Income Tax Appellate Tribunal - Mumbai
Su-Raj Diamond Industries Ltd , Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL "I" Bench, Mumbai Before Shri N.V.Vasudevan (JM) and Shri Rajendra Singh(AM) GTA No.02/M/2009 Assessment Year 1991-92 The ACIT Cent.Cir.10, Mumbai M/s. Su-Raj Diamond Industries Ltd. 8th Floor, Old CGO Bldg Annexe 73-C, Su-Raj House, MIDC, Marol M.K.Road, Mumbai 400 020. Andheri (E), Mumbai 400 093. PAN : AAECS7499L Appellant Respondent Revenue by : Shri S.S.Rana Assessee by : Shri D.J.Thakkar & R.P.Shah ORDER
PER RAJENDRA SINGH (AM) This appeal by the revenue is directed against the order dated 17.3.2009 of CIT(A) for the assessment year 1991-92. The only dispute raised by the revenue in this appeal is regarding alleged deemed gift on account of transfer of shares to a group concern.
2. Briefly stated the facts of the case are that the AO during assessment proceedings noted that the assessee had transferred shares of M/s. Suraj Diamond India Ltd. held by it to the group concerns, viz M/s.King Jetwel Pvt. Ltd and M/s. Bombay Diamond Co. Pvt.Ltd. The assessee had sold 1,76,667 shares of M/s.Suraj Diamond India Ltd. to M/s. King Jetwel Pvt. Ltd. and 15,23,193 shares to M/s. Bombay Diamonds Co. Pvt. Ltd. @ Rs.30/- per share for sums amounting to Rs.53,00,010/- and Rs.4,56,95,790/- respectively. The shares of M/s.Suraj Diamona India Ltd. were quoted on stock exchanges and on the date of sale i.e on 25.3.91 the shares were quoted at Rs.36.25 on the stock exchange. The AO therefore treated the difference with respect to the quoted price as deemed gift and after allowing standard deduction computed the taxable gift at Rs.1,06,04,125/- in the original assessment. In appeal CIT(A) after allowing normal variation of 3% and making allowance for brokerage payable computed the market price at Rs.34.52. The sale price was computed by him at Rs.32.50 as the share sold were cum-dividend and carried dividend @ 25%. Difference between the market price and sale price was thus computed at Rs.2.02 per share and on this basis deemed gift was computed at Rs.34,33,717/-. In further appeal, the tribunal set aside the order of CIT(A) and restored the matter to the file of AO for making the assessment denovo after allowing opportunity of hearing to the assessee. The relevant portion of the order is reproduced below as a ready reference.
"We have carefully considered the rival submissions. In this case both the Assessing Officer and the learned CIT(A) have proceeded on the footing of close connection between assessee and the buyers. The buyers have been described as the group concerns. The learned Authorised Representative has however, argued before us that the relationship between the parties was not very significant. In our view this aspect requires to be examined on facts. Secondly, the learned Assessing Officer has taken the price of the shares at Rs.36.25 but it is not specified as to what was the total number of shares bought and sold at what price. The Assessing Officer should have gone into the facts relating to trading of these shares in the Stock Exchange for a number of days preceding the date of sale so as to have an idea of average volume of business in the Stock Exchange. Thirdly, the assessee has argued that it was in urgent need of funds. It is therefore, necessary to find out how soon the payments were received by the assessee and for what purpose the same were employed. Since these material aspects have not been examined by the authorities below we are of the view that the assessment is required to be done afresh after taking into consideration all relevant facts. We therefore, set aside the assessment as made by the learned Assessing Officer to be made denovo after collection of full facts and after allowing the assessee reasonable opportunity of being hearing in the matter."
