http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5

CASE NO.:

Appeal (civil) 1934 of 1998

PETITIONER:

REVA INVESTMENT PVT. LTD.

Vs.

RESPONDENT:

COMMISSIONER OF GIFT TAX, GUJARAT II

DATE OF JUDGMENT: 02/05/2001

BENCH:

S.P. Bharucha & D.P. Mohapatra

JUDGMENT:

D.P. MOHAPATRA, J.

L...I...T.......T.......T.......T.......T.......T.......T..J

This appeal filed by the assessee is directed against

the judgment of the Gujarat High Court on a reference made

by the Appellate Tribunal under Section 26(1) of the Gift

Tax Act, 1958 (hereinafter referred to as 'the Act'). The

question which was referred for opinion reads as follows:

"Whether, on the facts and in the circumstances of the

case, the Tribunal was right in law in coming to the

conclusion that the difference of Rs. 8,21,950/- on the

sale of the jewellery by the assessee to its 12 wholly owned

subsidiary companies was not liable to gift tax under the

provisions of the Gift Tax Act, 1958."

The High Court disposed of the reference by answering

the question in the negative, in favour of the Revenue and

against the assessee. Hence this appeal.

The factual backdrop of the case relevant for the

present proceeding may be stated thus:

The assessee is a private limited investment company and

the assessment relates to the assessment year 1976-77. The

assessee transferred jewellery to twelve private limited

companies which were wholly owned subsidiary companies of

the assessee and in return the twelve private limited

companies transferred to the assessee fully paid equity

shares of the face value of Rs.100/- each, the face value of

all the shares being Rs. 5,69,400/-. The jewellery thus

transferred became the only asset of the twelve companies

and the shares transferred to the assessee were the entire

share holding of the twelve private limited companies.

Since the assessee did not file any gift tax return, a

notice under Section 16(1) of the Act was served upon the

assessee pursuant to which the assessee filed a 'nil'

return. Thereafter a notice under Section 15(2) of the Act

was issued and the proceeding for assessment was taken up.

In the assessment proceeding the assessee took the stand

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5

that it had transferred jewellery to the twelve subsidiary

companies of a book value of Rs. 5,69,400/- and received

shares from those companies of the face value of Rs.

5,69,400/-; in the circumstances there was no gift involved

in the transaction. The case of the Revenue, on the other

hand, was that the market value of the jewellery acquired by

the assessee amounted to Rs. 13,91,350/- on the date of

transfer, therefore, there was a gift to the extent of the

amount which exceeded the face value of the shares, i.e.,

Rs. 8,21,950/-.

The Gift Tax Officer by his order dated 12.9.1979 held

that there was a 'deemed gift' to the tune of Rs.

8,21.950/- for which the assessee was liable to pay gift tax

under the Act.

On appeal by the assessee, the Commissioner of Gift Tax

(Appeals) held that inasmuch as the jewellery is the only

asset of the subsidiary companies the value of the

consideration was the value of the jewellery and no 'deemed

gift' can be attributed. The Appellate Authority set aside

the order of the Gift Tax Officer.

Both the assessee and the Revenue filed appeals before

the Tribunal. The Tribunal upheld the conclusion of the

Appellate Authority and held that when the only asset of the

purchasing companies is jewellery purchased and their

capital consists only of the shares issued to the assessee

company, there is no question of any 'deemed gift' as

whatever will be the value taken for the jewellery will

become the value of fully paid up shares issued to the

assessee on the break up method of valuing of shares of

private limited companies. The Tribunal rejected the

contention of the Revenue on this point.

In the Reference Application filed by the Revenue the

question quoted earlier was referred to the High Court. The

High Court came to the conclusion that the Tribunal had

committed an error in law in coming to the conclusion that

the difference of Rs. 8,21,950/- on the sale of the

jewellery by the assessee to its twelve wholly owned

subsidiary companies was not liable to gift tax under the

provisions of the Act and accordingly answered the question

in the negative in favour of the Revenue. The High Court

did not accept the contention that in case of the transfer

of the entire paid up share holding of the twelve subsidiary

companies in lieu of the jewellery transferred by the

assessee the value of the jewellery must be taken to be the

value of the shares transferred by the subsidiary companies.

The High Court was of the view that the shares which were to

be passed on for the purchase of property were different and

independent of such property and would have their valuation

and to say that the value of such consideration, in the

instant case the shares, should be read as whatever the

value of property intended to be purchased would be to

defeat the very purpose underlying the provision in Section

4(1)(a) of the Act.

The term 'gift' is defined in Section 2(xii) of the Act

to mean the transfer by one person to another of any

existing movable or immovable property made voluntarily and

without consideration in money or money's worth, and

includes the transfer or conversion of any property referred

to in Section 4, deemed to be a gift under that section.

The expression 'taxable gifts' is defined under Section

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5

2(xxiii) to mean gifts chargeable to gift tax under the

Act. Section 3 which is the charging section lays down

that subject to the other provisions contained in the Act,

there shall be charged for every assessment year commencing

on and from the Ist day of April, 1958, a tax referred to as

gift tax in respect of gifts made by a person during the

previous year at the rate or rates specified in Schedule I.

