TaxTMI 
TaxTMI 
2006 (12) TMI 112
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....scrutiny subsequently. During the income-tax proceedings, internal audit was taken and there was an audit objection dated August 17, 1995, to the Assessing Officer and the Assessing Officer issued a letter to the assessee. Reply was submitted. Details were provided. There was correspondence between the Department and the assessee. According to the appeal memo, the appellant satisfied the Department that there was no element of gift, and accordingly the then officer did not proceed with any gift-tax proceedings under the Gift-tax Act, 1958 (for short, "the Act"). Thereafter, in August 1998, a search was carried out under section 132 of the Income-tax Act. After search, the Deputy Commissioner of Gift-tax issued a notice under section 16 of the Gift-tax Act in the matter. The said letter was replied to by the appellant. Assessments were reopened. The assessing authority declined to accept the appellant's contention and rejected the submission of the appellant and concluded that there was a deemed gift under section 4(l)(a) and section 4(1)(b) of the Act to the extent of Rs. 69,78,49,800 and levied gift-tax along with interest under section 16B of the Act from July 1993 to January 200....
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....edings collected the details of share transfers, consideration and the intrinsic value with a view to ascertain whether there was gift or deemed gift and having satisfied with the evidence and refrained from invoking the gift-tax proceedings while concluding the income-tax proceedings for the relevant year? 3. Whether there was fresh information on account of search proceedings in 1998 to justify the invoking of the gift-tax proceedings? 4. Whether the provisions of section 4(1)(a) of the Gift-tax Act were applicable to the share transfers made by the appellant to justify the determination of deemed gift for tax under the Act? 5. If the answer to question No. (d) is in the affirmative, whether the Tribunal was right in upholding the valuation of alleged quoted shares in lock-in period? 6. Whether in the light of the judgment of the Supreme Court in CIT v. Ranchi Club Ltd. [2001] 247 ITR 209, the levy of interest was justified especially when section 16B of the Act was in pari materia with section 234B of the Income-tax Act prior to its amendment vide Finance Act, 2001?" The matter is heard on several dates. Sri Aravind Datar, learned senior counsel, would argue that ....
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....uoted shares as understood in law. He would rely on several case law in support of his submission. Per contra, Sri Indra Kumar, learned senior counsel for the Department would with equal vehemence oppose every one of the submissions of the other side. He would say that the appellant has filed return of gift declaring nil gift chargeable to tax. The appellant has enclosed a letter along with the said declaration, and in the said letter several contentions are raised. The assessing authority negatived the contentions urged by the appellant and an order was passed under section 15(3) read with section 16 of the Act. The assessing authority after considering the material facts ordered payment of gift-tax by holding that the shares transferred by the appellant-company was for inadequate considerations, and that, therefore, section 4(1)(a) of the Act is attracted in the case on hand. The quantum of inadequate consideration provides for a right to the Department to initiate proceedings against the appellant. He would also refer to us an order of the Commissioner to say that the Commissioner has negatived the contentions with regard to jurisdiction in the case on hand. However, the appe....
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.... is without jurisdiction. To understand this question, one has to notice various provisions of the Gift-tax Act. The Gift-tax Act provides for gift escaping assessment. Section 16(1) of the Act would read as under: "16.(1) If the Assessing Officer has reasons to believe that the taxable gifts in respect of which any person is assessable under this Act (whether made by him or by any other person) have escaped assessment for any assessment year (whether by reason of underassessment or assessment at too low a rate or otherwise), he may, subject to the other provisions of this section and section 16A, serve on such person a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return in the prescribed form and verified in the prescribed manner, setting forth the taxable gifts made by him or by such other person during the previous year mentioned in the notice, in respect of which he is assessable, along with such other particulars as may be required by the notice, and may proceed to assess or reassess such gifts and also any other taxable gifts in respect of which such person is assessable, which have escaped ass....
