Kerala High Court
Commissioner Of Gift-Tax vs Padinjarekkara Agencies P. Ltd. on 2 December, 1997
Equivalent citations: [1999]235ITR551(KER)
Author: G. Sivarajan
Bench: G. Sivarajan
JUDGMENT K.K. Usha, J.
1. The references are at the instance of the Revenue. They arise out of a common order passed by the Income-tax Appellate Tribunal, Cochin Bench, in G. T. A. Nos. 8, 44 and 9/Coch. of 1986 relating to the assessment years 1973-74, 1975-76 and 1980-81, respectively. Following are the common questions referred for the opinion of this court under Section 26(3) of the Gift-tax Act :
."1. Whether, on the facts and in the circumstances of the case and in view of the positive findings by the Gift-tax Officer that 'assessee has been selling the products at a lower rate than the market rate', 'the sales 'represent transfer for inadequate consideration coming within the provisions of Section 4(1)(a) of the Gift-tax Act', the Tribunal is justified in law and fact in interfering with the assessment ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in relying on the decision of the High Court rendered under the Income-tax Act in the case of the assessee in connection with an assessment of the assessee completed under the Gift-tax Act, invoking Section 4(1)(a) ?"
2. The relevant facts are as follows : The assessee, a closely held company, is engaged in purchasing latex and selling the same after centrifuging it. In the process of centrifuging, the assessee gets a by-product known as "skim crepe". Till the assessment year 1971-72, the assessee-company was selling skim crepe directly to customers. From the year 1971-72, it entered into an agreement with a firm, Padinjarekkara Corporation, owned by the wives and daughters-in-law of the directors of the assessee-company, for sale of the entire production of skim crepe to the firm. The firm in its turn sold the material to different consumers. While finalising the assessment under the Income-tax Act for the assessment years 1970-71 and 1971-72 the assessing authority took the view that the firm, Padinjarekkara Corporation, was a sham unit and, therefore, the profits earned by the firm on the sale of skim crepe really belonged to the assessee-company. The above view was affirmed by the Tribunal for the assessment years 1970-71 and 1971-72. But in respect of the assessment years 1972-73 onwards, the Tribunal accepted the assessee's case and held that the Income-tax Officer had not established that the sales by the assessee to the firm were sham and, therefore, it cannot be held that the profits earned by the firm constituted the income of the assessee-company. References at the instance of the assessee for the years 1970-71 and 1971-72 and at the instance of the Revenue for the years 1972-73 onwards were heard together by a Bench of this court and disposed of under a common judgment reported as Padinjarekara Agencies (P.) Ltd.
v. CIT [1988] 173 ITR 637. This court took the view that "the sale by the company to the firm was not a sham and the profits attributable to the sales made by the firm could not be assessed in the hands of the asses-see-company". This court observed that for the years 1970-71 and 1971-72, the Tribunal was not justified in finding that the facts of the case of the assessee would fall within the ratio laid down by the Supreme Court in Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28.
3. While finalising the assessment proceedings under the Gift-tax Act, 1958, the Gift-tax Officer came to the conclusion that the sales made by the assessee to Padinjarekkara Corporation represented transfer for inadequate consideration coming within the provisions of Section 4(1)(a) of the Gift-tax Act. The difference between the purchase price paid by Padinjarekkara Corporation to the assessee-company and the price which it obtained on selling the skim crepe was treated as deemed gift. Aggrieved by such assessment orders dated March 25, 1985, November 22, 1982, and March 28, 1985, for the assessment years 1973-74, 1975-76 and 1980-81, the assessee filed appeals before the Commissioner of Income-tax (Appeals), Trivandrum, and the Commissioner of Gift-tax (Appeals), Ernakulam. These appeals were allowed under two orders dated October 24, 1985, for the assessment years 1973-74 and 1980-81 and November 12, 1985, for the assessment year 1975-76. The Revenue then took up the matter in second appeal before the Tribunal. As mentioned earlier, the three appeals were disposed of by the Tribunal under a common order dated December 14, 1989. Referring to the decision of this court in Padinjarehara Agencies (P.) Ltd. v. CIT [1988] 173 ITR 637 and following the same, the Tribunal held that the transactions between the assessee-company and the firm are genuine and valid and there was no gift involved, which was assessable to tax in this case.
