1 mgj IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION Gift Tax Reference No.3 of 1987 The Commissioner of Gift Tax, Central I, Bombay ..Applicant vs. Administrators of Estate of late Sir J.M.Schindia ..Respondent Mr.J.D.Mistry with Mr.P.C.Tripathi i/b Mr.A.K.Jasani for applicant. Mr.D.K.Kanwal with Mr.H.D.Pandey for respondent. Judgment Reserved on: 10.3.2010 Judgment pronounced on:22.3.10 CORAM: V.C.DAGA AND K.K.TATED JJ 22 nd March,2010 J U D G M E N T: (Per V.C.Daga J.) 1 This Gift Tax Reference at the instance of the Revenue relating to the assessment year 1968-69, is made by the Income Tax Appellate Tribunal, Bombay under section 26(1) of the Gift Tax Act, 1958 to 2 seek opinion of this Court on the following two substantial questions of law. Whether on the facts and in the circumstances of the case and in law the ITAT was justified in (1) holding that property can be valued on rent capitalization method to determine the fair market value of the property for purpose of Gift Tax Act and (2)holding that by valuing the property in question after applying the well recognized methods under the W.T.Rules, there is no question of deemed gift. THE FACTS 2 The relevant facts are that the administrator of the estate of late Sir J.M.Scindia was owning 1/3 rd share in the immovable property styled as Samundra Mahal while the other 2/3 rd share in this property was held by the H.U.F. Of late Sir J.M.Scindia. Originally, the entire property belonged to the HUF of late Sir J.M.scindia. On the death of Sir J.M.Scindia on 16 th July, 1961 his 1/3 rd share in the HUF properties devolved upon his legal heirs and the remaining 2/3 rd share 3 continued to belong to HUF. This property was jointly owned by the Administrator of the estate of late Sir J.M.Scindia and the HUF of Sir J.M.Schindia. During the previous year relevant to the year under appeal, this property was sold to M/s Scindia Investments Pvt. Ltd. a company closely held by the members of the ex-rulers of Gwalior for a sum of Rs.40,00,000/- The Gift Tax Officer (G.T.O.) referred the issue of valuation to the Valuation Officer for the purpose of assessment under the Wealth Tax Act. The Valuation Officer found the market value of the property as on 31 st March 1967 worth Rs. 86,70,000/- 3 The difference between the market value of the property as determined by the District Valuation Officer and the price at which the property was shown as sold or transferred worked out to Rs.46,70,000/-. The G.T.O. on this basis held that the 4 difference between the two valuations constituted deemed gift under sec.4(1) of the Gift Tax Act. He thus initiated proceedings by issuing notice under sec. 16(1) of the Gift Tax Act and finally issued notice under sec.16(1) of the Gift Tax Act. He on merits subjected the above difference to gift tax proportionately in the hands of the Administrator of the estate of late Sir J.M.Schindia and the HUF of late Sir J.M.Scindia. Being aggrieved by the above the assessee carried the appeal before the Commissioner Gift Tax (Appeal) (C.G.T. (Appeals). The view taken by the G.T.O. was confirmed by the C.G.T.(Appeals). Not satisfied with the above orders, the assessee invoked appellate powers of the Tribunal. The Tribunal held that the property can be valued on the rent capitalisation method and observed that on 5 the basis of the standard rent of the property the value of the property can be determined for the purpose of arriving at fair market value of the property which it can fetch in the open market. 4 The Tribunal further held that by following the above method the value of the property is less than sale price disclosed by the assessee. As such there will be no question of deemed gift. The appeal was allowed by the Tribunal. 5 Not satisfied with the order of the Tribunal the Revenue sought reference to this Court. The Tribunal, prima facie; finding the question of law requiring consideration of this Court, made a reference to consider the questions extracted in the opening part of this judgment. CONSIDERATION 6 Mr.Mistry, learned Counsel appearing 6 for the applicant and Mr.Kanwal for the respondent made their submissions in support of their respective contentions 7 Having heard both sides, the factual matrix drawn herein above is not in dispute. However, it appears that the questions of law referred for the opinion of this Court by the Tribunal are squarely covered by the two judgments of this Court. One in the case of Madhusudan Dwarkadas Vora Vs. Superintendent of Stamps reported in 1983 (141) ITR 802(Bom) and another in the case of Jehangir Mahomedali Chagla and Another Vs. M.V.Subrahmanian, Additional First Assistant Controller of Estate Duty and others reported in 1985 (155) ITR 637 (Bom). 