TaxTMI 
TaxTMI 
2009 (1) TMI 539
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..... The facts, in brief, are that the Assessing Officer from the perusal of the Balance Sheet noted that the assessee had taken loans from the following parties: (a) M/s. Nirmal Developers Rs. 5,60,000 (b) M/s. Utkantha Trading Co. Rs. 7,00,000 (c) M/s. Nirmal Lifestyle Ltd. Rs. 22,10,000 (d) M/s. Mayank Enterprises Rs. 20,00,000 Rs. 54,70,000 7. The assessee, as required by Assessing Officer, filed confirmation letters of the lenders. The Assessing Officer found that the parties from whom the assessee had taken loans, were builders by profession and were sister concerns and the assessee was also employed with one of the concerns viz., M/s. Nirmal Developers as Site Supervisor. The Assessing Officer also noted that the assessee had used these loans for purchase of residential flat from the same builder. The Assessing Officer also found that the assessee was having total income for the year under consideration, of Rs. 2,62,070, hence, repayment capacity of the assessee was very poor. The Assessing Officer required the assessee to submit security/mortgage offered by....
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....tion, hence, the said sums were without consideration. As regards the loans taken before 1-9-2004, the ld. CIT(A) held that it was claimed only before him and no such stand taken by the assessee before the Assessing Officer. The ld. CIT(A) also held that the fact of repayment of loan was also redundant, as the same had not been brought to the Assessing Officer which resulted into avoidance of further enquiry by the Assessing Officer. The ld. CIT(A) also held that the assessee was of the age of 50 years and had no other assets/business plans, which could make repayment as a viable proposition. Accordingly, he confirmed the action of the Assessing Officer. As regards the perquisites, the assessee contended that he was not an employee of these concerns, hence, no question of any perquisite. The ld. CIT(A) deleted the same for this reason and also stated that since the entire loan was treated as income, hence, there was no question of any addition on account of interest on such income. Still aggrieved, the assessee is in appeal before us. 8. The ld. Counsel for the assessee initiated his arguments by stating that it was a case of loans being given by the said builders/developers wit....
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....nal transaction. After emphasizing on the fact that it was a case of loan transaction, he contended that though no interest was payable thereon, however, the same was in-built in the price of flat, hence, it could not be said that this transaction was without consideration. Thereafter, the ld. Counsel raised an issue that whether any loan taken could be taxed under the provisions of section 56(2)(v). For this purpose, he referred to the objects of incorporation of this provision as enumerated by the Hon'ble Finance Minister while introducing this section and contended that the said provisions were brought on statute only to prevent the misuse of a situation created by the abolition of Gift Tax Act in 1997, hence, the loan transactions entered into by various persons, were not to come within the purview of this provision. He further contended that no doubt the words of the statute, were to be read as such, however, in case of ambiguity or unintended interpretation, the aid could be taken from the proceedings of the Parliament as held in various judicial decisions and, therefore, the Hon'ble Finance Minister's speech could be treated as an appropriate guide and binding in interpretin....
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....n Page 2776 to substantiate the above claim. He, accordingly, contended that, thus, it was not necessary that there must be some interest to make a transaction of lending of money, a loan transaction. In this regard, he referred to the decision of the Court of Appeal of State of California in the case of Patriarch F. Sheehy Et AL. v. Franchise Tax Board of the State of California, G021719 wherein the Hon'ble Court had observed that a loan of money was a contract by which one delivered a sum of money to another and the latter agreed to return at a future time without interest that sum which he borrowed. He further contended that the contract could be oral or written, hence, if no written agreement had been entered into by the respective parties, that fact by itself could not result into any adverse inference against the assessee. He also contended that a contract was nothing but a promise to do or forebear to do something, and anything which was having the effect of enlarging or limiting or conditioning that promise to do something, was a term of the contract for example, payment with or without interest was a term of contract and similarly, paying the amount in certain instalment w....