3. The tribunal had thus set aside the matter to AO to reexamine the relationship issue between different concerns, the volume of trading in the shares on number of days preceding the date of sales and the plea of urgency of funds to repay the group concern. During the fresh assessment proceedings the assessee pleaded that since the stock exchanges were not computerized the quantitative details were not available. The assessee however gave the closing dates in respect of shares on the stock exchange as under :
Date Closing price 04-Mar 43 05-Mar 44 07-Mar 42.5 08-Mar 41.25 11-Mar 42 12-Mar 41 13-Mar 41 15-Mar 42 18-Mar 41 20-Mar 41 21-Mar 39 22-Mar 39 25-Mar 36.25 26-Mar 36 27-Mar 37 01-Apr 38
4. After examination of details, the AO noted that there were vide variations between the prevailing rates and the rate adopted by the assessee. The AO also examined the share holding position of the group concerns as well as the position of Directors and observed that the controlling stake in the three group concerns were held by Shri Jatin R. Mehta and the family members. All the three concerns were thus related concerns. The AO also observed that though the assessee had raised the plea of urgency of funds but had not received any money from the sale of shares. The assessee argued that it owed money to the above two companies but the AO observed that this was a totally new argument taken which was not there before the tribunal. The AO also examined the various bank accounts of the assessee and noted that during the year there were substantial receipts in the bank accounts and the assessee had therefore sufficient funds to make payments. The details of receipts in the various bank accounts were given as under :
Name of the Bank Amount (Rs.) Bank of India, Opera House Branch 1560349 Vijaya Bank Overseas Bank 60088611 Canara Bank, J.S.Marg Branch 19750000 State Bank of Hyderabad, B.S.Marg 25043207 State Bank of Mysore 301100 Punjab National Bank 91732808 Bank of Credited Commerce International 2051013 Punjab National Bank (A/c. No.6979) 4310000
5. Considering the fact that the concerns were related and that there was no urgency in payment and the vide variation between the sale price and the value at which the shares were sold the AO concluded that the transactions were not at arms length and the same attracted the provisions of Gift Tax Act. Accordingly he determined the deemed gift at Rs.34,13,717/- as done in the order of CIT(A) dated 30.5.96.
6. The assessee disputed the decision of the AO and submitted before CIT(A) that the AO had noted only the receipts in the bank accounts of the assessee during the last three months of the year and had ignored the payments on various accounts. The assessee had to make payments for import of diamonds, labour charges etc. and the closing balances in the bank accounts as on 31.3.91 were only Rs.15,22,048/-. The assessee thus did not have sufficient funds to make payments to the creditors. It had therefore decided to liquidate the share holdings in Suraj Diamonds India Ltd. It was argued that the sale price was lower because the shares had been sold in bulk and the same were cum dividend. It was also submitted that the brokers had quoted Rs.10 lower than the market price for bulk sales. The price had been decided based on commercial considerations and therefore there could not be any deemed gift on this account. The assessee further submitted that the assessee was one of the promoters of Suraj Diamonds India Ltd. and on this strength the bankers had advanced working capital facilities to the said company. The assessee had therefore to maintain certain level of liquidity and had thus sold the shares to liquidate the money due to the group concerns. The shares in such large volume could not have been sold in the open market without risking the confidence of the investors when the shares were already quoted substantially below the issue price. The difference of Rs.2 between the sale price and market price computed by the AO was insignificant. The assessee referred to the judgment of Hon'ble High Court of Madras in case of D.Surendranath Reddy (102 Taxman 489) and the judgment in case of Indo Traders and Agencies (Madras) Pvt. Ltd. (131 ITR 313) in which it was held that if the consideration which passed between the parties could be considered as reasonable or fair it could not be said to be inadequate. The court also observed that the inadequate consideration was not necessarily what was ultimately determined by some one else as market value and unless the price was such as to shock the conscience of the Court, it would not be possible to hold that the transaction was otherwise than for adequate consideration. The assessee also referred to the decision of Bangalore Bench of tribunal in case of Khoday Distilleries Ltd. (81 ITD 438) and the Pune Bench decision in case of Jayant Forms Agency (78 ITD 27). CIT(A) considering the facts that the shares sold were in bulk and the small difference of Rs.2 in the market price and the sale price and the various judgment relied upon by the assessee agreed with the assessee that the difference could not be charged as deemed gift. Accordingly he deleted the addition made by AO aggrieved by which the revenue is in appeal before the Tribunal.
