Patna High Court
Umedray Worah vs Commissioner Of Income-Tax on 3 September, 1964
Equivalent citations: AIR1965PAT114, [1965]56ITR702(PATNA), AIR 1965 PATNA 114, 1964 (2) ITJ 667, ILR 45 PAT 168, (1965) 56 ITR 702, 1965 BLJR 186
Bench: V. Ramaswami, N.L. Untwalia
JUDGMENT Ramaswami, C.J.
1. During the accounting period the assessee had transferred his shares in ten private limited ompanies for a sum of Rupees 1,40,730/- to his wife, Shrimati Rajani, and his minor sons, Bharatendu and Himangshu, and also to the Hindu undivided family consisting of himself, his wife and his two sons. The private limited companies whose shares were the subject, matter of transfer were under the control of two or three families, the family of the assessee being one of them. The shares were not quoted in the Stock Exchange. The shares had been transferred for cash consideration which the transferee had raised in their turn from gifts received by them from the brother and father of the assessee. The legality of the gifts was not challenged by the Income-tax Department. The transfers in the case of ordinary shares were made at 150 per cent of the face value. In case of preference shares of Sendra Bansjora Colliery Company Limited the transfers were made at face value. The Income-tax Officer found that the cash consideration paid was inadequate because it was far less than the intrinsic or break-up value of the shares. It was also found that in some cases the dividend income of the shares for one year alone was almost 100 per cent of the face value of the shares. The details of the transactions will appear from the following statement:
Name of Co.
Face Value.
No. of shares Sale price.
Name of the person to whom transferred Break-up value of shares.
Dividend declared 1 2 3 4 5 6 7 East Ekra Colliery Co. Ltd.
100/-30 30
} 150/-
{ Bharatendu Himangshu Worah "
464/-
60/-
East Katras Colliery Co. Ltd. 100/-25 25
} 150/-
{ Bharatendu Himangshu "
"
1,474/-
120/-
East Bhalgora Colliery Co. Ltd.
10/-
210 210} 15/-
{ Bharatendu Himangshu "
"
128/-
15/-
East Bhuggatdih Colliery Co. Ltd.
100/-
12 12} 150/-
{ Himangshu Bharatendu "
"
563/-
90/-
East Ens. Colliery Co. Ltd.
100/-
3 3} 150/-
{ Himangshu Bharatendu "
"
980/-
858/-
New Damagoria Colliery Co. Ltd.
100/-
30 30} 150/-
{ Himangshu Bharatendu "
"
487/-
60/-
Sendra Bansjora Colliery Co Ltd.
(a) Ordy.
(b) Pref 100/-
250/-
74 13 13} 150/-
250/-
{ Rajani Himangshu Bharatendu "
"
"
1,181/-
250/-
165/-
Bengal Jharia Colliery Co. Ltd 100/-
20 20} 150/-
{ Himangshu Bharatendu "
"
512/-
70/-
East Sathgram Colliery Co. Ltd.
100/-
250 250} 150/-
{ Rajani Umedray (HUF) "
"
822/-
87.50 The Income-tax Officer took the view that though the transfer of shares was made at a price higher than the face value, the price paid was much lower than the real value of the shares. In reaching this conclusion the Income-tax Officer took into account the high break-up value of the shares and the high expected yield on the basis of the dividends declared. He was accordingly of the view that the transfer of the shares came within the mischief of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act. It was contended on behalf of the assessee that according to the Articles of the Association of the companies no shareholder could transfer his holding to a person who is not an existing share-holder unless it was first offered to the other shareholders and none of them was willing to purchase those shares. It was argued that since none of the other share-holders was willing to purchase the shares offered at the prices mentioned by the assessee, it must be taken that the prices paid for the shares were adequate. This contention was rejected by the Income-tax Officer who considered that the case came within the purview of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act. The assessee went up in appeal to the Appellate Assistant Commissioner who dismissed the appeal. When the matter came up in appeal before the Appellate Tribunal it was argued on behalf of the assessee that the transfer of the shares at 150 per cent of the face value should be taken to be a transfer for adequate consideration. It as also argued that the provisions of Section 16(3) of the Income Tax Act were unconstitutional as there was violation of the fundamental right of equality before the law in Article 14 of the Constitution. Both these arguments were rejected by the Income-tax Appellate Tribunal and the appeal of the assessee was dismissed.
2. Under Section 66(1) of the Income Tax Act the Income-tax Appellate Tribunal has referred the following questions of law for determination by the High Court:
"'(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the shares in the private limited companies were transferred by the assessee to his wife, minor children and to a Hindu undivided family consisting of himself, his wife and minor children, otherwise than for adequate consideration within the meaning of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act?
(2) Whether the provisions of Sections 16(3)(a) and 16(3 )(b) are ultra vires the Constitution?"