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....e of a written agreement, this fact remained unsubstantiated. He also contended that the evidences relating to repayment were additional evidences; hence, the matter could go back to the Assessing Officer for verification thereof and a decision on this issue accordingly. He also contended that the assessee was also a shareholder of one of the lender companies, hence, the provisions of section 2(22)(e) were also attracted. He also contended that the interest foregone by the lender would be a perquisite in the hands of the assessee. He further placed reliance on the order of ld. CIT(A). 10. The learned counsel, in the rejoinder, reiterated the fact that no show cause was given by the Assessing Officer to this effect before completion of the assessment proceedings, hence, the assessee was not at fault in not giving details of loans repaid earlier or loans taken before the effective date of this section, hence, no mala fides could be attached to the assessee. He further submitted that there was no departmental appeal against the ld. CIT(A)'s order on the aspect of perquisite, hence, at this stage; the same could not be raised. He also contended that the assessee was not a substantia....
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....n of Flat. Thereafter, the Assessing Officer has not issued any other notice, as is evident from the VI paragraph of the assessment order. Thus, the above chronological evidences show that at no stage, the assessee was made aware of the intention of the Assessing Officer to make the impugned addition so that the assessee could have made legal submissions. In our opinion, if such an opportunity should have been granted by the Assessing Officer, then, loans to the extent of Rs. 27,70,000 would not have been added at all under section 56(2)(v) of the Act as income of the assessee as these were received prior to 1-9-2004 (as evident from the loan confirmations and bank transactions details submitted to the Assessing Officer) as such provisions have been made applicable with effect from the above mentioned date. Further to this manner of completion of the assessment proceedings, the ld. CIT(A) has also ignored the relevant contentions of the assessee by holding that these were not raised before the Assessing Officer, whereas he could have examined the assessment records to verify claim of the assessee that no opportunity was given by the Assessing Officer to make these submissions. Thus....
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....ionable claim or of any interest in property by any person without bona fide reasons to the extent of value of such release, discharge, surrender, forfeiture or abandonment. No such kind of situations have been prescribed under section 56(2)(v) of the Act, hence, if this view of Revenue Authorities is accepted, then, it would amount to re-writing of provisions of this section and which is not in the domain of executive or judicial forum. Hence, in view of above discussion, we are of the prima facie opinion that this addition is not correct in law. 11.1 Having stated so, this addition also puzzles us as to what would happen in the case of genuine loans given and taken in the normal course of commercial practice or on account of social considerations. To put it in other words, if a interest free loan cannot be added under section 68, then, such loan should be added as income of the recipient under section 56(2)(v) of the Act which also means that there would not be any difference between capital receipt/liability and revenue liability/receipt. This type of addition also leads to a situation of having two provision for charging one type of income, i.e., the Legislature has provided....
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....levant point of time, are also reproduced as under: "(v )where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after 1-9-2004, the whole of such sum: Provided that this clause shall not apply to any sum of money received- (a )from any relative; or (b )on the occasion of the marriage of the individual; or (c )under a Will or by way of inheritance; or (d )in contemplation of death of the payer; or (e )from any local authority as defined in the Explanation to clause (20) of section 10; or (f )from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10, or (g )From any trust or institution registered under section 12AA. Explanation - For the purpose of this clause, relative means- (i )spouse of the individual; (ii )brother or sister of the individual; (iii)brother or sister of the spouse of the individual; (iv)brother or sister of either of the persons of the individual; (v )any lineal ascendant or descendant of....
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....e characterized as of the nature of gift as is understood generally. However, generally, the amounts given by such institution are essentially of the nature of gift income to the beneficiaries because the said sum are generally subsidies, charities, grants or other welfare payments under the schemes of State/Central Government. If, for a moment, it is assumed that such institutions also give loan without interest or at concessional rate of interest, then, such exceptions further support the case of the assessee that the loans are not covered within the provisions of section 56(2)(v). 11.5 Thus, in view of above discussion, we are of the view that this provision applies to the transactions where undisclosed/unaccounted income of a person is brought in his hand by way of purported gifts. Accordingly, the loan transaction is not covered under this section and, therefore, we delete this addition. 11.6 Having stated so, if, for a moment, it is presumed that loan transaction is also covered under section 56(2)(v) of the Act, then, the next question which arises for our consideration is whether in the facts of the present case such loan transaction is without consideration so as to ....