7. Before us the Learned DR appearing for the revenue assailed the order of CIT(A). It was argued that the transactions were between the group concerns and the shares had been sold on the lowest rate when there was no urgency established to pay the group concerns. There was also no commercial expediency in the share transactions. It was also argued that the assessee was a promoter of the company and had sold the stake and such sales are at higher than the market value. The AO had computed the difference of only Rs.2 after making allowance for various factors and to that extent therefore it was a deemed gift. It was also argued that various judgments relied upon were distinguishable. The Learned DR placed reliance on the judgments of Hon'ble High Court of Karnataka in case of BPL LTD Vs GTO (161 Taxman 64).
8. The Learned AR of the assessee on the other hand supported the order of CIT(A). He reiterated the submissions made before lower authorities that it was a case of bulk sales and therefore the sale rate would be lower than the market value. It was also submitted that the assessee had no funds after meeting its business requirements as was clear from the balances in the bank accounts. The assessee had therefore to liquidate its share holding in bulk to pay the group concerns. This was a commercial transaction guided by business considerations and therefore there could not be deemed gift in such cases. The difference was also ultimately minor. It was also argued that none of the family members of the group were on the board of the said companies. The decision had been taken by the board of directors on business considerations and not by the family members and therefore relationship issue was of no consequences. He placed reliance on various judgments relied upon before CIT(A). Accordingly it was pleaded that the order of CIT(A) should be upheld.
9. We have perused the records and considered the rival contentions carefully. The dispute is regarding deemed gift on account of transfer of shares of M/s.Suraj Diamond India Ltd. (SDIL) by the assessee. The assessee was promoter of M/s. SDIL and it had transferred 176667 shares and 1523193 shares of SDIL respectively to M/s. King Jetwel Pvt. Ltd. and M/s. Bombay Diamond Co. Pvt. Ltd. which were sister concerns of the assessee. All the above concerns were controlled by Shri Jatin R.Mehta and the family members. The above shares were transferred by the assessee on 25.3.91 at Rs.30/- per share when the quoted price of M/s.SDIL on the stock exchange on that day was Rs.36.25. As the concerns were related and the shares were transferred at a price lower than the quoted price the AO held that shares were transferred to the group concerns for inadequate consideration and thus there was a deemed gift. The assessee explained that it had transferred the shares at lower price as there was urgent requirement of funds for making payments to the group concerns to whom the assessee owed money. The other reason was that shares were sold in bulk for which there were no buyers and therefore these had to be sold at low price. The AO rejected the explanation holding that there were no material to show that the group concerns were pressing for urgent payment. Considering the relationship between the concerns he concluded that the shares were transferred for inadequate consideration to give benefit to the group concerns. The AO computed the market value of shares on the date of transfer at Rs.34.52 after making allowance for normal variation of 3% in the share price and further allowance for brokerage. The effective sale price was taken at Rs.32.50 as shares were sold cum dividend of 25%. The difference per share with respect to the market price was thus computed at Rs.2.02 per share and the deemed gift on account of transfer of shares was computed at Rs.34,13,717/-. The decision of the AO has been confirmed by the CIT(A).
10. The Learned AR has argued before us that difference between the sale price and the market price as computed by the department is only Rs.2.02 per share and for such small variation there cannot be deemed gift. Reliance has been placed on the judgment of Hon'ble High Court of Madras in case of Indo Traders and Agencies (Madras) Pvt. Ltd. (131 ITR 313) in which the Court observed that inadequate consideration was not necessarily what was ultimately determined by some one else as market value and unless the price was such as to shock the conscience of Court, it would not be possible to hold that the transaction was otherwise than for adequate consideration. We have gone through the said judgment and find that the High Court has also held in that case that if the consideration which passed between the parties could be considered as reasonable and fair, it could not be said to be inadequate. We have therefore to see whether on the facts and circumstances of the case price at which the shares were transferred by the assessee to the group concerns could be said to be reasonable and fair. The share quotations on the stock exchange in respect of the said share have been reproduced in para 3 earlier from which it is clear that the share price fluctuated between Rs.44 to Rs.39 from 4.3.91 to 22.3.91. On the next trading day on 25.3.91 the price was suddenly down at Rs.36.25 but again started going up and rise to Rs.37 on 27.3.91 and on the next trading day on 1.4.91 the quoted price was Rs.38. It is thus clear that shares were transferred on the day when the price was at its bottom. There is no case made that there was urgency to pay the group concerns on that day. No material has been produced to show that the concerns were pressing for immediate payment. Moreover no cash payment had been made. The assessee had only transferred the shares and there is no evidence to show that these shares were converted by the said concerns in cash immediately. In fact the shares transferred by the assessee to the group concerns were part of the controlling stake held by the assessee in M/s. SDIL as the assessee company was promoter of the said company. The assessee obviously could not transfer these shares to third parties. The shares were thus transferred to the concerns which were under the same group so that the assessee or the promoter family could still exercise control over M/s. SDIL even after transfer of shares. Therefore the plea that the assessee was in urgent requirement of cash for making payment to the group concerns has to be rejected being devoid of any merit.
