Deemed gift taxation applies where property is sold for inadequate consideration amid related-party tenancy arrangements and lack of bona fides

Sale of two flats was treated as a deemed gift under section 4 of the Gift-tax Act, 1958 because the consideration was found to be inadequate on the facts. The flats had been held as an investment, let out at low rent to connected concerns, and then transferred to the same circle of tenants for a price not commensurate with the investment value or surrounding circumstances. The Tribunal held that the arrangement was not a genuine transfer of only reversionary rights, but a transaction lacking bona fides and showing nominal rent and close family connection. The challenge failed and gift tax was attracted.

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Issues: Whether the sale of two flats, preceded by tenancy arrangements with associated concerns at a low rent and followed by sale at a price far below the apparent market value, attracted section 4 of the Gift-tax Act, 1958 as a deemed gift.

Analysis: The flats were held as an investment, let out to concerns connected with the assessee's management, and later transferred to the same circle of tenants for a consideration that was not commensurate with the investment value or the surrounding circumstances. The expression "adequate consideration" in section 4 had to be judged on the facts of the case. The Tribunal found that the transaction was not a genuine transfer of only reversionary rights, but an arrangement showing nominal rent, close family connection, and lack of bona fides. On the lease aspect, section 105 of the Transfer of Property Act, 1882 was referred to only to note that a lease requires a term and that the arrangement, in substance, created a tenancy, not a true lease protecting the assessee's contention.

Conclusion: The transaction fell within section 4 of the Gift-tax Act, 1958 and was liable to gift tax; the assessee's challenge failed.

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