Income Tax Appellate Tribunal - Bangalore
Khoday Distilleries Ltd. vs Deputy Commissioner Of Income Tax on 12 February, 2001
Equivalent citations: [2002]81ITD438(BANG)
JUDGMENT
T.J. Joice, A.M.
1. These are cross-appeals filed by the assessee and the Revenue respectively for the asst. yr. 1987-88 and are directed against the order of the CIT(A), Bangalore, dt. 4th Feb., 1994.
2. Before corning to the rival contentions, it is necessary for us to narrate briefly the facts of the case which form the backdrop to the whole controversy. The assessee-company, M/s Khoday Distilleries Ltd., presently known as M/s Khoday Industries Ltd., was a private limited company till June, 1986. The company came up in July, 1986, with a public issue and became a public limited company retaining 60 per cent of the shares to the Khoday family and forty per cent with the public at large. The main business of the company is manufacture of Indian-made foreign liquor besides civil engineering contracts etc., The company is run by the members of the Khoday family, particularly, the brothers, M/s K.L. Ramachandra, K.L. Srihari, K.L. Padmanabhasa and K.L. Swamy, who are the directors of the company. On 22nd Nov., 1985, the members of the family, floated the following seven investment companies :
(a) Honeywell Investments Ltd.
(b) Panchanganga Investments (P) Ltd.
(c) Vyjayanthi Investments (P) Ltd.
(d) Macdonald Investments (P) Ltd.
(e) Sri Gurunath Investments (P) Ltd.
(f) Pancha Kalyani Investments (P) Ltd.
(g) Peterscot Investments (P) Ltd.
On 30th Nov., 1985, in an extraordinary general body meeting of the company, additional equity shares of one lakh were authorised the face value of which, was Rs. 10 each. On 1st Dec., 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 1st Jan., 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 20th Jan., 1986, the family members floated two other investment companies, viz., (i) M/s Kanakapura Investments (P) Ltd., and (ii) Five Brothers Trading & Investment Co. (P) Ltd. In these companies, the family members invested Rs. 20 lakhs. Pursuant to the meeting of the Board of Directors on 1st Jan., 1986, share allotment was made on 29th Jan., 1986. Accordingly, Form 2 for allotment of shares was filed with the Registrar of Companies. The last two companies made investments in the first mentioned seven companies also by raising loans for the purpose. On 5th June, 1986, with the approval of the Controller of Capital Issues, the assessee-company allotted bonus shares to the existing shareholders including the seven investment companies in the ratio of 1 :23.
3. On the above set of facts, the Asstt. CIT, Central Circle-I, Bangalore (hereinafter referred to as AO for short) initiated gift-tax proceedings in respect of the assessee-company for the asst. yr. 1987-88 and a return of gift was called for. The assessee-company filed a nil return taking the stand before the AO that there was no gift made by the assessee-company during the relevant previous year in respect of the share transactions. However, the AO negatived the contentions raised by the assessee. He was of the view that by making an investment of Rs. 10,00,070. The seven investment companies became owners of 24,00,168 shares of M/s Khoday Distilleries Ltd, worth Rs. 2,40,01,680 at face value. According to the AO, the market value of the shares and the yield from the shares were disproportionate to the investment made by the companies. Hence, he proceeded to examine the issue whether there was any gift arising out of the issue of right shares and of bonus shares by the assessee-company. Since he was of the view that the value of the shares on yield basis came to Rs. 235 per share there was an element of gift in respect of the difference of Rs. 225 i.e. (Rs. 235 minus Rs. 10) and therefore, the value of the gift in respect of the right issue came to Rs. 2,25,00,000 (Rs. 225 X 1,00,000 shares). The AO also took a view that even in respect of the bonus issue there was an element of gift for which he calculated the value of each on yield basis at Rs. 12.24 and accordingly, the value of gift was calculated in respect of the bonus shares at Rs. 2,81,53,970 (Rs. 12.24 x 1,00,007 x 23), After allowing basic exemption of Rs. 20,000 the taxable gift was accordingly computed at Rs. 5,06,33,970 on which a gift-tax demand of Rs. 1,51,90,191 was raised.
4. 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 Departmental Representative 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 GT 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 of shares by the company was not a transfer as it did not involve any existing property at the time of such allotment. Moreover, the investment companies made payment towards the face value of the shares and, therefore, this was a contractual deal involving consideration. The learned counsel further went on to argue that even the element of deemed gift under the provisions of Section 4(1)(a) is not there as there is no transfer of property. Further, it is pointed out that the right to renounce is not applicable to deemed public company. Khoday India was a deemed public company at the time of increase of the additional share capital and allotment to seven investment companies. The company cannot hold its own shares and, therefore, what was transferred was not any existing movable properties and there was no inadequate consideration involved in the transfer. In other words, it was an allotment of increased shares by virtue of increasing the authorised or paid-up share capital by Rs. 10 lakhs in the form of equity shares.
