Deemed market value under capital gains law bars inconsistent gift-tax treatment for the same share transfer.

Where shares are transferred to connected transferees with the object of avoiding or reducing capital gains tax, section 52(1) applies and the consideration is deemed to be the fair market value on the date of transfer. On that footing, the transfer is chargeable to capital gains on the market value basis. The same transaction cannot then be treated inconsistently as a transfer for inadequate consideration under the Gift-tax Act, because the statutory deeming fiction for capital gains must be carried to its legal consequence. Simultaneous levy of gift-tax and capital gains tax on the same deemed consideration is therefore impermissible.

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Issues: (i) Whether the transfer of shares was liable to capital gains tax under section 52(1) of the Income-tax Act, 1961; (ii) Whether the same transfer could also be treated as a gift and subjected to gift-tax, including on the theory of simultaneous taxation.

Issue (i): Whether the transfer of shares was liable to capital gains tax under section 52(1) of the Income-tax Act, 1961

Analysis: The conditions for application of section 52(1) were satisfied because the transferees were directly connected with the transferor and the finding of the fact-finding authority was that the transfer was made with the object of avoiding or reducing liability to capital gains tax. Once those conditions existed, the full value of consideration had to be taken as the fair market value of the asset on the date of transfer.

Conclusion: The transfer was liable to be taxed under section 52(1), and the capital gain was correctly computed on the basis of the fair market value. This issue was decided against the assessee.

Issue (ii): Whether the same transfer could also be treated as a gift and subjected to gift-tax, including on the theory of simultaneous taxation

Analysis: After the transfer was statutorily treated as having been made for full market value for purposes of capital gains, it could not simultaneously be regarded as a transfer otherwise than for adequate consideration under section 4(1)(a) of the Gift-tax Act, 1958. The statutory deeming fiction had to be carried to its legal consequence, and the same transaction could not be treated inconsistently as both a full-value sale and a taxable gift.

Conclusion: The transaction was not liable to gift-tax, and simultaneous taxation to gift-tax and capital gains tax was not permissible on these facts. This issue was decided in favour of the assessee.

Final Conclusion: The reference was answered in part for the revenue on capital gains and in part for the assessee on gift-tax, on the basis that the transaction could not be subjected to both levies on the same deemed consideration.

Ratio Decidendi: Where a transfer is statutorily deemed to have been made for full market value for capital gains purposes, the same transaction cannot, on the same footing, be treated as a transfer without adequate consideration so as to attract gift-tax.

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