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Thursday, January 24, 2013

gift-tax =whether there was in fact a gift of 14,000 bonus shares made by the assess to the transferee. The answer to this question lies in the interpretation of Section 4(1)(c) of the Act which reads as follows :- “Gifts to include certain transfers. 4. (1) For the purposes of this Act,- (a) xxx (b) xxx (c) where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the Assessing Officer to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment; (d) to (e) xxx” = The only event that took place in the previous year relevant to the Assessment Year 1989-90 was the revocation of the gift by the assessee on 15th June 1988. Was this event enough for the Gift Tax Officer, in 1996, to re-open the assessment for the year 1989-90, while keeping in mind the fact that bonus shares were allotted to the transferee on 29th September 1982 and 31st May 1986? It is possible, on an interpretation of Section 4(1)(c) of the Act to answer this question either way, but unfortunately the High Court did not even notice this provision of the Act. - As far as the applicability of Escorts Farms is concerned, the question that arose for consideration in that case was the determination of the cost of acquisition of the original shares when bonus shares are subsequently issued. That is the second part of Section 4(1)(c) of the Act and that question would arise (if at all) only after a finding is given by the High Court on the first part of Section 4(1)(c) of the Act. But, as we have noted above, the High Court has not considered the interpretation of Section 4(1)(c) of the Act. 28. Under the circumstances we have no option but remand the matter for de novo consideration by the High Court keeping in mind the provisions of Section 4(1)(c) of the Act as well as the orders passed in the case of the assessee for the Assessment Year 1982-83. We do so accordingly. 29. In view of the above, both the Civil Appeals are allowed and the impugned judgment and order of the High Court is set aside but without any order as to costs. 30. We make it clear that the parties are entitled to raise all contentions before the High Court and are at liberty to file additional documents, if necessary.


                                                                  REPORTABLE
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 3914 OF 2010


Satya Nand Munjal                             …..Appellant

                                   Versus

Commissioner of Gift Tax                 …..Respondent

                                    WITH

                        CIVIL APPEAL NO. 3915 OF 2010


                               J U D G M E N T


Madan B. Lokur, J.

1. Civil Appeal No.  3914/2010  (Assessee:  Satya  Nand  Munjal)  and  Civil
   Appeal No. 3915/2010 (Assessee: Om Prakash Munjal) arise  out  of  G.T.A.
   No. 3/2001 and G.T.A. No. 2/2001 respectively both decided  by  the  High
   Court  of  Punjab  &  Haryana  on  17th  December,  2008.   The  relevant
   Assessment Year is 1989-90.

2. At the instance of the Revenue, the High Court was called upon to  decide
   the following common substantial question of law:-
      “Whether, on the facts and in the circumstances of the case, the  ITAT was right in law in quashing the gift-tax assessment in the assessee’s case.”