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....belief is not to be judged from the standards of proof required for coming to a final conclusion. At the stage where he finds a cause or justification to believe that such income has escaped assessment, the Assessing Officer is not required to base his belief on any final adjudication. In Saradbhai M. Lakhani v. ITO [1998] 231 ITR 779, the Gujarat High if Court holds that the validity or otherwise of the reasons for initiation of reassessment proceedings should be gone into on the basis of facts mentioned and the reasons recorded prior to such initiation. Thus, where the reasons recorded do not bring out any grounds for making out an objective satisfaction arrived at by the Assessing Officer, no reasons other than those recorded by the Assessing Officer can possibly be urged at the time of initiation. It is necessary that before any action is taken, the Assessing Officer should substantiate his satisfaction. CIT v. Prithviraj Maheshwari [2004] 266 ITR 402 is a Division Bench decision of the Rajasthan High Court. The court ruled that once the assessee declares fully and truly all material facts in income-tax proceedings for the assessment of that transaction, and value has bee....
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....gue and indefinite or distant, remote and far-fetched, which would warrant formation of "belief" relating to escapement of the income of the assessee from the assessment. Formation of belief must be in "good faith" and it should not be a mere pretence. From the case law, it is clear that "satisfaction" has to be bona fide and there has to be reasonable nexus and has to be based on prima facie acceptable material. It is also ruled that it should be based on objective satisfaction arrived at reasonably and never be an outcome of change of opinion. From the case law, what is to be noticed by us is that reopening must be on acceptable grounds and it cannot be at the whims and fancy of the authorities in terms of the provisions. There has to be a reasonable nexus in terms of the law declared by the courts of law. It should be based on objective satisfaction arrived at by the Assessing Officer reasonably and can never be an outcome of change of opinion. Let us see as to whether this principle is followed in the case on hand. The Assessing Officer has issued notice and thereafter obtained a reply from the assessee. After obtaining reply, he has passed a very detailed order rejecting th....
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....ected by the assessee. After noticing he was of the view that the materials before the present Assessing Officer were sufficient to form an honest view, i.e., to give "reason to believe" genuinely that taxable gift escaped assessment. The Tribunal has accepted this finding in its order. The Tribunal after noticing all relevant facts and also the case laws and the findings, has chosen to say that the question of change of opinion forming the sole basis for initiation of action under section 16 of the Act is totally strange to the facts of the case. The Tribunal accordingly held that the gift-tax proceedings were validly initiated in the facts and circumstances of the case. We are of the view that all the three authorities are justified in holding that the initiation of proceedings under section 16 of the Act is for a bona fide reason and it is objective in character. There is no change of opinion resulting in the assessment proceedings as argued by Sri Datar, learned senior counsel appearing for the assessee. We are unable to accept his submission in the given circumstances. From the material on record, it is seen that some correspondence was there between the parties in the m....
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....ion in terms of the arguments advanced in the given circumstances nor there exists any reason to believe for reopening the matter in terms of the material available on record. Both the contentions were rightly considered and rejected on facts by all the authorities. We accept this finding as recorded by all three authorities. Findings are based on facts. The Rajasthan High Court judgment in CIT v. Prithviraj Maheshwari [2004] 266 ITR 402 would show that in that case, the Department has accepted the earlier valuation. It was in those circumstances, the Rajasthan High Court did not accept the plea of the Department. Similarly, the judgment of the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 is not available to the proceedings. In that case the court notices the previous assessment proceedings and thereafter it has accepted. The next contention is with regard to "satisfaction" on the part of the Additional Commissioner in the matter of section 16 proceedings. What is contended before us is that there is no acceptable satisfaction available on record in the matter of sanction in terms of section 16 of the Act. It is submitted before us that the Deputy Commissione....
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....is tainted or opposed to any provision of law, the same cannot be disturbed. We therefore accept the permission granted by the authorities. In the circumstances, we deem it proper to answer the questions of law in the matter of jurisdiction in favour of the Revenue. First three questions are therefore answered against the assessee. Re. Questions Nos. 4 and 5 : Question No. 4 deals with share transfer being a deemed gift for the purpose of tax under section 4(1) (a) of the Act. Question No.5 is with regard to the valuation of shares in lock-in period. Both the questions can be considered together. Before we touch upon the merits of the matter, we must say that the Assessing Officer in his order has considered the deemed gift for non-receipt of consideration under section 4(1)(b) of the Act to the extent of Rs. 13,90,64,563. A detailed order was passed. The Appellate Commissioner has chosen to hold that it was difficult to hold that the consideration was not intended to pass for the purpose of section 4(1)(b) of the Act. The Commissioner deleted the amount assessed under section 4(1)(b) in his order. The same is confirmed by the Tribunal. No further appeal is filed. Hence....