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.... clauses of section 64 transfer without adequate consideration, attracts the applicability of these provisions. Thus, in such provisions, consideration has been used in a narrow sense as compared to the general contract law and where, there exist consideration in a transaction as per such general law and if such consideration cannot be converted into money or money's worth, then, such transfer would not attract the charging provisions of Gift Tax Act, 1958 or Income-tax Act, 1961. For example, transfer of property in consideration of promise of marriage by the transferee is a valid consideration under general contract law but since such promise cannot be converted into money or money's worth, hence, this transaction cannot be subjected to gift tax. In this regard, we may refer to the Hon'ble Bombay High Court in the case of I. Chatterji v. CGT [1990] 185 ITR 610^1 held so, i.e., a promise of marriage, although it may be a valid consideration in law under the Contract Act but it could not be considered as consideration in money or money's worth as various considerations could go into a promise of marriage. Similarly, the term "adequate consideration" as per general law, is relevant ....
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....ity of agreements and to establish which promises should be legally enforceable but, in the present case, we are not saddled with this issue as none of the parties has disputed the validity of contract. The term 'consideration' has one more connotation, i.e., something of value must be a subject-matter of term between the promisor and promisee. In this regard, following paras at pages 67 and 68 of the 12th Edition of the Book Pollock & Mulla on Indian Contract and Specific Relief are relevant: Consideration is defined as: "A valuable consideration in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the party or some for-bearance, detriment, loss or responsibility given, suffered or undertaken by the other. This definition requires that something of value must be given, and that this can either be a benefit to the promisor or some detriment to the promisee. The Supreme Court compared this definition with section 2(d) of this Act, and approved as being practically the same. It held that the word 'valuable' was implied in our law, and could be negative or positive. Another definition approved extensively is the one given by Si....
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....g the provisions of Gift Tax Act, 1958, and the Indian Contract Act, 1872, held that where the assessees renounced their option to take ordinary shares in favour of the entities without any return which had commercial dealings with the company wherein such assessees were shareholders, the benefit to the company was a good consideration for renouncing their rights, hence, no gift tax was chargeable. In this case, 3 assessees were shareholders of M/s. Mahindra & Mahindra Limited, having majority stake. M/s. Mahindra & Mahindra Limited entered into an Agreement with two overseas entities for purchase of Jeeps and other vehicles. There were certain agreements between the Company and the said overseas entities as well as between these 3 persons and the said overseas entities whereby the Company as well as the shareholders had agreed for issue and allotment of certain shares to said overseas entities. Subsequently, there was a further issue of capital. These 3 persons renounced their subscription rights in favour of the overseas entities without receiving any consideration. The Gift-tax Officer held that such assessees got no consideration in money or money's worth when they gave away th....
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....n has not passed or was not intended to pass. The department's case is clear that these transfers were gifts because there was no consideration at all for the shares transferred. The case, according to the department, falls within the opening words of the definition, viz., transfers "without consideration in money or money's worth". That is how it was argued by Mr. Joshi. So far as the present case is concerned, therefore, what we have to see is whether the Mahindras received any consideration at all in money or money's worth when they transferred their "right shares" and not whether the consideration was large or small, adequate or inadequate or whether it passed or did not pass. That is also clear from the first question referred: "Whether, on the facts and in the circumstances of the case, the amounts representing the value of right shares renounced in favour of Willys were chargeable as gifts. . . . as being without consideration in money or money's worth ? The question is not whether the right shares were transferred for inadequate consideration and, if so, to what extent was the consideration inadequate. It seems to us that in this reference this is a vital consideration, ....