3. After having heard learned Counsel for both the parties I have reframed the questions as follows in order to bring out the real points in controversy between the parties:
"(1) Whether the provisions of Sections 16(3)(a) and 16(3)(h) of the Income Tax Act are ultra vires the Constitution?
"(2) Whether in the facts and circumstances of the case the Income-tax Appellate Tribunal was legally justified in holding that the shares in the private limited companies were transferred by the assessee to his wife and minor children otherwise than for adequate consideration within the meaning of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act?
(3) Whether in the facts and circumstances of the case the Income-tax Appellate Tribunal was justified in holding that the shares of the Last Sathgram Coal Company Limited were transferred to the Hindu Undivided family otherwise than for adequate consideration within the meaning of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act? "
4. The constitutional validity of Sections 16(3)(a)(i) and 16(3)(a)(ii) of the Income Tax Act has recently been examined by the Supreme Court in Balaji v. Income-tax Officer, Special Investigation Circle, Akola, 1961-43 ITR 393: (AIR 1962 SC 123). It has been held by the Supreme Court in that case that the provisions of Sections 16(3)(a)(i) and 16(3)(a)(ii) did not violate the fundamental right of equality before the law in Article 14 of the Constitution as it made a reasonable classification having regard to the object of preventing evasion of tax. It has also been held by the Supreme Court in that ease that the provisions of Sections 16(3)(a)(i) and 16(3)(a)(ii) did not impose an unreasonable restriction on the fundamental rights guaranteed under Article 19(1)(f) and Article 19(1)(g) of the Constitution. In view of the decision of the Supreme Court in this case it must be held that the provisions of Sections 16(3)(a) and 16(3)(b) of the Income Tax Act do not violate the provisions of Artiele 14 or Articles 19(1)(f) and 19(1)(g) of the Constitution. Accordingly the first question of law must be answered against the assessee and in favour of the Income Tax Department.
5. As regards the second question, the Government Advocate on behalf of the assessee contended that the Income-tax authorities were erroneous in taking into account the break-up value of the shares in examining whether the shares were transferred by the assessee to his wife and his minor children for adequate consideration. It was conceded on behalf of the assessee that the question of adequate consideration was a question of fact, but it was argued by the learned Government Advocate that the Income-tax Appellate Tribunal has misdirected itself in law in deciding this question when it took into account the break-up value of the shares. I am unable to accept the argument as correct. In case of shares of company for which there is no Stock Exchange quotation or regular market it is rarely possible to estimate the value of the shares from the price at which actual sales may have taken place. Even if the Articles of Association do not positively restrict the transfer of shares, sales are usually infrequent and do not take place under open market conditions. In such a case the commonest method of valuation is by comparison of past and prospective dividends with the yield on his money which a purchaser would expect, based on the yields obtainable from quoted shares of a similar class, with some allowance for the relative unmarketability of the unquoted shares.
This method was approved by the House of Lords in Commissioners of Inland Revenue v Crossman & Inland Revenue Commissioners v. Mann, 1937 AC 26. In that case the dividends represented a fairly full distribution of the profits. It may, however, happen that there is a wide discrepancy between the amount of the profits earned find the amounts distributed as dividends. In such a case, primary regard must usually be paid to the earnings of the company rather than the dividends in valuing the shares: Salvesen's Trustees v. Commissioners of Inland Revenue, (1930) 9 ATC 43. It may also happen that the value, it calculated on the basis of dividends or earnings, would be considerably less than the "break-up value", i.e. the net amount which the share-holder would receive in the event of liquidation (see M'Connel's Trustees v. Commissioners of Inland Revenue, 1927 SLT 14.) "Moreover, even when an early realisation of the assets would not necessarily be advantageous, the 'assets value' is a relevant factor in the valuation (1930) 9 ATC 43. And where there have been violent fluctuations in results and a disruption of general business conditions by war, so that it is not possible to estimate a future average maintainable profit by arithmetical calculation from past profits and losses, it may be impossible to value the shares other than by reference to the value of the assets as a going concern: A. G. of Ceylon v. Mackie, (1952) 2 All ER 775 a case under a Ceylon statute in similar terms to Section 7(5) of the Finance Act, 1894, where the date of valuation viz. 17th September, 1940, was abnormal. (Dymond's Death Duties, 13th Edition page 481). It is manifest, therefore, that the break-up value of the shares is a relevant consideration to be taken into account in estimating the value of the shares of a company for which there is no stock Exchange quotation or regular market. I would accordingly reject the argument of the learned Government Advocate on this aspect of the case
6. It was also contended on behalf of the assessee that the Tribunal has not taken into account the Articles of Associations of the companies which placed restrictions on the right of transfer of the shares. It was also submitted that the Tribunal has not taken into account the refusal of the members to purchase the shares at the price offered by the assessee. I do not think there is any substance in this argument. The Tribunal has taken into account the fact that the Articles of Associations of the companies restricted the transfer of the shares. The Tribunal also considered the circumstance that the assessee offered the shares for being purchased by other members who refused to purchase them at the price offered by the assessee. The argument was stressed on behalf of the assessee that the Tribunal has considered the dividend yield of the shares only for the accounting year and not for other years in calculating the value of the shares. It was submitted that the Tribunal should have taken into account the future prospects of the colliery companies. But there is nothing to show that the assessee produced the balance-sheets or the particulars of dividends for the years other than the accounting year, nor was any material produced before the Tribunal to indicate the future prospects of the colliery companies. It is, therefore, manifest that the finding of the Tribunal that consideration was not adequate within the meaning of Section 16(3)(a) of the Income Tax Act is not vitiated by any error of law.
