it was to be sold in the open market. Once the value of the share is not ascertainable then the provisions of Rule 10 (2) would apply which postulate 'breakup' method. However, there is no iota of evidence on record to prove that the value of the share was not ascertainable by reference to the value of total assets of the company. It is also evident that there is no material on record to suggest that any attempt was made by the Assessing Officer to work G.T.R. No. 1 of 1997 10 out the value of the share as per provisions of Rule 10 (2) of the rules. On a purely conceptual point of view the value of the asset as per books of accounts has to be taken as per provision of Rule 10(2). Therefore, the view taken by the Tribunal deserves to be accepted and we have no hesitation to hold that break up method as postulated by Rule 10 (2) of the rules would not be applicable and Tribunal has rightly applied the yield method of calculating the value.
14. The judgment of this Court in Satya Nand Munjal's case (supra) would not be applicable to the facts of the present case for the reason that their Lordship's never considered clauses 2 and 3 of Section 6 of the Act which contemplate the method of estimating the value of any property in case it is not saleable in the open market. The value has to be then determined in the prescribed manner and one such manner has been provided by Rule 10 (2). Therefore, we have no hesitation to conclude that the Division Bench judgment of this Court in Satya Nand Munjal's case would not apply to the facts of the present case. Likewise the judgment of the Supreme Court in the case of Kusumben D. Mahadevia would not be applicable because their Lordship's refused to entertain the controversy on the ground that no question concerning Rule 10 (2) of the rules was raised before the Tribunal. In that regard para 8 of the judgment makes it abundantly clear which reads thus:
"8. Now it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break-up method by reason of Rule 10 sub-rule (2) of the Gift Tax Rules can be required to be referred by the Tribunal to the High Court. G.T.R. No. 1 of 1997 11 It is well settled that no question can be referred to the High Court unless it arises out of the order of the Tribunal and, as pointed out by this Court in C.I.T. v. Scindia Steam Navigation Co. Ltd., a question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal or is raised before though not decided by the Tribunal and a question of law not raised before the Tribunal and not dealt with by it in its order cannot be said to arise out of its order, even if on the facts of the case stated in the order the question fairly arises."
15. As a sequel to the aforesaid discussion question No. 1 is answered against the Revenue and in favour of the Assessee and question No.2 is a consequential question which is also answered against the Revenue. Accordingly, the order of the Tribunal dated 3.2.1999 is upheld. The matters are disposed of in above terms.
(M.M. KUMAR)
JUDGE
(H.S. BHALLA)
January 12, 2009 JUDGE
Pkapoor/rts