4. It is contended by learned standing counsel for the Revenue that the Tribunal has committed a grave error in coming to the conclusion that sales made by the assessee-company in favour of the firm would not come within Section 4(1)(a) of the Gift-tax Act. According to learned counsel, the Tribunal should have found that the sales in favour of the firm were for inadequate consideration and that the decision of this court in Padinjarekara Agencies (P.) Ltd. v. CIT [1988] 173 ITR 637 has no relevance in deciding the issue before the Tribunal. Since admittedly the price at which skim crepe was sold by the firm was at a higher rate than the price it paid to the company, it has to be taken that the sale by the company to the firm was for inadequate consideration.
Section 4(1)(a) of the Gift-tax Act, 1958, as it stood during the relevant period, reads as follows :
"4. Gifts to include certain transfers.-(1) For the purposes of this Act,-'
(a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor."
5. The question, therefore, to be considered is whether the sale made by the assessee to the firm was for adequate consideration or not. The assessing authority arrived at the conclusion that there was no adequate consideration only for the reason that the sale price was lesser than the price obtained by the firm on its sale to different consumers. It was also pointed out by the assessing authority that the sales by the firm to different consumers took place on the same day or the next day of purchase of a particular lot by the firm from the assessee. The first appellate authority disagreed with the above finding. There is an elaborate discussion on this aspect in the order passed by the first appellate authority as follows :
"In the present case, the Tribunal has very clearly held that the firm was a genuine body and what took place between the firm and the appellant represented a commercial transaction at arm's length. In other words, the relationship between the partners of the firm on the one hand and the directors of the appellant did not in the view of the Tribunal sway the consideration of and the determination of the selling price of the product to the firm. I gather from the representative that the product sold does not enjoy a ready market and it has to be necessarily sold to only a restricted group of persons who will have an interest in the commodity. The market value of such a product is not easy for determination. In the present case, the firm after getting hold of the commodity from the appellant has unloaded it on the market either on the same day it had taken delivery from the appellant or very soon thereafter. The Income-tax Officer's view that the transaction of the second sale to a consumer following closely on the heels of the firm purchasing it from the appellant, should invest that price as the market price of the commodity. In my view that would be a very impracticable and unrealistic view to be taken of a situation where it has been agreed at all hands that the transaction between parties has been at arm's length. For, any purchase of a commodity by a trader or a retailer from a manufacturer or a wholesaler has built into it a concept of profits. We have a chain of manufacturing and retailing organisations before a manufactured product reaches finally a consumer. In between manufacturer and the consumer, there are persons like an agent, a distributor, a wholesaler and retailer who obtain commodities in normal course with an idea of dealing in them and making a profit. If the Gift-tax Officer's view in this regard were to be accepted, then the profits made by each of these units would have to be treated as a gift by the manufacturer to each one of them. That would be a very unreal and an absurd situation, for it will totally ignore the basic concepts of trade. Each one of these functionaries has a separate role to play. In the present case, the determination of the gift as the difference between the sale price and the purchase price in the hands of the firm also ignores the costs of operation and the costs of sale which the firm has incurred. The computation totally ignores the selling expenses, the distribution expenses and the expenses of the godown charges and other commitments which the firm had incurred in dealing with this commodity. Since the transaction which has been subjected to a gift-tax by the Department essentially is a trade transaction and its genuineness has not been in question, in my opinion there can be no deemed gift in this case."
6. The above finding has been affirmed by the Tribunal.
7. While examining the meaning of the term "inadequate consideration" under Section 4(l)(a") of the Gift-tax Act in CGT v. Indo Traders and Agencies (Madras) P. Ltd. [1981] 131 ITR 313, a decision of the Madras High Court, it is observed that: "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." It is further observed that "adequate consideration" is not necessarily what is ultimately determined by some one else as the market value. The investigation that has to be made in the case of such a transaction is to see whether there was any attempt at evasion of tax or whether it was a bona fide transaction. In CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390, a Bench of the Bombay High Court considered the scope of the term "adequate consideration" in Section 4(a) of the Gift-tax Act and observed as follows (page 398) :
"The expression 'adequate consideration' has to be construed in a broad sense, and merely because there may be some difference between the consideration for a transfer, and the true value of the property transferred, the same would not attract the applicability of Section 4(a) of the Act. In order that the court may 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 appreciable in the context of the facts and figures of the particular case. It may be that in a given case a few hundred rupees would lead to the conclusion of inadequacy of consideration, whereas in Another case, a few lakhs of rupees may not lead to such conclusion. The expression 'adequate consideration' cannot be construed with precision but, as already stated above, it must be construed in relation to the facts and figures of each particular case."
