Share allotment at face value can be a deemed gift when market value is much higher and the issue is not a rights allotment.

Allotment of fresh shares to new shareholders at face value, where the market value is substantially higher, may fall within the Gift Tax Act's deeming provision because the statute treats transfers for inadequate consideration as gifts and defines transfer of property broadly. The text distinguishes this from a rights issue or bonus issue, noting that the shares were issued to new shareholders and not created in the context addressed by Khoday Distilleries. On that basis, the earlier ratio was considered inapplicable to the stated facts, and the transaction was treated as a deemed gift under the statutory scheme.

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Issues: (i) Whether allotment of shares at face value to persons interested in the company, where the market value was much higher, constituted a transfer of property and a deemed gift under the Gift Tax Act. (ii) Whether the ratio in Khoday Distilleries applied so as to exclude the transaction from the ambit of the deeming provisions.

Issue (i): Whether allotment of shares at face value to persons interested in the company, where the market value was much higher, constituted a transfer of property and a deemed gift under the Gift Tax Act.

Analysis: The statutory scheme treats as gift not only voluntary transfers without consideration but also transfers for inadequate consideration, and defines transfer of property broadly to include transactions intended to diminish the value of one person's property and increase the value of another's. The transaction in question was not a rights issue or bonus issue but an allotment of fresh shares to new shareholders at face value, while the shares had a much higher market value. The consideration was adjusted against amounts standing to the credit of the purchasers, and the company consciously conferred a valuable asset at a lesser value.

Conclusion: The allotment amounted to a transfer for inadequate consideration and attracted the deeming provision of gift under the Gift Tax Act. The issue was answered in favour of the Revenue.

Issue (ii): Whether the ratio in Khoday Distilleries applied so as to exclude the transaction from the ambit of the deeming provisions.

Analysis: The earlier decision concerned a rights allotment and proceeded on the footing that allotment in that context was creation of shares out of unappropriated capital, not transfer from an existing shareholder. The present case was materially different because the shares were allotted to new shareholders at face value and not as rights or bonus shares under the Companies Act. The reasoning in Khoday Distilleries therefore did not govern the present factual setting.

Conclusion: Khoday Distilleries was held to be inapplicable, and the concurrent findings below were reversed. This issue was answered in favour of the Revenue.

Final Conclusion: The transaction was held taxable as a deemed gift, the assessee's challenge failed, and the appeal was allowed.

Ratio Decidendi: Allotment of shares to new shareholders at face value, where the shares have a substantially higher market value and the transaction is not a rights or bonus issue, can amount to a transfer for inadequate consideration and a deemed gift under the Gift Tax Act.

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