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.... of the consideration of the transfer. Thus, the ambit of a gift in the Gift Tax Act is somewhat enlarged and the corresponding area of a contract for consideration artificially narrowed down. In the present case, the extension of the meaning need not be considered, because it was never the case of the department that the transfer in the present case was for an inadequate consideration. What we have to see, therefore, in the present case is to treat the transaction as if it were an ordinary contract and decide whether it was for consideration at all. Thus, the second part of the definition of "gift" need not at all detain us, nor the provisions of section 4(a) or 4(b). The second thing that has to be noted, so far as the definition of "consideration" in section 2(d) of the Contract Act is concerned, is the express modification made to that definition by the use of the words "consideration in money or money's worth" in the definition of "gift". Under the Contract Act, consideration must of course be something which the law can deem of some value but it need not necessarily be "money or money's worth". Sir Dinshaw Mulla puts it thus at page 15 of his commentary on the Contract Act....
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.... is enforceable."' Now it is undoubtedly the intention of the Gift-tax Act by the use of the words "consideration in money or money's worth" in section 2(xii) to limit the meaning of consideration to something which can be reckoned in terms of money and not to any and every obligation, e.g., a promise to marry, which would be a valid consideration under the ordinary law of contracts. It is a moot question whether "consideration in money or money's worth" is the same things as "valuable consideration or some thing which the law deems of value" or whether it was intended by the definition to narrow down the concept of consideration. We have adverted to this distinction in order to emphasise the extent of the narrowness of the concept of consideration in the Gift-tax Act. The distinction, however, need not detain us here, for we shall proceed to consider whether the consideration in the present case was as stated in the Gift-tax Act definition "in money or money's worth". Now, the fundamental assumption in the orders of the Gift-tax Officer and of the Tribunal in the present case (the Appellant Commissioner does not seem to have applied his mind to it at all) is that no consider....
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....f "consideration" in section 2(d) to show that when "the promise has done or abstained from doing or does or abstains from doing, or promises to do or to abstained from doing or does or abstains from doing or promises to do or to abstain from doing, something", the benefit of that act or abstinence must "directly" go to the promisor. A contract can arise even though the promise does or abstains from doing something for the benefit of a third party - in this cases the company - and the assessee can treat that benefit to a third party as a good consideration to him. This is clear upon the authorities. At page 91, Sir William Anson puts the principle thus : 'The courts will not make bargains for the parties to a suit and, if a man gets what he contacted for, will not inquire whether it was an equivalent to the promise which he gave in return. The consideration may be of benefit to the promisor, or to a third party, or may be of no apparent benefit to anybody, but merely a detriment to the promise......"; in any case "the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced. The most trif....
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.... specialty (though Priscot was impressed by Danver's and Moyle's instances), and an objection was also taken to the jurisdiction on the ground of marriage being a spiritual matter : the case was adjourned and the result is not stated. But the point is quite clearly stated that what a man chooses to bargain for must be conclusively to be of some value to him", and the learned author then adds that it is really by a deduction from this that the English courts have in modern times laid it down as an "elementary principal that the law will not enter into an inquiry as to the adequacy of the consideration". It is here that point we have stressed earlier that the adequacy of the consideration, though expressly made a ground for challenging the contract as being without consideration in the definition of the Gift-tax Act read with section 4(a) and 4(b), becomes of importance. Though under the Act it was open to them the point was never taken by the department that the consideration in the instant case is inadequate. Therefore, the normal doctrine must apply, and the normal doctrine is that since the assessees chose to treat the consideration flowing from Export's contracts with the compan....
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.... promising by the agreement of 9-10-1957. In other words, the assessees treated the benefits which were to be received and to conferred upon the company by the agreement of 9-10-1957, as a sufficient enough consideration to them for granting of the rights in the "right shares" to Export. The position as it appears to us from this agreement and the facts and circumstances of the case is clear. The three Mahindras between them owned 43.44 per cent of the share capital. Mr. Parpia urged that really the three Mahindras and the members of their families together owned 54 per cent of the share capital of the company (vide paragraph 9 of the Tribunal's order). If so, they undoubtedly controlled the company Mahindra and Mahindra Ltd. They were moreover vitally interested in the success of the company and the profits which it earned. Two of them were also directors of the company and the third was its principal officer. It is not too much to suppose that with such a major interest in the company, the assessees could well regard anything done for the company as beneficial to themselves as individuals, for they and their family members owned more than half the share capital of the company.....