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....llotment of the shares as the residue of consideration was intended to cover the entire assets transferred less liabilities undertaken by the transferee-company. The liabilities as on the date of transfer had a worth in money and was in effect quantified in terms of money. So, when the transferee, under the terms of the agreement, agreed to pay the liabilities attached to the business which was being transferred, it was paying as consideration money's worth of the liabilities. The balance consideration was agreed to be satisfied in shares of the face value of £ 998 irrespective of the value of assets already vested in the transferee. The transferee-company had shown the excess value in share premium account and accepted the liabilities in respect of such share premium in favour of V. F. Ltd. as its shareholders as a result of increase of assets. The amount thus stood as liability for the entire excess value of assets along with the share capital while for the transferor the excess value had been shown in investment in the subsidiary. The entire assets were fully accounted for in the accounts of both companies under the requirements of the Companies Act" The Calcutta High Court ....
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....operation of the Act, then he can be made liable under section 4(1)(a). The High Court further observed that it is this attempt at evasion which was sought to be thwarted by enacting section 4(1)(a). In Polestar Electronic P. Ltd. v. Addl. Commissioner, Sales Tax [1978] 41 STC 409, the Supreme Court observed reading as under (headnote) : "A statutory enactment must ordinarily be construed according to the plain natural meaning of its language and no words should be added, altered or modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. This rule of literal construction is firmly established and it has received judicial recognition in numerous cases." The Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77, observed that it is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs; that the court is not to be satisfied with the form and leave well alone ....
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....nbsp; 100 shares (c) P.P. Katdhare 100 shares (d) BPL Ltd. 360 shares (e) EEMS Company Ltd. 20 shares The Assessing Officer therefore observes that M/s. Alpha Securities Limited was not a wholly owned subsidiary of the assessee-company as on March 2, 1993. The Assessing Officer further notices in his order about the share-holding pattern of M/s. Celestial Finance Limited as on the date of incorporation, i.e., November 9, 1992, reading as under: (a) Ajit G. Nambiar 100 shares (b) Anju Nambiar 100 shares (c) Rajiv Chandrashekar 100 shares As on the da....
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....noticed that the assessee-company has intentionally and deliberately tried to make M/s. Celestial Finance Limited and M/s. Alpha Securities Limited as its subsidiaries to avoid payment of gift-tax. He has thereafter come to the conclusion that the contention of "no gift" cannot be accepted. He would say that there is transfer from one company to another and that it is not a transfer by a holding company to the subsidiary company on the facts. All these facts have been noticed by the Commissioner and after noticing the Commissioner accepts that the assessee-company had intentionally and deliberately tried to make M/s. Celestial Finance Limited and M/s. Alpha Securities Limited as their subsidiaries to avoid payment of gift-tax. The appellate authority also notices various aspects of the matter in its order. When this order was challenged in appeal, the Tribunal has accepted the findings of these two authorities. In our view, all the three authorities are justified in coming to their conclusions. The chronological events as accepted by the Commissioner and the Tribunal would go to show that an attempt was made probably to avoid or evade gift-tax. The bundle of facts available on r....
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....n the order. He has also seen that after receiving notice from the Assessing Officer, the assessee has chosen to create the theory of subsidiary company. He has also noticed the documents filed by the assessee in his order. After noticing the material aspects of the matter, he has answered this question as against the assessee. When the same was challenged before the Tribunal, the Tribunal has noticed in paragraph 37 the contentions of the parties. After noticing the material available on record, the Tribunal has rejected the contentions urged by all the three authorities on facts and has chosen to hold against the assessee. The bundle of facts, as accepted by the authorities, could be disturbed by us only in the event of adverse findings not based on evidence. Material on record would reveal that the subsidiary company status has been given probably to avoid payment of gift-tax. The shares are provided for inadequate consideration. The status of subsidiary company in terms of the findings has lasted only for 50 days. They were not reported as subsidiary companies in the annual report of BPL. Even the benefits which have been provided is mostly made to T. P. G. Nambiar and membe....