3. The High Court set aside the order of the Income Tax  Appellate  Tribunal
   (the Tribunal) and held in favour of the  Commissioner  of  Gift  Tax  by
   upholding the assessment order.  
It is in these  circumstances  that  the
   assessee is now before us.
4. For convenience, we refer to the facts in the case of Satya Nand Munjal.
The facts:
5. On 20th February 1982 the assessee, being  the  absolute  owner  of  6000
   fully paid up equity shares of the face value of Rs. 25 each of M/s  Hero
   Cycles (P) Ltd.  executed a deed of revocable transfer in favour  of  M/s
   Yogesh Chandra and Brothers Associates (the transferee).  
Under the deed,
   the assessee could, on completion of 74 months from the date of  transfer
   but before the expiry of 82 months from the said date, exercise the power
   of revoking the gift.  In other words, the assessee left a  window  of  8
   months within which the gift could be revoked.
6. The deed of revocable transfer specifically stated that  the  gift  shall
   not include any bonus shares or right shares received and/or accruing  or
   coming to the transferee from M/s Hero Cycles (P) Ltd. (the  company)  by
   virtue of ownership or by virtue of the shares gifted by the assessee and
   standing in the name of the transferee. Effectively,  therefore,  only  a
   gift of 6000 equity shares was made by the assessee to the transferee.
7. On 29th September 1982 the company issued  bonus  shares  and  since  the
   transferee was a holder of the gifted equity shares, 4000 bonus shares of
   the said company were allotted to the transferee.  Similarly, on 31st May
   1986 another 10,000 bonus shares were allotted to the transferee  by  the
   company.
8. Thereafter, during the window of eight months, the assessee  revoked  the
   gift on 15th June 1988 with the result that the 6000 shares gifted to the
   transferee came back to the assessee.  
However, the 14,000  bonus  shares
   allotted to the transferee while it was the holder of the  equity  shares
   of the company continued with the transferee.
Assessment proceedings for AY 1982-83:
9. For  the  Assessment  Year  1982-83,  the  Gift  Tax  Officer  passed  an
   assessment order on 17th February 1987 in respect  of  the  assessee.
 He
held that the revocable transaction entered into by the assessee was only for the purpose of reducing the tax liability. 
As such, it could  not  be accepted as a valid gift. 
For arriving at this conclusion, the  assessing
   officer relied upon McDowell & Co. v. Commercial Tax Officer, [1985]  154
   ITR 148.
Accordingly, the assessing officer, while holding the gift to be
   void, made the assessment on a protective basis.
10. Feeling aggrieved by the assessment order,  the  assessee  preferred  an
   appeal before the  Commissioner  of  Gift  Tax  (Appeals)  but  found  no
   success.
The Commissioner of Gift Tax (Appeals), however, held that since
   the gift was void, a protective assessment could not be made.
11. The assessee then preferred a further appeal to the Tribunal and by  its
   order dated 23rd August 1991 allowing the appeal;
the Tribunal  
held  the
   revocable gift to be valid.  
It was noted that the concept of a revocable
   transfer by way of gift is recognized by Section 6(2)  of  the  Gift  Tax
   Act, 1958 (the Act). 
The value of the gift in  such  a  case  was  to  be
   calculated in terms of Rule 11 of the Gift Tax Rules, 1958.
12. Although the decision was rendered by the Tribunal after  the  gift  had
   been revoked by the assessee, it was held that if the assessee “does  not
   exercise an option to revoke the gift within the provided for  period  of
   82 months, then at that point of time  also,  there  will  be  a  further
   valuation of the residuary interest….”.
13. Feeling aggrieved by the decision of Tribunal, the Revenue took  up  the
   matter in appeal before the Punjab & Haryana High Court. By its  judgment
   and order in Commissioner of Gift-tax v. Satya Nand  Munjal,  [2002]  256
   ITR 516 the High Court dismissed the appeal and held:
      “It is a legitimate attempt on the part of the assessee to save  money
      by following a legal method. 
If on account of a lacuna in the  law  or
      otherwise the assessee is able to avoid  payment  of  tax  within  the
      letter of law, it cannot be said that the action is void because it is
      intended to save payment of tax. 
So long as  the  law  exists  in  its
      present form, the taxpayer is entitled to take its advantage. 
We  find
      no ground to accept the contention that merely because  the  gift  was
      made with the purpose of saving on payment of wealth-tax, it needs  to
      be ignored.”




14. The position as it stood, therefore, was that the  revocable  gift  made
   by the assessee was held to be a valid gift and the assessee  was  liable
   to pay gift tax on the value of the gift as determined under Rule  11  of
   the Gift Tax Rules, 1958.
Assessment proceedings for AY 1989-90:
15. All of a sudden, on 30th January 1996 the  Gift  Tax  Officer  issued  a
   notice to the assessee under Section 16(1) of the Act to the effect  that
   for the Assessment Year  1989-90  the  gift  made  by  the  assessee  was
   chargeable to gift tax and  that  it  had  escaped  assessment  for  that
   Assessment Year.  
The assessee responded to the notice by simply  stating
   that there is no gift that had escaped assessment.
16. On 24th March 1998 the assessing officer  passed  a  reassessment  order
   for the Assessment Year 1989-90. 
While doing so, he framed two issues for
   consideration: 
firstly,
whether the transferee becomes the owner  of  the
   bonus shares particularly because the shares have been received by it  as a result of a revocable transfer;  
secondly,
whether  the  bonus  shares
   received by the transferee could be described as a benefit derived by the transferee from the transferred shares.
17. The assessing officer held that  
the  transferee  does  not  become  the
   owner of the gifted shares until the transfer is an irrevocable transfer.
   Proceeding on this basis, it  was  held  that  the  14,000  bonus  shares
   allotted to the transferee were a part and parcel of  the  gifted  shares
   and the assessee only took back 6000 shares from the transferee  pursuant
   to the revocable gift. 
Consequently, it was held that  the  assessee  had
   surrendered his right to get back 14,000 bonus shares which were  treated
   as a gift by the assessee to the transferee in view of the provisions  of
   Section 4(1)(c) of the Act. The assessee was taxed accordingly.
18. Feeling aggrieved by the reassessment order, the assessee  preferred  an
   appeal to the Commissioner of Gift Tax (Appeals).
By his order dated 8th
   September 1998 the Commissioner held that  
since  there  was  no  regular
   transfer of  the  bonus  shares,  the  transferee  could  not  claim  any
   ownership of the shares.  
In fact he was only a trustee of  the  assessee
   in respect of the  bonus  shares.   
The  Commissioner  also  referred  to
   McDowell & Co. and held that  the  assessee  had  carefully  planned  his
   affairs in such a manner as to  deprive  the  Revenue  of  a  substantial
   amount of gift tax.  
The reassessment order was accordingly upheld.
19. The assessee then took up the matter with the  Tribunal  which  held  in
   its order dated 23rd May 2000 that
 in view of the assessment to gift  tax
   made in respect of the assessee for  the  Assessment  Year  1982-83,  the
   notice issued under Section 16(1) of the  Act  was  merely  a  change  of
   opinion and, as such the reassessment proceedings  could  not  have  been
   taken up. On the merits of the  case,  it  was  noted  that  neither  the
   dividend income on the bonus shares nor their value had been taxed in the
   hands of the assessee.  Consequently, the assessee was liable to  succeed
   on the merits of the case also. The gift tax reassessment was accordingly
   quashed by the Tribunal.
20. The Revenue then came up in  appeal  before  the  High  Court  with  the
   substantial question of law mentioned above.
21. In the impugned order,
the High Court held that 
the assessee was  liable
   to gift tax on the value of the bonus shares which were a  gift  made  by
   the assessee to the transferee. 
 It was held that the bonus  shares  were
   income from the original shares by relying upon Escorts  Farms  (Ramgarh)
   Ltd.  v. Commissioner of Income Tax, [1996] 222 ITR 509. 
Accordingly, the
   order of the Tribunal was set aside and the reassessment order upheld.
Discussion and conclusions:
22.  Although  learned  counsel  for  the  assessee  seriously  doubted  the
   correctness of the impugned judgment and order  on  several  grounds,  we
   find that it is not necessary for us to go into all the issues raised  by
   him.
23. The fundamental question before the High Court was
whether there was  in fact a gift of 14,000 bonus shares 
made by the assess to the  transferee.
   The answer to this question lies in the interpretation of Section 4(1)(c)
   of the Act which reads as follows :-
      “Gifts to include certain transfers.
      4.    (1) For the purposes of this Act,-
            (a) xxx
            (b) xxx
           (c) where there is a release, discharge,  surrender,  forfeiture
           or abandonment of any debt, contract or other  actionable  claim
           or of any interest in property by any person, the value  of  the
           release, discharge, surrender, forfeiture or abandonment to  the
           extent to which it has not been found to the satisfaction of the
           Assessing Officer to have been bona fide, shall be deemed to  be
           a  gift  made  by  the  person  responsible  for  the   release,
           discharge, surrender, forfeiture or abandonment;


