Case: Commissioner of Income Tax (Central Circle) Vs. Fomento Barges Private Limited

Oral Judgment:1. On 12.3.2007, the appeal has been admitted on the following two questions as substantial questions of law:-"A) Whether on the facts and in the circumstances of the case, the transaction of purchasing shares over and above the quoted rate of shares amounts to excess payment, without consideration and therefore deemed to be gift made under Section 4(1) (a) of the Gift Tax Act 1958B) Whether on the facts and in the circumstances of the case the purchase of shares by the assessee over and above the quoted rate without consideration and therefore attracts Gift-tax under section 4(1)(a) read with section 2(xxiv)(d) of the Gift Tax Act, 1958"However during the arguments, it is not disputed that answer to second question is contingent upon the first question and accordingly, parties have advanced arguments only on first question.2. Learned counsel for the revenue has taken us through the order of CIT (Appeals) to urge that in fact a loan transaction has been camouflage as purchase of equity shares when in market the shares were listed at Rs.5/-, the same have been sold and purchased at the rate of Rs.10/-. Thus, when there legally could have been loan of Rs.49,00,000/-, a gift of Rs.49,00,000/- has been made to the sister concern by assessee. It is urged that therefore, the provision of Section 4(1)(a) of the Gift Tax Act,1958 are squarely attracted. Support is taken from the judgment of Gujarat High Court reported in the case of Commissioner of Gift Tax Vs. Reva Investment(P) Ltd., (1999) 239 ITR 224. It is submitted that provisions of Gift Tax Act and Schedule (2) prescribed thereunder are very clear. The shares were quoted at Rs.5/- per share and it is purchased by respondent/assessee at Rs.10/- per share. Therefore, it is squarely covered under Section 4(1)(a) of the Gift Tax Act. Support is also taken from the observation of Honble Apex Court in the case of B.T. Patil & Sons Vs. Commissioner of Gift Tax, reported in (2001) 247 ITR 588 (SC) .3. Learned counsel for the assessee has submitted that the question sought to be raised does not arise from the order of ITAT at all. He invited our attention to the finding recorded by CIT(Appeals) that provisions of Section 4(1)(a) of the Gift Tax Act are not attracted. Appeal before the ITAT was filed by respondent/assessee.Assesseecontended that the case of allotment of shares was conferred by CIT (Appeals) as one of the transfer and, hence, filing of appeal before ITAT became necessary. The ITAT accordingly considered the issue. Learned Counsel also invited our attention to the specific query made by the ITAT in this respect and as been recorded by it in paragraph 6 of the impugned order. He relies upon the judgment of the Honble Apex Court in the case Khoday Distilleries Ltd Vs. Commssioner of Income-Tax and another, reported in (2008) 307 ITR 312(SC) , to point out how Apex Court has considered the provisions of Companies Act and Gift Tax Act, and explained different meaning of phrases "transfer", "allotment" and "creation" etc. He pointed out that the genuineness of the transaction between assessee and its sister concern has been affirmed by the ITAT and, as such, in the light of the said finding of ITAT, the question of law as framed does not really arise for consideration.4. The facts show that assessee/respondent before this Court is a private limited company and Sociedade De Fomento Industries Limited is one of its sister concern. Both these companies were one of the promoters of Fomento Resorts and Hotels Limited (hereinafter referred to as "FRHL" for short). FRHL started its activities in October, 1981 and to finance the cost of project, a public issue was made in the year 1982 and thereafter rights issue was made in the year 1984. Loans were also taken from promoters, banks, financial institutions. To meet further need, FRHL approached financial institutions in the year 1986 which in turn agreed to provide for further finance, provided promoters brought additional finance either in the form of equity or as unsecured loans and repay outstanding over due amount. FRHL accordingly made rights issue in August, 1982 of 11,25,000/- equity shares of Rs.10/- each at par. It was fully subscribed by the members of the company including assessee, its sister concern and other share holders. Assessee purchased 9,80,000/- equity shares of Rs.10/- each in August, 1987. At that juncture the shares were quoted in terms of schedule (2) of the Gift Tax Act at Rs.5/- per share. Excess amount of Rs.5/- per share paid by assessee was held by Assessing Officer to be without any consideration and, therefore, a deemed gift under Section 4(1)(a) of the Gift Tax Act. Levy of the Gift Tax on an amount of Rs.49,00,000/- representing difference in market prices and the face value of said 9,80,000/- shares was questioned by Assessee in appeal before CIT(Appeals).CIT(Appeals) in its order dated 12.7.1999 in paragraph 3 accepted the appellants contention that Section 4(1)(a) of the Gift Tax Act had no application. However, it then proceeded to consider the case of cash gift and in the facts noted supra, held that there was cash gift by assessee to FRHL. It therefore, proceeded to confirm the gift tax charged by Assessing Officer. This later finding of the cash gift was questioned by the assessee in appeal before ITAT. The ITAT has evaluated rival contention in this respect. The contention of