Family arrangement transfers and book profit computation: shares were not treated as a gift, and reassessment on omitted section 115JB issues was upheld.

A binding family arrangement made to equalise and consolidate family holdings is not a gift unless it is a voluntary transfer without consideration in the legal sense; on that basis, shares transferred under such an arrangement were not treated as gifted property, and the recipient could not claim the previous owner's holding period or cost basis on a gift footing. The text also notes that reassessment was valid where the original assessment had not examined whether the surplus on sale of the shares, credited to capital reserve, affected book profit under section 115JB, so the reopening was not a mere change of opinion. The book profit adjustment was sustained because routing the surplus to capital reserve did not exclude it from profit computation.

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Issues: (i) Whether shares transferred to the assessee under a binding family arrangement were received as a gift without consideration; (ii) whether reassessment was valid under the Income-tax Act on the ground of escapement of income; (iii) whether the surplus on sale of the shares could be added while computing book profit under section 115JB.

Issue (i): Whether shares transferred to the assessee under a binding family arrangement were received as a gift without consideration.

Analysis: A gift under section 122 of the Transfer of Property Act, 1882 must be a voluntary transfer made without consideration. The family arrangement was entered into to equalize and consolidate family holdings and to avoid disputes. Such an arrangement was binding and carried monetary connotation, since it adjusted wealth and ownership among family members. The transfer therefore could not be treated as voluntary and without consideration in the legal sense required for a gift.

Conclusion: The shares were not received as a gift and the assessee was not entitled to the benefit of the previous owner's holding period or cost basis on that footing.

Issue (ii): Whether reassessment was valid under the Income-tax Act on the ground of escapement of income.

Analysis: The original assessment had not examined whether the surplus on sale of the shares, credited directly to capital reserve, ought to have formed part of book profit. There was no question earlier considered on this aspect, so the reopening was not a mere change of opinion. Since the omission affected computation under section 115JB, the Assessing Officer had reason to believe that income had escaped assessment.

Conclusion: The reassessment was valid and the objection to reopening failed.

Issue (iii): Whether the surplus on sale of the shares could be added while computing book profit under section 115JB.

Analysis: Once the shares were held not to be gifts, the assessee's basis for excluding the sale surplus from the profit and loss account disappeared. The credit was not one that could be kept outside the profit computation merely by routing it to capital reserve. The adjustment made by the Assessing Officer for book profit purposes was therefore justified.

Conclusion: The addition to book profit under section 115JB was sustained.

Final Conclusion: The Revenue succeeded on all substantial issues, the assessee's challenges failed, and the assessment as framed by the Assessing Officer was restored.

Ratio Decidendi: A transfer made under a binding family arrangement to equalize family wealth is not a gift unless it is both voluntary and without consideration in the legal sense, and reassessment is valid where a material item affecting book profit was not examined in the original assessment.

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