KHODAY DISTILLERIES LTD. vs. COMMISSIONER OF INCOME TAX AND ANR.

CIVIL APPEAL No. 6654/2008Supreme Court[2008] 15 S.C.R. 113314 November 2008Bench: 2 JudgesAuthor: S.H. KAPADIA, B. SUDERSHAN REDDY18 pages
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What were the facts?

The appellant company, Khoday Distilleries Ltd., had 27 shareholders, including seven investment companies. The company announced a rights issue. Twenty shareholders did not subscribe, and their rights were allotted to the seven investment companies. Subsequently, the company issued bonus shares. The Assessing Officer (AO) considered the rights issue allotment without adequate consideration as a deemed gift under Section 4(1) of the Gift Tax Act, 1958, taxing the difference between the yield-based value and the face value. The AO also levied gift tax on bonus shares. The CIT(A) held the company liable for gift tax on the transfer of shares to investment companies, suggesting proceedings against renouncer shareholders. The Tribunal allowed the company's appeal, holding that allotment of rights was not a transfer and the contract was with consideration. The Department appealed to the High Court, which ruled in its favour. The present appeal is against the High Court's decision.

What did the Supreme Court hold?

The Supreme Court held that the allotment of rights shares by the appellant company to the seven investment companies was not a 'transfer' as it involved the creation of new shares and not the transfer of existing property. Therefore, Section 4(1)(a) of the Gift Tax Act, 1958, was not attracted. The Court noted that the investment companies had paid the face value for the shares, indicating consideration. The Court further clarified that the liability to pay gift tax, if any, would be on the renouncer shareholder who exercised the option to renounce, not on the company. The Court found that the Department had not initiated proceedings against the renouncer shareholders despite observations by the CIT(A). Regarding bonus shares, the Court held that fully paid bonus shares are a distribution of capitalized undivided profits and recipients cannot be considered donees, thus not constituting a 'gift' under Section 2(xii). The Court also noted conflicting submissions from the Department regarding tax evasion, making their case unsustainable. The High Court's judgment was set aside, and the appeal was allowed.

What were the issues?

1. Whether the allotment of rights shares by the appellant company to the seven investment companies, where other shareholders did not subscribe, constituted a 'transfer' and a 'gift' under Section 2(xii) and Section 4(1)(a) of the Gift Tax Act, 1958, attracting gift tax liability on the company. - Assessee's contention: The allotment of rights shares was a creation of new shares, not a transfer of existing property. The investment companies paid the face value, so there was consideration. Bonus shares are a distribution of capitalized profits and not a gift. - Revenue's contention: The allotment was without adequate consideration, constituting a deemed gift. The company's actions were aimed at tax evasion. 2. Whether the issuance of bonus shares by the appellant company was exigible to gift tax. - Assessee's contention: Bonus shares are a distribution of capitalized undivided profits and not a gift. - Revenue's contention: The issuance of bonus shares was part of a tax evasion scheme.

Which sections of the Income-tax Act were involved?

Section 2(xii),Section 4(1)(a),Section 2(22)

AI-generated summary — verify with the full judgment below

- [2008] 15 S.C.R. 1133 ~ KHODAY DISTILLERIES LTD. A v. COMMISSIONER OF INCOME TAX AND ANR. (Civil Appeal No. 6654 of 2008) NOVEMBER 14, 2008 B [S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.] Gift Tax Act, 1958: ss. 2(xii), 4(1) - Rights issue by Company - Not c subscribed by shareholders - Allotment to remaining shareholders-investment companies - Liability of Company to pay gift tax - Held: Such allotment was not transfer - There was no element of existing right - Thus, no 'gift' arose ..: in terms of s. 2(xii)- Deemed gift uls. 4(1)(a) also not attracted D - In any event, liability to: pay gift tax would be on donor- shareholder who exercised the option to renounce and. not on the company - Despite decision of Appellate Authority, Department did not initiate gift tax proceedings against renouncer shareholder - As regard, evasion of tax, E submission of Department was conflicting - Thus, order of High Court that Company was liable to pay gift tax for transfer of shares to investment companies, set aside. -" s. 2(xii) - Bonus shares - Exigibility to gift tax - Held: Fully paid bonus shares are merely distribution of capitalized F undivided profit - Recipie

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