8. The nature of the transaction between the assessee-company and the firm had been considered in detail by this court in Padinjarekara Agencies (P.) Ltd. v. CIT [1988] 173 ITR 637. It was found that the firm was constituted in the year 1959, it owned immovable properties and it was carrying on business. From the year 1964-65 it began to buy goods from the assessee-company. The firm had its own capital and its profits were assessed in its hands and it was granted registration by the Department. While making the assessment for the year 1971-72 in respect of the firm, the Income-tax Officer had allowed salary and allowances to the personnel of the firm as also provident fund contributions of its employees. There was also a finding that there was no regular market price for skim crepe. Even though the question considered in the above decision was whether the firm was genuine and not sham, the observations made by this court regarding the nature of the transaction between the company and the firm are relevant for deciding the question whether the sale by the company to the firm was for adequate consideration. The reasons given by the first appellate authority in its detailed order are justified in the facts and circumstances of this case. Apart from stating that the firm had sold the skim crepe at a higher rate than the purchase price paid to the company, the Revenue had not adduced any material to show that the transfer by the assessee in favour of the firm was for inadequate consideration.
9. Learned standing counsel for the Revenue placed substantial reliance on a decision of this court in CGT v. Elixir Plantations P. Ltd. [1995] 214 ITR 243, to support the case of the Revenue that the transfer made by the company in favour of the firm would attract Section 4(1)(a) of the Gift-tax Act. On examining the decision closely we found that the issue raised therein was whether reopening of an assessment under Section 16(1)(a) of the Gift-tax Act was justified in the facts and circumstances of that case. The assessee raised a contention that after entering a finding in the draft income-tax assessment order that the transaction between the assessee and K and K trust was sham when the very same officer issues notice under Section 16(l)(a) in his capacity as Gift-tax Officer it has to be taken that there existed no reason to believe that a gift had escaped assessment. Only if the transaction is valid and legal a question of gift would arise. There was no finding regarding the correctness or otherwise of the view taken by the assessing authority that the transfer was without adequate consideration. Even if we go to the facts of that case, it can be found that it is not comparable with the present case. There the assessee-company purchased a coffee estate in the year 1958, sold rosewood trees standing in the estate to K and K trust where the descendants and wives of the shareholders of the company were beneficiaries. The trust was doing business in timber. The trees purchased from the assessee-company were being sold to another firm, Mysore Farms and Enterprises, a sister concern of the assessee and of the trust.
10. It is seen that during the previous year relevant to the assessment year 1973-74, the assessee had sold 50 rosewood trees to K and K Trust for a price of Rs. 1,08,000. The very same trees were sold by K and K Trust to Mysore Farms and Enterprises for an amount of Rs. 2,65,000. During the accounting year relevant for the assessment year 1974-75, 56 trees were sold by the assessee to the trust for Rs. 1,12,000 which in turn were sold to the firm for Rs. 5,25,000. In the accounting year ending on March 31, 1975, 65 trees were sold by the assessee to the trust for Rs. 1,30,000 which in turn were sold to the firm for an amount of Rs. 5,30,000. The above would show that the difference in purchase price paid by the trust and the price obtained by it on sale to the firm was very huge. The increase was to the extent of 145 per cent., 368 per cent, and 307 per cent, for the abovementioned three years. It was under these circumstances, the assessing authority in that case came to the conclusion that there was an element of gift in the sale by the assessee to the trust. Coming to the facts of the present case, we find that the difference in the price is not so substantial. In the year 1973-74, skim crepe was purchased by the firm from the assessee for an amount of Rs. 20,36,082 and when the same quantity was sold to the different consumers the firm obtained Rs. 22,13,820. In the assessment year 1974-75, the purchase amount would come to Rs. 13,22,097 and the sale amount Rs. 14,78,668. In 1980-81, the price obtained by the assessee from the firm would come to Rs.'20,16,923 where the sale consideration obtained by the firm would be Rs. 25,58,220. The above would show that the difference between the purchase price and the sale price would come to an increase to the extent of 8.72 per cent., 10 per cent, and 26.8 per cent., respectively, for the three years. It was under these circumstances, the first appellate authority as well as the Tribunal took the view that there was no case of inadequate consideration. We do not find that the enhancement in the selling price is so high which would shock the conscience of the court as in the case considered in CGT v. Elixir Plantations (P.) Ltd. [1995] 214 ITR 243 (Ker). No attempt was made by the Revenue to show that the price paid by the firm to the assessee was much lower than the general market price of the commodity concerned. We, therefore, hold that the Tribunal was justified in finding that the sale of skim crepe by the assessee to the firm would not be exigible to gift-tax.
11. In view of the above, questions Nos. 1 and 2 are answered in the affirmative, in favour of the assessee and against the Revenue.
12. Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench, for information and compliance.