2001 (2) TMI 265 - AT - Income Tax

Tribunal rules in favor of Khoday Distilleries Ltd. in Gift-tax dispute

The Tribunal ruled in favor of the assessee-company, M/s. Khoday Distilleries Ltd., in a Gift-tax dispute. It held that the allotment of right shares did ... Deemed Gift Issues Involved:1. Levy of Gift-tax on the allotment of right shares.2. Levy of Gift-tax on the allotment of bonus shares.Issue-wise Detailed Analysis:1. Levy of Gift-tax on the Allotment of Right Shares:The assessee-company, M/s. Khoday Distilleries Ltd., was involved in a controversy regarding the levy of Gift-tax on the allotment of right shares. The Assessing Officer initiated Gift-tax proceedings, asserting that the market value of the shares allotted to seven investment companies was disproportionate to the investment made. He calculated the gift value based on the difference between the market value of the shares (Rs.235 per share) and their face value (Rs.10 per share), resulting in a taxable gift of Rs.2,25,00,000.The CIT(A) upheld the levy of Gift-tax on the right shares, leading to the assessee's appeal. The assessee contended that the allotment did not involve any element of gift as per Section 2(xii) of the Gift-tax Act, arguing that there was no transfer of existing property and that the transaction was contractual with adequate consideration.The Tribunal examined whether the allotment of right shares constituted a gift. It concluded that the shares did not exist before the allotment, and thus, there was no transfer of existing property. The payment made by the investment companies for the shares was considered adequate consideration. Therefore, the Tribunal held that the definition of a gift under the Gift-tax Act was not satisfied, and the levy of Gift-tax on the right shares was not justified. The Tribunal reversed the orders of the Assessing Officer and the CIT(A) regarding the levy of Gift-tax on the right shares.2. Levy of Gift-tax on the Allotment of Bonus Shares:The Assessing Officer also levied Gift-tax on the bonus shares issued in the ratio of 1:23, arguing that the issue of bonus shares was a colorable transaction intended to evade taxes. He calculated the gift value based on the yield value of the shares, resulting in a taxable gift of Rs.2,81,53,970.The CIT(A), however, deleted the levy of Gift-tax on the bonus shares, leading to the Revenue's appeal. The Tribunal upheld the CIT(A)'s decision, stating that the issue of bonus shares did not involve any transfer of property or inadequate consideration. Bonus shares are issued from the company's accumulated profits and do not enhance the intrinsic value of the shareholders' interest.The Tribunal also noted that the allegations of tax evasion were not substantiated by concrete evidence. The reliance on the Supreme Court's decision in McDowell & Co. Ltd. v. CTO was deemed misconstrued, as there was no tangible evidence of tax evasion. The Tribunal upheld the CIT(A)'s finding that no Gift-tax was chargeable on the bonus shares.Conclusion:The Tribunal directed the deletion of the levy of Gift-tax on the right shares and upheld the CIT(A)'s decision that no Gift-tax was chargeable on the bonus shares. Consequently, the assessee's appeal was allowed, and the Revenue's appeal was dismissed.