Satya Nand Munjal vs. CGT (2013) 350 ITR 640(SC)
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 Chandran 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 eight months within which the gift could be revoked.
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 6,000 equity shares was made by the assessee to the transferee.
On 29th September, 1982, the company issued bonus shares and since the transferee was a holder of the gifted equity shares, 4,000 bonus shares of the said company were allotted to the transferee by the company. Similarly, on 31st May, 1986, another 10,000 bonus shares were allotted to the transferee by the company.
Thereafter, during the window of eight months, the assessee revoked the gift on 15th June, 1988, with the result that the 6,000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transfree while it was the holder of the equity shares of the company continued with the transferee.
Assessment proceedings for the assessment year 1982-83
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 and Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC). Accordingly, the Assessing Officer, while holding the gift to be void, made the assessment on a protective basis.
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.
The assessee then preferred a further appeal to the Tribunal and by its order dated 23rd August 1991, allowing the appeal; the Tribunal held that the revocable gift to be valid. It was noted the concept of a revocable transfer by way of gift was recognised by section 6(2) of the Gift-tax Act, 1958 (“the Act”). The value of the gift in such a case was to to calculated in terms of rule 11 of the Gift-tax Rules 1958.
Feeling aggrieved by the decision of the Tribunal, the Revenue took up the matter in appeal before the Punjab and Haryana High Court. By its judgement and order in CGT vs. Satya Nand Munjal [2002] 256 ITR 516 (P&H) 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.”
Assessment proceedings for the assessment year 1989-90
On 30th January, 1996, the Gift-tax Officer issued a notice to the assessee u/s. 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 year. The assessee responded to the notice by simply stating that there is no gift that had escaped assessment.
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 by the transferee from the transferred shares.
The Assessing Officer held that the transferee does not become the owner of the gifted shares until the transfer is an irrevocable transfer. Proceedings 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 6,000 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.
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. The Commissioner also referred to McDowell and Co. Ltd. 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.
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 u/s. 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. The Revenue then came up in appeal before the High Court with the following substantial question of law:
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the gift tax assessment in the assessee’s case?”
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. vs. CIT [1996] 222 ITR 509 (SC). Accordingly, the order of the Tribunal was set aside and the reassessment order upheld.
On appeal to the Supreme Court by the assessee, the Supreme Court observed that the fundamental question before the High Court was whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. According to the Supreme Court the answer to this question lay in the interpretation of section 4(1)(c) of the Act, but a perusal of the impugned judgment and order facially indicated that there had been no consideration of the provisions of section 4(1) (c) of the Act.
The submission of the learned counsel for the assessee is that on an interpretation of section 4(1)(c) of the Act, it could not 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.
The Supreme Court however, was not inclined to decide this issue finally since it did not have the view of the High Court on the interpretation of section 4(1)(c) of the Act. Nor did it have the view of the High Court on the applicability or otherwise of the principle laid down in McDowell and Co. Ltd.
As far as the applicability of Escorts Farms is concerned, the Supreme Court observed that 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 finding is given by the High Court on the first part of section 4(1)(c) of the Act.
Under the circumstances, the Supreme Court remanded 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.
