Commissioner Of Income Taxcoimbatore v. M/S. Centwin Textile Mills Ltd

?IN THE HIGH COURT OF JUDICATURE AT MADRAS%DATED: 08/09/2011*CORAMTHE HON'BLE MR.JUSTICE ELIPE DHARMA RAOandTHE HON'BLE MR.JUSTICE M.VENUGOPAL+Tax Case No.212 of 2008#Commissioner of Income Taxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx$Centwin Textile Mills Ltd.xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx!FOR PETITIONER : J.Naresh Kumar^FOR RESPONDENT : T.N.Seetharaman:ORDER IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 08.09.2011CORAM THE HONOURABLE MR JUSTICE ELIPE DHARMA RAOandTHE HONOURABLE MR JUSTICE M. VENUGOPAL Tax Case No.212 of 2008 Commissioner of Income TaxCoimbatore ... Appellant Vs M/s. Centwin Textile Mills Ltd.,370, Kamaraj Road,Tirupur 641 604. ... Respondent Prayer:- Appeals under Section 260A of the Income Tax Act, 1961 against the orders of the IncomeTax Appellate Tribunal Madras 'D' Bench, dated 16.2.2007 in GTA.No.10/Mds/2004 for theassessment year 1997-1998. For Petitioner : Mr.J. Naresh KumarSenior Standing Counsel for I.T For Respondent : Mr.T.N. Seetharaman - - - JUDGMENT ELIPE DHARMA RAO, J The Revenue has come forward with the present Tax Case Appeal against the order passed by theIncome Tax Appellate Tribunal Madras 'D' Bench, dated 16.2.2007 in GTA.No.10/Mds/2004 for the 2. The facts in brief are as follows :- Revenue is the Appellant. Respondent/Assessee is a concern dealing in readymade garments. Theassessee had allotted shares at the face value of Rs.100/- to the following persons :- (a) Shri P. Govindasamy : 10,000 shares valued at Rs.10 lakhs (b) Shri P. Palanisam : 10,000 shares valued at Rs.10 lakhs (c) Shri P. Kumarasamy : 10,000 shares valued at Rs.10 lakhs For Petitioner : Mr.J. Naresh KumarSenior Standing Counsel for I.T For Respondent : Mr.T.N. Seetharaman - - - JUDGMENT ELIPE DHARMA RAO, J The Revenue has come forward with the present Tax Case Appeal against the order passed by theIncome Tax Appellate Tribunal Madras 'D' Bench, dated 16.2.2007 in GTA.No.10/Mds/2004 for the 2. The facts in brief are as follows :- Revenue is the Appellant. Respondent/Assessee is a concern dealing in readymade garments. Theassessee had allotted shares at the face value of Rs.100/- to the following persons :- (a) Shri P. Govindasamy : 10,000 shares valued at Rs.10 lakhs (b) Shri P. Palanisam : 10,000 shares valued at Rs.10 lakhs (c) Shri P. Kumarasamy : 10,000 shares valued at Rs.10 lakhs As per Rule 5 under Schedule 2 of the Gift Tax Act, the value of unquoted shares of the company ason 31.3.1997 worked out to Rs.408.71 per share. Since the assessee had allotted shares to thepersons who are interested in the company for inadequate consideration, a notice under Section16(2) was issued for the deemed gift. However, a Nil return was filed by the assessee on 7.2.2001and it was stated that allotment of shares of the company does not involve any transfer and for a giftthere should be movable or immovable property and there should be a transfer and further statedthat the question of inadequate consideration would not arise and the company had issued theshares only at the face value. The submission of the Assessee has been rejected by the Gift TaxOfficer by observing that the assessee is a private company in which interest of the public is notinvolved, that the shares were issued to the persons who were interested in the affairs of thecompany and that the amount outstanding to the credit of their account in the Company's Bookswere adjusted against the face value of the share allotted to him. By observing as stated above, theGift Tax Officer came to the conclusion that, as per Section 4(1) of the Gift Tax Act, when a propertyis transferred otherwise than for adequate consideration, the amount by which the value of theproperty as on the date of transfer and the value determined in the manner laid down in Schedule IIexceeds the value of the consideration, shall be deemed to be a gift made by Transfer. Accordingly,the Gift Tax Officer worked out the total value of the shares at the rate of Rs.408.71 amounting toRs.1,22,61,3000/- against the consideration of Rs.30 lakhs offered by the assessee. Thus, the deemedgift was determined on Rs.92,61,300/- for which tax was sought. Aggrieved by the order passed bythe Gift Tax Officer, the assessee preferred G.T. Appeal No.:I-C/03-04 before the Commissioner ofGift-Tax (Appeals) Coimbatore, who, by order dated 7.6.2004, reversed the finding of the Gift TaxOfficer by relying on an earlier decision of the Bangalore Tribunal in Khoday Distilleries Ltd., v.DCIT reported in 81 ITD 438 and also by observing that the two essential conditions of Clause (a) ofSection 4(1) of the Gift Tax are not satisfied. Aggrieved by the aforesaid decision of the AppellateAuthority, the Revenue took the matter in appeal before the Income Tax Appellate Tribunal inG.T.A.No.10 (Mds)/2004, which, by order dated 16.2.2007, confirmed the finding of the appellateauthority. The aforesaid decision is in challenge before this Court at the instance of the Revenue. 