Bona fide share purchase and gift tax: inadequate consideration must be independently proved; low yield alone is insufficient.

A bona fide purchase of redeemable non-cumulative preference shares at face value was not treated as a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958. The department failed to prove inadequacy of consideration on independent, reliable material; low yield, higher borrowing cost, and related group transactions were insufficient to fix a lower market value. The proviso to section 4(1)(a) was also held inapplicable because approval of the memorandum of association was not approval of the consideration for the specific transfer. The gift-tax assessments were therefore unsustainable.

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Issues: Whether the purchase of redeemable non-cumulative preference shares at face value, funded by borrowed money carrying a higher rate of interest, gave rise to a taxable gift under section 4(1)(a) of the Gift-tax Act, 1958, and whether the proviso to that clause was attracted.

Analysis: The transaction was examined as a purchase of shares from the company and not as a transfer supported by any material showing inadequacy of consideration. The department relied mainly on the low yield of the shares, the borrowing cost, and certain other transactions within the group, but no independent and reliable basis was shown for fixing market value at a lower figure. The record also showed that a company could not issue shares below face value in the manner suggested by the department, and the mere fact that the investment yielded only 4% did not by itself establish a taxable gift. The earlier income-tax finding that the borrowing and investment were bona fide and incidental to business further weakened the foundation for invoking gift-tax. The proviso to section 4(1)(a) was held not applicable on the facts, since approval of the memorandum of association did not amount to approval of the consideration for a specific transfer.

Conclusion: The transaction did not attract section 4(1)(a) of the Gift-tax Act, 1958, and no taxable gift arose; the finding was in favour of the assessee.

Final Conclusion: The gift-tax assessments were unsustainable and the revenue's appeals failed.

Ratio Decidendi: A bona fide purchase of shares cannot be treated as a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958 unless the department independently proves inadequacy of consideration on reliable material; low commercial return or use of borrowed funds by itself is insufficient.

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