(Emphasis supplied).

Section 4 makes provisions for gifts to include some

transfers. Sub-section (1) clause (a), which is relevant

for the purpose of the case, reads as under:

" 4(1) For the purpose of this Act- (a) where property

is transferred otherwise than for adequate consideration,

the amount by which the [value of the property as on the

date of the transfer and determined in the manner laid down

in Schedule II] exceeds the value of the consideration shall

be deemed to be a gift made by the transferor.

[Provided that nothing contained in this clause shall

apply in any case where the property is transferred to the

Government or where the value of the consideration for the

transfer is determined or approved by the Central Government

or the Reserve Bank of India]"

Ordinarily, a gift is a transfer of property without

consideration; but for the purpose of the Act a transfer

for inadequate consideration is to be deemed to be a gift

under section 4(1) (a). By the inclusive definition in

section 2(xii) of the Act a 'deemed gift' is also a gift.

The provision of deemed gift in section 4 (1) (a) is

intended to bring within the purview of the tax such

transactions which are entered between the parties to evade

the tax.

The question which arises for determination in this case

is whether the transaction made by the assessee can be said

to be a 'deemed gift' under Section 4(1)(a) of the Act. For

invoking the deeming provisions of section 4(1)(a) of the

Act inquiries have to be made regarding - (i) the existence

of a 'transfer of property' (ii) the extent of consideration

given i.e. whether the consideration is adequate. It is

necessary for the assessing officer to show that the

property has been transferred otherwise than for adequate

consideration. The finding as to inadequacy of the

consideration is the essential sine-qua-non for application

of the provisions of 'deemed gift'. The provision is to be

construed in a broad commercial sense and not in a narrow

sense. In order to hold that a particular transfer is not

for adequate consideration the difference between a true

value of the property transferred and the consideration that

passed for the same must be appreciated in context of the

facts of the particular case. If the transaction involves

transfer of certain property in lieu of certain other

property received then the process of evaluation of the two

items of property should be similar and on such evaluation

if it is found that there is appreciable difference between

the value of the two properties then the transaction will be

taken as a 'deemed gift' to the extent as provided in the

Section. It is to be found that the transaction was on

inadequate consideration and the parties deliberately showed

the valuation of the two properties as the same to evade

tax. Such a conclusion cannot be drawn merely because

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5

according to the assessing officer there is some difference

between the valuation of the property transferred and the

consideration received.

In the present case, as noted earlier, the face value of

the shares of the 12 fully paid subsidiary companies of the@@

JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

assessee was Rs.5,69,400/- which was taken to be the value@@

JJJJJJJJJJJJJ

of the jewellery that was transferred in exchange by the

assessee to the subsidiary companies. The subsidiary

companies had no other asset. The value of the jewellery as

determined by the assessing officer being Rs.13,91,350/- the

real value of the shares may be said to be Rs.13,91,350/-,

but there was thus no gift involved in the transaction for

whatever is the value of the jewellery is infact the value

of the shares transferred in consideration. In the

circumstances the assessing officer committed an error in

treating the transaction between the parties as a deemed

gift.

At this stage we may notice a few decisions of different

High Courts to which our attention was drawn. In the case@@

JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

of Bireswar Sarkar vs. Gift Tax Officer [(1997) 223 ITR 404@@

JJJJJJJJJJJ

(Cal)] the High Court allowed the writ petition and quashed

the notice under section 16 of the Act, inter alia, on the

ground that as far as the question of inadequacy of the

consideration is concerned no answer could be given by the

respondent authorities as to the adoption of different

standards for the purpose of evaluating the value of the

assets transferred and for evaluating the consideration

received.

The Madras High Court in the case of C.G.T. vs. Indo

Traders & Agencies (Madras) P. Ltd. [(1981) 131 ITR 313

(Mad)] observed that the provision is designed to check

evasion of tax by persons transferring properties for

inadequate consideration; If a person had effected a gift

which would be without consideration, he would be liable to

be taxed under the Act; the same person may, in order to

avoid the tax, transfer properties for a paltry

consideration so as to get out of the operation of the Act

then he can be made liable under section 4(1)(a) . It is

this attempt at evasion which was sought to be thwarted by

enacting S. 4(1)(a).

A similar view was taken by the Kerala High Court in the

case of Commissioner of Income-Tax vs. Jacobs (P) Ltd.

(1999) 237 ITR 433.

The High Court of Madras in the case of Commissioner of

Gift-Tax vs. D.Surendranath Reddy (1998) 233 ITR 21

observed that adequate consideration is not necessarily,

what is ultimately determined by some-one else as market

value; unless the price was such as to shock the conscience

of the court, it would not be possible to hold that the

transaction is otherwise than for adequate consideration.

In view of the discussions in the foregoing paragraphs,

it is clear that the High Court was in error in holding that

in the facts and circumstances of the case the transaction

could be held to be a 'deemed gift' within the purview of

Section 4(1)(a) of the Act and in holding the assessee

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5

liable for the tax. Accordingly, the appeal is allowed;

the judgment of the High Court under challenge is set aside

and the order of the Tribunal is confirmed. There will,

however, be no order as to costs.