3. While admitting the Tax Case Appeal, the following substantial questions of law have beenformulated for consideration :- 3. While admitting the Tax Case Appeal, the following substantial questions of law have beenformulated for consideration :- "1. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right inlaw in holding that there was no gift within the meaning of Section 4(1)(a) of the Gift Tax Act inallotment of shares of face value of Rs.100/- each to the persons who are interested in the company ?2. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in lawin not considering Section 2(xxiv)(d) of the Gift Tax Act which clearly states that any transactionentered into by any person with intent thereby to diminish directly or indirectly the value of his ownproperty and to increase the value of the property of any other person, will amount to transfer ofproperty? 4. Learned Standing Counsel for the appellant contended that as per Section 2(xxiv)(d) of the Gift Tax Act (in short "the Act"), any transaction entered into by any person with an intention to diminish,directly or indirectly the value of his own property and to increase the value of the property of anyother person, then it would amount to transfer of property, whereas, the respondent as the owners of the existing shares, had reduced to the value of the shares to the extent of fresh allotment,thereby value of the shares of other people were increased to that extent and, therefore, to theextent of transfer of assets of the company to the reduced value, they are entitled to pay thedifference in the share amount and they would come under the purview of Section 2(xxiv)(d) and assuch section 4(1)(a) could be invoked. 5. Learned counsel appearing for the assessee supported the decision of the Tribunal and contended that the concurrent finding of the Appellate Authority as well as the Tribunal is based on thedecision of the Supreme Court in Khoday Distilleries Ltd., case and as such it does not call anyinterference from this Court. 6. We have carefully considered the submissions made by the learned counsel for the parties. Inorder to appreciate the respective contentions of the parties and to resolve the controversy weconsider it appropriate to extract definitions of �gift� and �transfer of property� from Section 2 ofthe Act: �2. (xii) �gift� means the transfer by one person to another of any existing moveable or immovableproperty made voluntarily and without consideration in money or money's worth, and includes thetransfer or conversion of any property referred to in Section 4, deemed to be a gift under thatsection. Explanation.�A transfer of any building or part thereof referred to in clause (iii), clause (iii-a) orclause (iii-b) of Section 27 of the Income Tax Act by the person who is deemed under the said clauseto be the owner thereof made voluntarily and without consideration in money or money's worth,shall be deemed to be a gift made by such person;* * * (xxiv) �transfer of property� means any disposition, conveyance, assignment, settlement, delivery,payment or other alienation of property and, without limiting the generality of the foregoing,includes� (a) the creation of a trust in property; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; (c) the exercise of a power of appointment (whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made) of property vested in any person, notthe owner of the property, to determine its disposition in favour of any person other than the doneeof the power; and (d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person;� 7. A reading of this section would clearly show that the words �disposition�, �conveyance�, (a) the creation of a trust in property; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; (c) the exercise of a power of appointment (whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made) of property vested in any person, notthe owner of the property, to determine its disposition in favour of any person other than the doneeof the power; and (d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person;� 7. A reading of this section would clearly show that the words �disposition�, �conveyance�, �assignment�, �settlement�, �delivery� and �payment� are used as some of the modes of transfer ofproperty. The dictionary gives various meanings for those words but those meanings do not help us.We have to understand the meaning of those words in the context in which they are used. Words in asection of a statute are not to be interpreted by having those words in one hand and the dictionary inthe other. In spelling out the meaning of the words in a section, one must take into consideration thesetting in which those terms are used and the purpose that they are intended to serve. If sounderstood, it is clear that the word �disposition� in the context means giving away or giving up bya person of something which was his own, �conveyance� means transfer of