7. When a case involves a question of tact, the jurisdiction of the High Court to interfere with the finding of the Tribunal is of a very limited character. If the Tribunal decides a question of fact without any material at all, or if the Tribunal decides a question of fact by applying a wrong principle, the High Court has jurisdiction to interfere. Also in a case where the finding of the Tribunal is perverse, or if the finding is such that it cannot reasonably be entertained upon the material produced, the High Court would have jurisdiction to interfere with the finding of the Tribunal. It was observed by the Supreme Court in a recent case, Sree Meenakshi Mills Ltd., Madurai v. Commissioner of Income tax, Madras (1957) 31 ITR 28: ((S) AIR 1957 SC 49), that the findings on questions of pure fact arrived at by the Tribunal would not be disturbed by the High Court on a reference unless it appeared that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they had come. In other words, the finding of the Tribunal can be reviewed only on the ground that there was no evidence to support it or that it was perverse. In a recent English case, Edwards (Inspector of Taxes) v. Baistow (1955) 28 ITR 579 also it was slated by Lord Simonds as a universally accepted proposition that the court would interfere with a pure finding of fact if it appeared that the commissioners had acted without any evidence or on a view of the facts which could not reasonably be entertained. Applying the principle to the present case, I am satisfied that the question at issue has not passed from the realm of fact into the realm of law and the High Court has no jurisdiction to interfere with the finding of the Tribunal on the question referred. The principle has been well stated by Lord Sterndale in Currie v. Commissioners of Inland Revenue (1921) 12 Tax Cas 245 at p 259:
"The first question that has been debated before us is this: Is the question whether a man is carrying on a profession or not, a matter of law or a matter of fact? I do not know that it is possible to give a positive answer to that question, because it must depend upon the circumstances with which the court is dealing. There may be circumstances in which nobody could arrive at any other finding than that what the man was doing was carrying on a profession; and, therefore, taking it from the point of view of a judge directing a jury, or any other tribunal which has to find the facts, the judge would be bound to direct them that on the facts they could only find that he was carrying on a profession. That reduces if to a question of law. On the other hand, there might be facts on which the direction would have to be given the other way But between those two extremes there is a very large tract of country in which the matter becomes a question of degree; and where it becomes a question of degree, it is then undoubtedly, in my opinion, a question of fact; and if the Commissioners come to a conclusion of fact without having applied any wrong principle, then their decision is final upon the matter."
8. With regard to the third question, I am of opinion that it should be answered in favour of the assessee. The question is whether the transfer by the assessee to a Hindu undivided family of the shares of East Sathgram Coal Company was a transfer of assets within the meaning of Section 16(3)(a) to the wife and minor children of the assesses. It is manifest that when property is transferred to a Hindu undivided family, income accrues to the joint family from the property so transferred. It could not be said to be income which accrues to any individual member of that family. In this connection it should be noticed that a Hindu undivided family is a person in the eye of law, within the meaning of the Income Tax Act. A Hindu undivided family is, therefore, an assessable unit under that Act. According to the doctrine of Hindu Law, the ownership of coparcenary property is in the whole body of coparceners and no individual member of that family, whilst it remains undivided, can predicate, of the joint and undivided property, that he, that particular member, has a definite share. The interest of the coparcener is a fluctuating interest capable of being enlarged by deaths in the family and liable to be diminished by births in the family. It is only on a partition that such coparcener becomes entitled to a definite share. As observed by the Privy Council in Katama Nalchier v. Moottoo Vijaya Raganadha, 9 Moo Ind App 539 at p. 615 (PC) there is community of interest and unity of possession between all the members of the family, and upon the death of any one of them the others may well take by survivorship that in which they had during the deceased's lifetime a common interest and a common possession. It is, therefore, manifest that when assets are transferred to a Hindu undivided family there is no transfer, direct or indirect, effected by the transferor in favour of his wife or minor child who may be members of the Hindu undivided family within the meaning of the language of Section 16(3)(a). I would accordingly answer the third question of law referred by the Income-tax Appellate Tribunal in favour of the assessee and against the Income-tax Department. This view is borne out by the decision of the Gujarat High Court in Keshav Lal v. Income-tax Commissioner, AIR 1902 Guj 6 at p. 9.
9. I do not propose to make any order as to costs of this reference.
Untwalia, J.
10. I agree.