           (d) to (e) xxx”

24. A perusal of the impugned judgment and  order  facially  indicates  that
   there has been no consideration of the provisions of Section  4(1)(c)  of
   the Act.
From the rather elaborate narration of facts, it is quite clear
   that the assessee had made a valid revocable gift of 6000  equity  shares
   in the company on 20th February 1982 to the transferee.
This is a finding
   of fact conclusively determined by the High Court in the  assessee’s  own
   case.
25. The only event that took place in the  previous  year  relevant  to  the Assessment Year 1989-90 was the revocation of the gift by the assessee on 15th June 1988.  
Was this event enough for the Gift Tax Officer, in 1996,
 to re-open the assessment for the year 1989-90, while keeping in mind the fact that bonus shares were allotted to the transferee on 29th  September 1982 and 31st May 1986? 
It is possible, on an interpretation  of  Section
   4(1)(c) of the Act to answer this question either way, 
but  unfortunately
   the High Court did not even notice this provision of the Act.
Of  course,
   the submission of  learned  counsel  for  the  assessee  is  that  on  an
   interpretation of Section 4(1)(c) of the Act, it cannot be  said  by  any
   stretch of imagination, that the assessee had made a gift of 14,000 bonus
   shares to the transferee in the previous year relevant to the  Assessment
   Year 1989-90.
26. However, we are not inclined to decide this issue finally  since  we  do
   not have the view of the High Court  on  the  interpretation  of  Section
   4(1)(c) of the Act.
Nor do we have the view of  the  High  Court  on  the
   applicability or otherwise of the principle laid down in McDowell & Co.
27. As far as the applicability of Escorts Farms is concerned, 
the  question
   that arose for consideration in that case was the  determination  of  the
   cost of  acquisition  of  the  original  shares  when  bonus  shares  are
   subsequently issued. 
That is the second part of Section  4(1)(c)  of  the
   Act and that question would arise (if at all) only  after  a  finding  is
   given by the High Court on the first part of Section 4(1)(c) of the  Act.
   But, as we have noted above,  the  High  Court  has  not  considered  the
   interpretation of Section 4(1)(c) of the Act.
28. Under the circumstances we have no option but remand the matter  for  de
   novo consideration by the High Court keeping in mind  the  provisions  of
   Section 4(1)(c) of the Act as well as the orders passed in  the  case  of
   the assessee for the Assessment Year 1982-83. 
We do so accordingly.
29. In view of the above,  both  the  Civil  Appeals  are  allowed  and  the
   impugned judgment and order of the High Court is set  aside  but  without
   any order as to costs.
30. We make it clear that the parties are entitled to raise all  contentions
   before the High Court and are at liberty to file additional documents, if
   necessary.

                                       ….…….……………………..J.
                                        (D.K. Jain)





                                         ….…….……………………..J.
                                        (Madan B. Lokur)
New Delhi;
January 22, 2013


















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