ownership, �assignment�means the transfer of the claim, right or property to another, �settlement� means settling theproperty, right or claim � conveyance or disposition of property for the benefit of another, �delivery�contemplated therein is the delivery of one's property to another for no consideration and�payment� implies gift of money by someone to another. Clause (d) of Section 2(xxiv) speaks of atransaction entered into by any person with intent thereby to diminish directly or indirectly the value 8. Coming to the contentions, it is the stand of the appellant Revenue that the allotment of shares infavour of three persons who are interested in the affairs of the company amounts to "transfer" asdefined in 2(xxiv) and, therefore, the assessee is liable. 9. The basis for rejecting the stand of the assessee by the Gift-tax Officer was that the shares wereissued to the persons interested in the affairs of the company and the amount outstanding to thecredit of their account in the Company's Books were adjusted against the face value of the shareallotted to them. The reason for rejecting the claim of the Revenue by the appellate authority as wellas the Tribunal is the decision of the Supreme Court in Khoday Distilleries case. 10. Whether the transaction entered into by the assessee with the shareholders would amount to'transfer of property' as defined under Section 2(xxiv)(d) of the Act is the question arises forconsideration. The Tribunal as well as the Appellate Authority have considered the issue in favour ofthe assessee mainly by relying on the decision of the Bangalore Tribunal in Khoday Distilleries Ltd.,which was subsequently confirmed by the Supreme Court by the decision reported in (2009)1 SCC256. Therefore, one has to see as to whether the principle laid down in the aforesaid decision wouldbe applicable to the facts of the present case. 10. Whether the transaction entered into by the assessee with the shareholders would amount to'transfer of property' as defined under Section 2(xxiv)(d) of the Act is the question arises forconsideration. The Tribunal as well as the Appellate Authority have considered the issue in favour ofthe assessee mainly by relying on the decision of the Bangalore Tribunal in Khoday Distilleries Ltd.,which was subsequently confirmed by the Supreme Court by the decision reported in (2009)1 SCC256. Therefore, one has to see as to whether the principle laid down in the aforesaid decision wouldbe applicable to the facts of the present case. 11. In the aforesaid reported decision, on 29-1-1986 the assessee Company, on the othershareholders not exercising the option given to them to take up the right shares issued by theassessee, allotted them to the seven investment companies, who were the shareholders in theCompany. Twenty shareholders did not subscribe to the rights issue and consequently the appellantCompany allotted them to the remaining seven existing shareholders. The AO held that the saidallotment by way of rights issue was without adequate consideration within the meaning of Section4(1)(a) of the 1958 Act. He further held that the modus operandi was an attempt to evade taxes; thatit was a colourable transaction and since the shares allotted were without adequate consideration,there was a deemed gift under Section 4(1) of the Act. Accordingly, the difference between the valueof the shares on yield basis and the face value of Rs 10 at which the shares were allotted was soughtto be brought to tax under the said section. Aggrieved by the decision of the AO, the appellantcarried the matter in appeal to CIT (A). It was held that the entire exercise undertaken by theappellant was to evade payment of wealth tax by the individual shareholders of the appellantCompany. This finding was given by CIT (A) on the ground that right shares were allotted because20 existing shareholders out of 27 shareholders of the Company did not subscribe for the rights.However, according to CIT (A), gift tax proceedings had to be initiated by the Department notagainst the appellant Company but it ought to have initiated gift tax proceedings against the existingshareholders who had renounced their rights. Having so held, CIT (A) came to the conclusion thatthe entire exercise undertaken by the appellant was to avoid payment of wealth tax and, therefore, itwas held that the Company was liable to pay gift tax for transfer of the said shares to the seveninvestment companies. This decision of CIT (A) stood reversed by the Tribunal which decided theappeal filed by the Company against the Department. The Tribunal came to the conclusion that theallotment of rights by the appellant did not constitute �transfer� as it did not involve any existingproperty at the time of such allotment. According to the Tribunal, the seven investment companiesmade payment towards the face value of the shares and, consequently, it cannot be said that thecontract was without consideration. It was further held that in this case there was no element of giftunder Section 4(1)(a) as there was no transfer of property as defined under Section 2(xxiv) of the1958 Act. Aggrieved by the decision of the Tribunal, the Department preferred Gift Tax Appeal No. 2of 2002, which, vide the impugned judgment, stood disposed of in favour of the Department,thereby, the matter was took in appeal by the company before the Supreme Court. 