revenue before the ITAT was that share holding pattern should have been looked into and reasons for bringing additional fund in the form of subscription to the equity shares and not by making loans also should have been properly evaluated.5. In paragraph 6, ITAT has observed "during the course of hearing a query was raised by Bench whether this was right issue or preferential allotment in view of the observations of the learned CIT(Appeals) that no outsiders had participated in such right and the assessee was required to file appropriate documentary evidence in this regard." Its further observation shows that respondent/assessee then filed letter dated 25.2.1996 from financial institution namely Industrial Finance Corporation whereby that institution approved the companys proposal to issue right shares of Rs.112.50 lacs. FRHL after completing necessary formalities approached the Controller of Capital Issues to issue 1181250 equity shares of Rs.10/- each for cash at par. Out of it employees of the company were given a share to the extent of Rs.56250 shares. The Controller of Capital Issues vide letter dated 9.10.1986 gave its approval. The assessee also placed on record copies of Form 2 -Register of right of allotment which reveals that number of peoples participated in rights issue. Application of mind by ITAT proceeded on these lines. In paragraph 9 of the impugned judgment ITAT has confirmed that pricing of shares depended upon the economic strength of the company as well as the market conditions prevailing at the time of making such issues.It further observed that contention of revenue before it "noted supra" could not have been accepted. It also observed that there cannot be any intention of legislature to impose gift tax in such cases because in that event all genuine business transaction done in normal course of business would become chargeable to gift tax also. It also noted in paragraph 9 that FRHL was having sufficient properties and the purpose of right issue was to repay overdue interest/liability to enable company to further obtain funds. This observation needs to be appreciated in the background in the limited challenge placed before ITAT as the finding of CIT(Appeals) that Section 4(1)(a) of the Gift Tax Act had no application was not questioned by revenue.6. In so far as the Division Bench judgment of Gujarat High Court is concerned, the said judgment reported in case of Commissioner of Gift Tax (supra) has been over ruled by the Honble Apex court in its judgment reported in the case of Reva Industries Pvt. Ltd Vs. Commissioner of Gift Tax, (2001) 249 ITR 337. The Honble Apex Court has in the case of Khoday Distilleries Ltd (supra) has explained the differences between the transfer and allotment of share. It has noted in paragraph 7 that it is only on allotment that shares come to existence and in every case the words "allotment of shares" have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. Later on it is also pointed out that there is difference between issue of shares to a subscriber and purchaser of share from existing share holders. It is found that in first case there is creation while in second case there is transfer of chose-in-action. On facts before its the Honble Apex Court has noted that when twenty shareholders did not subscribe to the right issue, the appellant allotted them to the seven investment companies, such allotment was not transfer. It found that therefore, Section 4(1)(a) of the Gift Tax Act had no application.7. We find that this observation of the Honble Apex Court is also attracted in the present matter. We have already noted supra that the finding of Section 4(1)(a) of the Gift Tax Act recorded by CIT(Appeals) was not in question before the ITAT.8. In this situation, we hold that substantial questions of law reproduced supra cannot be answered in favour of the appellant in the present matter.

Decision:
0[ds]6. In so far as the Division Bench judgment of Gujarat High Court is concerned, the said judgment reported in case of Commissioner of Gift Tax (supra) has been over ruled by the Honble Apex court in its judgment reported in the case of Reva Industries Pvt. Ltd Vs. Commissioner of Gift Tax, (2001) 249 ITR 337.   The Honble Apex Court has in the case of Khoday Distilleries Ltd (supra) has explained the differences between the transfer and allotment of share. It has noted in paragraph 7 that it is only on allotment that shares come to existence and in every case the words "allotment of shares" have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. Later on it is also pointed out that there is difference between issue of shares to a subscriber and purchaser of share from existing share holders. It is found that in first case there is creation while in second case there is transfer ofOn facts before its the Honble Apex Court has noted that when twenty shareholders did not subscribe to the right issue, the appellant allotted them to the seven investment companies, such allotment was not transfer. It found that therefore, Section 4(1)(a) of the Gift Tax Act had no application.7. We find that this observation of the Honble Apex Court is also attracted in the present matter. We have already noted supra that the finding of Section 4(1)(a) of the Gift Tax Act recorded by CIT(Appeals) was not in question before the ITAT.8. In this situation, we hold that substantial questions of law reproduced supra cannot be answered in favour of the appellant in the present matter.