11. Further the shares transferred were substantial part of controlling stake of the assessee in M/s. SDIL. The stake holding shares in a company cannot be transferred stock exchange quoted price. Such shares are transferred over the quoted price. In this case, the shares were transferred much below the quoted price and that too on a day when the share price was at its bottom for which there is not justification as there is no case made out that the assessee had to make cash payments on the same day. It may also be noted that as admitted by the assessee, the share price of the company was already depressed as the shares were being quoted below the issue price and in such period of depression the assessee chose to transfer the shares on the day when the quoted price was at its bottom and that too much below the bottom of the quoted price. The plea that the price was low as the shares were transferred in bulk has no merit as these were not normal trading shares. These were part of stake holding shares which could not be transferred at normal trading rate. The sale price in such cases is much above the average quoted price over a particular period. In this case the average quoted price over a period from 4.3.91 to 1.4.91 for which details have been made available clearly appears to be over Rs.40/-. The market price therefore in such case of transfer has to be over Rs.40/-. The conduct of the assessee to transfer the shares being part of the stake holding at the time when the market was depressed and that too much below quoted price on the day when the price was at its bottom would definitely shock anybody who is familiar with the stock market and corporate governance. Therefore even the judgment of Hon'ble High Court of Madras in case of Indo Traders and Agencies (Madras) Pvt. Ltd. (supra) will not be any help to the assessee. The decisions of the tribunal relied upon by the assessee before CIT(A) are also distinguishable on facts. The price at which the shares have been transferred by the assessee to the group concerns on the facts and circumstances of the case cannot be as reasonable and fair and was definitely inadequate.
12. The expression "inadequate consideration" had come up for consideration by the Hon'ble jurisdictional High Court of Mumbai in case of CGT Vs Cawasji Jahangir Co. Pvt. Ltd. (106 ITR 390) to which reference has also been made by the Hon'ble High Court of Madras in case of CGT Vs Indo Traders and Agencies (Madras) Pvt. Ltd. (supra) on which reliance has been placed by the assessee. The High Court observed that the expression "inadequate consideration" has to be construed in a broad sense in relation to the facts and figures of each particular case and that it cannot be construed with precision. It was also observed that it may be that in a given case a few hundred rupees would lead to conclusion of inadequacy whereas in another case a few lacs of rupees may not lead to such conclusion. In the present case considering the facts and circumstances mentioned earlier, we have to hold that the consideration was not reasonable and fair and was definitely inadequate and would attract the provisions of Gift Tax Act. As pointed out earlier the market value of shares would definitely have been much higher than the value adopted by the AO. The deemed gift computed by the AO in our view is favourable to the assessee. The order of CIT(A) canceling the gift tax assessment is therefore set aside and the assessment of deemed gift by the AO is upheld.
13. In the result the appeal of the revenue stands allowed.
14. The order was pronounced in open court on 16.09.2010.
Sd/- Sd/-
( N.V. VASUDEVAN ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 16.09.2010
At :Mumbai
Copy to :
The Appellant
The Respondent
The CIT(A), Mumbai concerned
The CIT, Mumbai City concerned
The DR "I" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk
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