12. The following substantial questions of law were formulated by the Apex Court for consideration :-"(i) Whether any �gift� arose in terms of Section 2(xii) of the Gift Tax Act, 1958 (the 1958 Act) on theallotment of rights issue by the appellant Company to its shareholders vide Board's resolution dated29-1-1986? (ii) Whether there was any element of �gift� as defined under Section 2(xii) in the appellant issuingbonus shares in the ratio of 1:23 in Apri1/May 1986?" 13. While answering Question No.1, the Hon'be Supreme Court observed as follows :- 12. The following substantial questions of law were formulated by the Apex Court for consideration :-"(i) Whether any �gift� arose in terms of Section 2(xii) of the Gift Tax Act, 1958 (the 1958 Act) on theallotment of rights issue by the appellant Company to its shareholders vide Board's resolution dated29-1-1986? (ii) Whether there was any element of �gift� as defined under Section 2(xii) in the appellant issuingbonus shares in the ratio of 1:23 in Apri1/May 1986?" 13. While answering Question No.1, the Hon'be Supreme Court observed as follows :- "16. There is a difference between �renunciation� and �allotment�. In this case, the Department hasconfused the two concepts. The judgment of the Madras High Court in S.R. Chockalingam Chettiardealt with the case of renunciation in which case under certain circumstances the renouncer couldbe treated as a donor liable to be taxed under Section 4(1)(a) of the Gift Tax Act, 1958. That is notthe situation here. In the present case, the Department has sought to tax the appellant Company asa donor under the 1958 Act for making allotment of right shares. The Department has not taxed therenouncer shareholders despite the decision of CIT (A). Allotment is not a transfer. Moreover, thereis no element of existing right in the case of allotment as required under Section 2(xii) of the 1958Act. In the case of renunciation for inadequate consideration in a given case Section 4(1)(a) couldstand attracted. However, in such a case, the Department has to proceed against the renouncer(shareholder). For the above reasons, the judgment of the Madras High Court in S.R. ChockalingamChettiar case has no application. 17. One more aspect needs to be mentioned. As stated above, in this case, even according to CIT (A),the right shares were allotted to the seven investment companies because the other existingshareholders did not subscribe for the shares. According to CIT (A), the gift tax proceedings ought tohave been initiated against the existing shareholders, who had renounced their rights. We aresurprised that despite the orders passed by CIT (A), the Department did not initiate proceedingsunder the Gift Tax Act against the shareholders who had renounced their rights, particularly whenCIT (A) has specifically said so in her order. For the aforestated reasons, we hold that the word�allotment� indicates creation of shares by appropriation out of the unappropriated share capital toa particular person and that such creation did not amount to transfer. That, in any event, liability topay gift tax would be on the donor (shareholder) who exercises the option to renounce and not onthe appellant Company. Accordingly, Question 1 is answered in favour of the appellant and againstthe Department." Ultimately, the Apex Court allowed the appeal preferred by the assessee Company. 14. From the facts of the aforesaid decision, it is seen that there were 27 existing shareholders andthe company had allotted rights share to seven investment companies out of 27 as the remaining 20did not subscribe to the rights issue. The Apex Court, keeping in view of its earlier judgment in SriGopalan Jalan and Company (1964) 3 SCR 698, had came to a conclusion that in the KhodayDistilleries case the allotment of shares have been used to indicate the creation of shares byappropriation out of the unappropriated share capital to a particular person and not purchase of ashare from an existing shareholder. Taking into account that the transfer of shares is nothing but acreation, the Apex Court came to a conclusion that such allotment was not transfer. 10. Coming to the present case, taking into consideration the factual scenario, with respect, we areof the considered opinion that the decision of the Supreme Court in Khoday Distilleries (cited above)is not applicable to the facts of the present case for the following reasons. 11. In the present case, the assessee company had allotted 10,000 shares each at the face value ofRs.100/- to three individuals, viz., Shri. P. Govindasamy, Shri P. Palanisamy and Shri P. 10. Coming to the present case, taking into consideration the factual scenario, with respect, we areof the considered opinion that the decision of the Supreme Court in Khoday Distilleries (cited above)is not applicable to the facts of the present case for the following reasons. 