6. The learned counsel also took strong exception to the reliance placed by the Revenue authorities on the decision of the Supreme Court in the case of Mcdowell & Co. v. CTO (1985) 154 ITR 148 (SC). The Department has not proved how the assessee-company has sought to evade taxes at the time when the allotment of shares was made. But the AO and the CIT(A) have left this point vague.
7. Thus, the learned counsel has argued that there is no element of gift in the allotment of right shares. Nor is there, according to him, any element of gift in the allotment of bonus shares as rightly held by the learned CIT(A).
8. On the other hand, Shri K. Ramesh, the learned Departmental Representative, vigorously supported the order of the AO and of the CIT(A) in so far as the issue pertains to allotment of right shares. He laid special emphasis on the following portions of the assessment order.
"In the corporate history, I am sure, it is unheard of that thousands of shares are allotted by way of rights issue in respect of one single share. Normally the number of shares allotted by way of rights issue is much less than the shares held by the shareholder. As against this in the instant case, shares ranging from 13,000 to 14,500 were allotted against a single share each held by the seven companies. Further, the right issue is followed by bonus issue 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 GT 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 :
Rs.
The value (of a share of face value at Rs. 10) according to yield basis vide Annexure A 235 less : Consideration received per share gift per share 10 Gift per share 225 Gift liable to tax (in respect of one lakh shares) 2,25,00.000 II. Bonus issue The second issue to be decided is whether there is any element of gift in the company's issuing bonus shares in the ratio of 1:23 in April/May 1986.
The contentions of the assessee in respect of bonus issue are more or less the same as in the case of rights issue. A share whether rights or bonus share does not confer any rights to the shareholder over the assets of the company. There is no transfer when an allotment of share takes place. Without prejudice to these contentions, it was argued that the company is not authorised to deal in its own share. The company cannot charge more or less.
Having considered the assessee's argument I am unable to agree with him. Keeping in view the sequence of events the intentions of the assessee to maintain the hold over the company in the guise of a corporate veil, I hold that the issue of bonus shares in the ratio of 1:23, which is unheard of in the corporate history, is liable to gift-tax. Accordingly, the amount of gift which is worked out below is brought to tax.
Rs.
Value of each share on yield basis vide Annexure 'B' 12.24 Less : Consideration paid Nil Gift per share 12.24 Gift liable to tax in respect of 23,00,161 (1,00,007 X 23) shares is Rs. 2,81,53,970."
He also relies upon the following remarks made by the learned CIT(A) :
"5. I have gone through the submissions made by the appellant and also perused the facts. It is very clear from the entire transactions that the primary objective was to reduce the wealth-tax liability for the individual members of the Khoday family. If the seven investment companies were not there, then the entire right issue and the bonus issues would have accrued to the family members on which they would have had to pay wealth-tax. There were only 27 shareholders in the appellant company. All the directors of the appellant company are also the directors in the seven investment companies and other two investment companies viz., 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 in 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 right 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 McDowell & Co. Ltd. v. CTO (1985) 154 ITR 149 (SC)....
The facts of this case clearly prove that the allotment of shares to the seven investment companies has been made with a true intention of tax evasion by the family members and therefore, I hold that the company would be liable for gift-tax for the transfer of the shares."
9. The learned Departmental Representative points out that the assessee itself has consented for the levy of gift-tax on the basis of valuation of shares on yield basis as per the decision in CGT v. Smt. Kusumben D. Mahadevi (1980) 122 ITR 38 (SC). He also placed reliance on the following case laws with regard to the various contentions raised in support of the Revenue :
(i) CIT v. Sahu Jain Ltd. (1976) 103 ITR 135 (SC);
(ii) CIT v. MA Alagappan (1977) 108 JTR 1000 (Mad);
(iii) CIT v. TISCO (1994) 206 ITR 196 (Bom);
(iv) D.M. Naterwalla v. CIT (1980) 122 ITR 880 (Bom);
(v) McDowell & Co. v. CTO (1985) 154 JTR 148 (SC);
(vi) Tata Engineering & Locomotive Co. Ltd. v. State of Bihar (1964) 1 Com. LJ 280 : (1964) 34 Com. Cas. 458 (SC);
(vii) United Shates v. Milwaukee Refrigerator Transit Co. (1905) 143 Fed. 247;
(viii) CIT v. Sri Meenakshi Mills (1967) 63 ITR 609 (SC): (1967) 1 ITJ 316 (SO; and
(ix) Juggilal Kamlapat v. CIT (1969) 2 Comp L.J. 188 : AIR 169 SC 932.