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....d the agreement were entered into at the same time and signed on the same day is in favour of the conclusion that they formed part and parcel of one arrangement. The parties signing on behalf of the Indian company as well as the parties who agreed to sell the right shares were substantially the same. Three persons signed the letter of whom two were the directors of the company who must be held to have brought about and ratified the agreement. It was urged on the behalf of the department that Willys were under no obligation to take the shares but they only acquired an option to take them we do not see what difference that can make except to the extent of consideration. The right shares had undoubtedly some value. They were, upon the findings of the authorities, worth Rs. 2 each and we do not suppose that Willys Export would not take them even though they were fully paid up and there was no possible future liability to face. Since the transaction and since in law challenged on the ground of the inadequacy of consideration and since in law the consideration need not flow directly from the transferees to the transferor himself but the transferor could accept the consideration whi....
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.... was not useful to the assessees for that reason. We have already pointed out that the assessees could well treat the benefit to be derived by the company under the agreement with Export and Willys we as a sufficient enough benefit to the assessees themselves. In substance it was a substantial enough benefit to the assessees, because they were vitally interested in the company and would be enable to get a higher return upon the shares which they held would be "Consideration in, money's worth". Lastly, the Tribunal remarked : "To come within the definition of consideration as laid down in the Contract Act, Willys ought to have done something or abstained from doing something at the desire of the three assessees. This is lacking in the present case. . . ." Now, we have already shown the vital connection between the assessees and the company and how the benefit to the company was also a benefit to the assessees and a consideration which passed from Willys or Export to the company was as good as a consideration passed from Willys and Export to the assessees. In fact, it was the assessees who were running the business and were in a position to control it. The agreement and the letter....
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....the benefit was to the company. It seems to us that in construing commercial contracts of this kind the tax authorities and the Tribunal must have regard to normal business considerations, and look at the substance of commercial transactions rather than the particular form they assume in a given case. They must not assume that every large transaction is a good potential source of revenue and then proceed to determine how much tax can be gathered from it; otherwise they are bound to fall into error and also make business impossible. In the result, therefore, the answer to the first question referred is in the negative. Since that is the answer to the first question, upon the terms of the second question no answer is necessary to it because the second question arises only "if the answer to the first question is in the affirmative". We are not, therefore, called upon to answer the second question. The Commissioner will pay the costs of the assessees." 11.10 Thus, the Hon'ble High Court, in this case, held that the benefit derived by the company was a proper consideration for 3 assessees for renouncing their rights to subscribe to the shares in favour of overseas entities and, in....
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....t he contracted for, will not inquire whether it was an equivalent to the promise which he gave in return. The consideration may be of benefit to the promisor, or to a third party, or may be of no apparent benefit to anybody, but merely a detriment to the promisee'." [Emphasis supplied]. I respectfully concur with the view held by the Bombay High Court and hold that the appropriate authority has ignored this elementary principle." 11.12 We most humbly feel that, this decision also supports our view as stated above that the benefit confirmed on the third party would also be a good consideration to support an agreement between the promisor and promisee and, therefore, the present transaction is with consideration, hence, enforceable by law. In this case, all the parties were not connected in the manner in which they were connected in the case of Keshub Mahendra (supra), hence, in our humble view, this decision is also an authority for the proposition the benefit conferred to a third party not connected with the promisor or promisee in a pecuniary capacity would also be a good consideration to support the transaction. In this regard, we humbly add that even as per the definition....
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....tion. The term "consideration" has not been defined under the Gift-tax Act and naturally being the inevitable essence of an agreement or contract is to be found in section 2(d) of the Indian Contract Act, 1872. In this connection, by the Full Bench, this court in CGT v. Nirmala (C.K.) (Smt.) [1995] 215 ITR 156 , has ruled that the word "consideration" as found in the definition of the term "gift" in the Gift-tax Act would carry the meaning assigned to it in section 2(d) of the Indian Contract Act, 1872. This was following the decision of the Bombay High Court in Keshub Mahindra v. CGT [1968] 70 ITR 1 . It would be at once seen as a result of the above decision, by barely perusing the said definition in section 2(d) that the understanding of the term "consideration" cannot get confined to money alone. The term "consideration" is that which creates a contractual relationship between the promisor and promisee in regard to the performance of promise and in regard to which the parties to the agreement or contract get related to each other. It is more than elementary that the law in regard to consideration tells us that consideration may be relating to a party other than the promisor ....