8 In the case of Madhusudan Dwarkdas (supra),Dwarkadas Vora died on 29 th December, 1979. In the proceedings for probate of his Will, Madhusudan had annexed to the petition 7 a schedule of the assets of his late father. Item no.21 thereof related to a ½ share in a self occupied house property which was valued at Rs.1,64,000/- The Collector and Superintendent of Stamps opined that it was under valued and determined the value of the property at Rs.3,70,787/- adopting the land and building valuation method. This Court held that the method provided under Rule 1BB of the W.T.Rules was rightly applied for the purpose of ascertaining the value for payment of estate duty. 9 The aforesaid judgment in the case of Madhusudan D.Vora (supra) was followed by this Court in the case of Jehangir Mahomedali Chagla wherein this Court held that rental method as laid down in Rule 1BB of the Wealth Tax Rules was required to be followed even under the Estate Duty Act, 1953 in respect of the estate of the deceased, who, had left for heavenly abode 8 on 9 th February 1981 despite the fact that there was no link between the Estate Duty Act or the Rules and the Wealth Tax Act or the Rules. 10 In the Estate Duty Act, 1953, an amendment was introduced with effect from March 1, 1981 whereby section 36(3) of the Estate Duty Act was inserted. It was advantageous to the assessee since, interalia, it provided the above said link with the Wealth Tax Act. But, as already mentioned, the deceased in question therein had died prior to March 1, 1981 i.e. on 9 th February, 1981. In that connection, the argument of the Revenue in that case was that the abovesaid section 36(3) could not be invoked by the assessee and the property value of the flat in question could not be determined in accordance with Rule 1BB of the Wealth Tax Rules, but it ought to have been on the estimated price, which the flats 9 would have fetched if sold in the open market on the date of death of the deceased. 11 Repelling the above contention, the learned Single Judge of this Court relying on the principles laid down in Patel Gordhandas Hargovindas Vs. Municipal Commissioner reported in AIR 1963 S.C.1742 at page 646 of 155 ITR held as under: The Legislature, therefore, to give effect to this harmonious construction inserted sub-section (3) of section 36 in the Estate Duty Act, and in my judgment, the method recognized under rule 1BB for valuation is the only method available to the Controller for valuation of the flat under section 36(1) of the Estate Duty Act.....Mr.Seervai submitted that as there were no rules under the Estate Duty Act for determining the value of the flat on the basis of the price it would fetch if sold in the open market, the method provided by rule 1BB of the Wealth Tax Rules should be applied and in support of his 10 submission relied on the decision of the single Judge in the case of Madhusudan Dwarkadas Vora Vs.Superintendent of Stamps (1983)141 ITR 802(Bom)....The learned Judge held that the same method provided under rule 1BB of the Wealth Tax Rules must be applied for the purpose of ascertaining the value for payment of estate duty and drew support for the conclusion from the decision of the Mysore High Court in the case of CED V.J.Krishna Murthy (1974) 96 ITR 87....I am in respectful agreement with the conclusion reached by the learned Judge. (Emphasis supplied) The following further observations of the Bombay High Court in the abovesaid decision is also significant (at page 645 of 155ITR) : By far the more prevalent, especially in urban areas, is the annual value method (another name for the abovesaid rental method), where the net notional annual rental value of the property is determined in the manner done for income tax purpose. The amount is then capitalised by a 11 multiplier, depending on the economic factors prevalent at the relevant time.Annual value method is entirely based on the rent realised from the property and the rent is standard or fair rent when it is regulated by rent legislation. The annual value method is a statutory recognised method for valuation of houses for the purpose of municipal tax, income tax and wealth tax and there is no rational explanation why the said method should not be adopted for ascertaining the value of the flat for purposes of estate duty. (emphasis supplied) 12 In the aforesaid back drop, according to the learned Counsel for the assessee, under the present Gift Tax case also the above rental method has been rightly adopted by the Tribunal. 13 Having seen both the judgments of this Court and principle culled out therefrom reliance placed by the Tribunal on Rule 1BB for the purpose of valuation cannot be 12 faulted with. The Tribunal has rightly relied upon the judgment in the case of Madhusudan Dwarkadas Vora which has been subseqauently followed by this Court in the subsequent judgment as stated hereinabove. 14 In the result both the questions referred for the opinion of this Court are answered against the Revenue and in favour of the assessee. Order accordingly. No order as to costs. (K.K.TATED J.) (V.C.DAGA J.)