10. We have carefully considered the rival submissions and the evidence on record in the light of the various case laws cited by both the parties. The learned Departmental Representative's argument that the assessee itself consented for the levy of gift-tax on the basis of valuation of shares on yield basis is not true as the entire levy was subject-matter of dispute before the CIT(A). Here the question to be examined in whether gift-tax is attracted in respect of the allotment of right shares and bonus shares made by the assessee-company to the seven investment companies mentioned above. The term 'Gift' is defined in Section 2(xii) of the GT Act, 1958, as under :
"Section 2(xii) : "gift" means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or moneys worth, and includes the transfer or conversion of any property referred to in Section 4, deemed to be a gift under that section :
Explanation : A transfer of any building or part thereof to in Clause (in), Clause (iiia) or Clause (iiib) of Section 27 of the IT Act by the person who is deemed under the said clause to be the owner thereof made voluntarily and without consideration 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 GT 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) which has been invoked by the AO 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 consideration for the transfer is determined or approved by the Central Government or the Reserve Bank of India;"
From the above, it is clear that the primary condition even for the deemed gift under Section 4(1)(a) is transfer of property otherwise than for adequate consideration. However, the transfer should be of an 'existing' movable or immovable property. Here', the word 'existing' assumes special significance. Before allotment of shares took place, the shares were not existing at all. In other words, the shares came into existence at the time when the company allotted the shares to the investment companies who had paid the consideration in money's worth being the face value of the shares to which they subscribed. Thus, there is payment of consideration in money and this resulted in increase in the authorised or paid up share capital of the assessee-company. In doing so, the assessee-company fulfilled contractual obligation of alloting the shares. This being purely a contractual transaction for adequate consideration and there being no existing property which was transferred at the time of allotment of shares, we are of the view that the definition of gift as contemplated in the GT Act, 1958 is not satisfied in the present case.
11. Since there was no existing movable property at the time when the assessee-company allotted the shares, the question whether there was inadequate consideration in the transfer does not arise at all. This question would have been relevant in the case of any existing shareholder or shareholders transferring his or their shares to another person or persons for a consideration less than the prevailing market value of the shares on the date of transfer. Moreover, the Companies Act is also clear that a company cannot hold its own shares except in specified cases such as when it holds shares for the benefit of its employee (vide Section 77 of the Companies Act). When a company-allots shares for consideration provided by the shareholders, it does not sell or otherwise part with shares. Allotment is nothing more than division of the entire share capital into divided shares, each of particular value simply or numerously to different persons. It is only on allotment that the shares come into existence.
12. The above observations hold good in respect of issue of right shares to the seven investment companies in the present 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 of holding the original shares including the right shares allotted to the investment companies. We do not find any merit in the Revenue's appeal against this decision of the learned CIT(A).
13. The Revenue's allegation that the entire exercise of issuing right shares followed by issue of bonus shares is a colourable device is not substantiated by any evidence On the one hand, the AO alleges that the assessee has tried to evade taxes as the directors would have otherwise come under the deeming provisions of Section 2(22) of the IT Act, 1961. On the other hand, the learned CIT(A) has opined that the family members have tried to avoid wealth-tax. These allegations are not substantiated by any tangible or concrete evidence and, therefore, the reliance placed on McDowell's case (supra) is misconstrued. As regards the various case laws relied on by the learned Departmental Representative mentioned in para 9 supra, we have to observe that the ratio of those decisions is not applicable to the facts of the case before us. The first case quoted by the learned Departmental Representative is in respect of the status of a company and the other case laws pertain to capital gains or perquisites assessable in the hands of the directors or the company or other issues but not definitely on the leviability of gift-tax under the GT Act, 1958. In the present case before us, there is no assessability to capital gains. The question involved is whether the provisions of the GT Act are attracted to the facts of the present case. Moreover, even if McDowell's case is invoked, it will apply only in a case where tax evasion in praesenti in real terms is established if the stratagem adopted by the assessee is given full play. In other words, the revenue authorities will not be justified in relying on McDowell's case (supra) for taking an adverse inference against the assessee on vague allegations of tax evasion or on sheer surmise or suspicion or on hypothetical premises without any tangible evidence against the assessee. As stated earlier, in the present case, the allegation relating to tax evasion either under the IT Act or under the WT Act is far-fetched and vague and, therefore, the ratio in McDowell's case (supra) cannot be applied here. It is also worthwhile mentioning in this connection that GT proceedings were contemplated in the case of the other shareholders who renounced their rights in 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 CIT(A)'s order wherein she has mentioned that a remand report was called for and received from the AO 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 p. 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 AO and of the CIT(A) with regard to the levy of gift-tax on right shares. We also uphold the finding of the CIT(A) to the effect that no gift-tax is chargeable on the bonus shares. In the result, we direct the AO to delete the levy of gift-tax on the assessee-company for the asst. yr. 1997-98.
15. Accordingly, the appeal of the assessee is allowed and the appeal by the Revenue is dismissed.