11. In the present case, the assessee company had allotted 10,000 shares each at the face value ofRs.100/- to three individuals, viz., Shri. P. Govindasamy, Shri P. Palanisamy and Shri P. Kumarasamy. It is not in dispute that at the time of allotment of shares, the value of the share as perthe market value was Rs.408.71. The difference amount between the face value and the actual valuewas claimed as tax by the Department. The two essential requirements to bring the transactionwithin clause (a) of Section 4(1) of the Gift Tax Act are (1) there should be a property and (2) thereshould be a transfer. According to the assessee, the allotment does not involve transfer andtherefore this clause is not attracted. On contra, according to the Revenue, it is a transfer as therewas purchase of share from an existing shareholder i.e., the company. From the facts it is seen thatthe shares have been allotted to three individuals who were interested in the affairs of the companyand the amount outstanding to the credit of account were adjusted against the face value of theshare allotted to them. These shares were allotted as that of a new shareholder. It is quiteunderstandable that when shares are allotted to a new shareholder, the value as on the date of thepurchase should be taken into consideration and not the face value of the share. When the marketvalue of the share is Rs.408.71, the assessee has transferred the share to a new shareholder, who isnot an existing shareholder, at the face value of Rs.100/- that too the consideration for the saidtransfer was adjusted from the amount outstanding to the credit of the purchasers. It is not the caseof the assessee that these shares were allotted as bonus or shares on rights basis as contemplatedunder Section 81 of the Companies Act on the three individuals as has been done in KhodayDistilleries case. This transaction is said to be "transfer" of shares and not "creation" of shares.Therefore, it cannot be said that Section 2(xxiv)(d) of the Gift Tax Act would not apply to the presentcase. 12. The facts of the present case can also viewed from another aspect. An individual assessee sold ahouse-site for a consideration to a Trust on the market value. The Sub-Registrar adopted theguideline value for stamp duty purposes, which was higher than the market value. The claim of theassessee was that the market value should be adopted. In a similar situation, this Court inCommissioner of Gift-tax v. Dr.Mrs. Malini Krishnan reported in (2002) 258 ITR 0414, observed asfollows :- "The Commissioner has rightly stated that a broad view should be taken while deciding the questionas to whether the gift is a deemed gift. It is only is cases where the difference in price is abnormal,the conclusion that the vendor has consciously given away to the buyer a valuable thing at a muchlesser value only to favour the buyer can be reached, and the question of deemed gift would arise."(Emphasis added) 13. Applying the said principle to the case on hand, it is apparent that the assessee has consciouslygiven away to the buyer a valuable thing viz., the shares, at a much lesser value only to favour thebuyer. It is not the case of the assessee that the shares were sold at the market value available atthat time and that the buyer/shareholders have paid the market value of the shares allotted to themand the purchasers have no interest over the company. 13. Applying the said principle to the case on hand, it is apparent that the assessee has consciouslygiven away to the buyer a valuable thing viz., the shares, at a much lesser value only to favour thebuyer. It is not the case of the assessee that the shares were sold at the market value available atthat time and that the buyer/shareholders have paid the market value of the shares allotted to themand the purchasers have no interest over the company. 14. Viewed from any angle, we are not in a position to accept the case of the assessee. The appellateauthority as well as the Tribunal have placed much reliance on the decision of the Supreme Court inKhoday Distilleries's case for reversing the order of the Gift-tax officer and, since the aforesaiddecision is distinguishable to the facts of the present case, we have no hesitation in reversing theconcurrent finding arrived at by the appellate authority as well as the Tribunal. 15. For the aforesaid reasons, the substantial questions of law arisen for consideration are answeredagainst the assessee and in favour of the Revenue. Accordingly, the Tax Case Appeal is allowed.There would be no order as to costs. (E.D.R.,J.) (M.V.,J.)Index :Yes / No 08.09.2011Website :Yes / No dpk To 1. The Income Tax Appellate Tribunal'D' Bench, Chennai. 2. Commissioner of Income TaxCoimbatore. ELIPE DHARMA RAO,J.and M. VENUGOPAL, J dpk