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....company has not specifically given up any claim or released or transferred any debt or claim in favour of Giraben. It is significant to note that the release of the debt in favour of Giraben by the society has never been questioned as sham or bogus. The authorities have proceeded on the footing that the release was a bona fide release in favour of Giraben. The transaction in the form of composite agreement is also not doubted and the authorities have proceeded on the footing that it was a genuine transaction. In fact, the sale deed was executed between the society and the company pursuant to the said composite agreement. Since from the composite agreement it does not transpire that the assessee-company was responsible for getting the dues of Giraben released by the society, it cannot be said that the assessee-company was the "person responsible" for getting the debt of Giraben released. Even if an inference is drawn on the basis that Giraben was the sister of the managing director of the assessee-company, that such relationship must have weighed on the society for releasing the debt of Giraben, there is nothing to show that the release was not bona fide. In fact, the release of ....
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....acy of the consideration is immaterial but under the Gift-tax Act an agreement to transfer property "otherwise than for adequate consideration" gives rise to a gift to the extent of the inadequacy. This court is not concerned with the adequacy or inadequacy of the consideration, for, the Tribunal has specifically found that the consideration in this case is more than the value of the interest transferred by the assessee to the incoming partners. No doubt, such transfer of interest includes the goodwill of the business. Therefore, the predominant question before this court is whether the capital introduced by the incoming partners can be taken as consideration for the transfer of the assessee's interest in the business. There is nothing to show in the definition of the term "consideration" that the benefit of any act or abstinence must "directly" go to the promisor. A contract can arise even though the promisee does or abstains from doing something for the benefit of a third party and the promisor can treat the benefit to a partnership firm where he is also a partner as consideration. Sir William R. Anson. said : "The consideration may be of benefit to the promisor, or to a third....
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....on also. 11.17 Having held so now, we would like to deal with other contentions of the revenue. It was contended that there must be an agreement in writing which is not a requirement of law of contract as the agreement can be oral or in writing, hence, we reject this contention of the revenue. Similarly, a contention was raised that the repayments schedule was not prescribed and, however, in our opinion, this fact is not material so as to alter the nature of the transaction because the term of repayment can be expended by mutual consent of both the parties. The provisions of section 63 of the Indian Contract Act, 1872 also provide for notation of contract which reads as under : "Every promisee may dispense with or may frame, whole or in part, the purpose of the promise made to him or may extend the time of such performance, or may accept in respect of it any satisfaction which he thinks fit." 11.18 Thus, we do not find any merit in the contention of the revenue, hence, we reject the same. 11.19 Another contention raised by the revenue was that the liability to repay never existed at the time of receipt of the said sums and this fact was not proved by the assessee. In th....
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....on of the assessee with the lenders and except for this, no other material has been brought on record which could really support this assumption as financial status/association cannot be presumed to have resulted into no obligation to repay the loan particularly when both the parties have, by their conduct treated this transaction as a loan transaction. Hence, we accept the contention of the assessee that expressed desire/terms and conditions of contract cannot be given a different colour without bringing any material on record to support such stand. The assessee has also contended that a loan can be with interest or without interest which we also accept because no condition exists in law of contract that a loan can be with interest only. In regard to our view on the aspect of repayment obligation, being implied in case of loan transaction and loan can be with or without interest, we derive support from the decision of the observations of the Hon'ble Delhi High Court in the case of CIT v. Mridu Hari Dalmia [1982] 133 ITR 550^1 wherein while dealing with the issue that whether there could be a transaction of loan between the assessee and the minor son, the Hon'ble Court held that th....