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....cts. Therefore, we have no hesitation in accepting the concurrent findings of all the three authorities with regard to the status in this appeal. We reject the argument of the assessee on this aspect of the matter. Issue relating to valuation of shares Elaborate arguments have been advanced with regard to the valuation of shares in the case on hand. Lots of arguments had been addressed both by Sri Datar, learned senior counsel for the assessee and Sri Indra Kumar, learned senior counsel for the Revenue. Several legal points were shown to us for the purpose of valuation by the authorities. Sri Datar, learned senior counsel, as mentioned earlier, has invited our attention to rule 2 of Schedule II to the Gift-tax Act for the purpose of valuation. He would also refer to us the Wealth-tax Rules to say that the valuation that has been done by the Commissioner has been enhanced without justification. Per contra, Sri Indra Kumar, learned senior counsel for the Revenue, with vehemence, would say that lock-in period would not in any way affect the valuation of shares. He would refer to us various case law and various provisions in support of his submission. After hearing, we have....
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....tax Rules: "Forms for certificate of valuation of shares/jewellery, etc.-(a) The form for certificate of quoted shares or debentures of a company to be issued by a stock exchange under sub-rule (9) of rule 2 shall be in Form O-11." It is an undisputed fact that the transferred shares suffered a lock-in period. The question is as to how to treat the lock-in period for the purpose of valuation in terms of the Gift-tax Act. The Assessing Officer has considered this issue in detail in his order. He has noticed quoted shares as well as unquoted shares. He has taken into consideration the valuation which was prevailing on the stock exchange as on the date of transfer of shares in his order. He has come to the conclusion that the lock-in period has not affected the transfer of shares from the assessee-company. He has also noticed unquoted shares. Thereafter, he has chosen to give a finding in his order. When this order was challenged before the Commissioner, the Commissioner has taken pains to refer to various aspects of the matter including the case law for the purpose of valuation. The assessee-company filed certificates issued by the Assistant Manager, Listing of the Bangal....
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....nbsp; transferable for a period of three years from the date of allotment and the same are not tradable on the stock ....
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....; No trading on March as quoted on the 31st day of 31,1993 March of the year 6. If the share/debenture is not quoted on the date mentioned in column 5, the value as quoted on a date immediately preceding the date mentioned in that column The shares of the company were last traded on this &....
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....he restriction as to the transferability have not prevented the shares from being transferred. Only when it comes to the taxability, the assessee is trying to take the benefit of the restrictive clauses that are contained in terms of the issue of shares. The assessee has no doubt obtained the certificates subsequently from the BSE authorities, which were issued on the assessee's request. The shares of the company were listed securities in the stock exchange and they were all actively traded. The Tribunal has also ruled that it is only the promoters' quota of shares which were in the lock-in period; and that however, merely there being a bar on trading does not mean that the shares themselves were unquoted shares. In that view of the matter, he approved the action of the Assessing Officer and set aside the finding of the Commissioner. After hearing, we have carefully seen all the three orders. Admittedly, certain additional materials were placed before the Commissioner. The Commissioner noticing those materials has chosen to hold in favour of the assessee. The Tribunal has set aside the same by holding that the assessee obtained a certificate subsequently from the BSE authorities....
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....cates would make it clear that the shares in question were not traded and were not tradable. If that is so, in our opinion, the Commissioner is right in holding that the lock-in-period is a factor that would go in favour of the assessee. After noticing the lock-in-period, the Commissioner has chosen to accept the amount of Rs . . . as the amount that warrants gift-tax. We accept his findings. Therefore, on the facts, we are satisfied that the Commissioner is right in holding that the lock-in period is a factor that would go in favour of the assessee. We accept these findings. We therefore answer section 4(1)(a) question in favour of the Revenue. However, on the question of valuation, we deem it proper to accept the order of the Commissioner. Several judgments have been cited by the Revenue in this regard. Bharat Hari Singhania v. CWT [1994] 207 ITR 1 is a judgment of the apex court. That is a case in which the court was considering the valuation aspect of the matter. The facts in that case would show that it was prior to the amendment of the Act in terms of the Wealth-tax Act. CWT v. Purshottam N. Amersey [1969] 71 ITR 180 (Bom) ; Purushottam N. Amarsay v. CWT [1973] 88 IT....