COMMISSIONER OF WEALTH TAX vs. MOTOR & GENRAL FINANCE LTD

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WTA/3/2007HC DelhiDLHC01079682200718 February 2011Bench: HON'BLE MR. JUSTICE A.K.SIKRI,HON'BLE MR. JUSTICE M.L. MEHTA4 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the impugned orders of the ITAT were to be set aside. The Court reasoned that while the High Court's previous judgment in the income tax proceedings had established that the consideration received and claimed as a capital loss was a device, it did not ignore the underlying validity of the share transaction or transfer. The amounts were brought to tax as business receipts or losses. Therefore, a similar treatment should have been accorded in the gift tax proceedings. The Court noted that at the stage when the ITAT intervened in the gift tax proceedings, it had only considered the validity of the proceedings and had not conclusively determined whether the transaction under Section 4(1)(a) amounted to a deemed gift. Consequently, the matters were remitted to the ITAT for fresh consideration in accordance with the law. No issue was expressly left undecided, but the substantive determination of a deemed gift was deferred.

What were the facts?

The assessee, M/s Jindal Equipment Leasing & Consultancy Services Ltd., along with Stainless Investments Ltd. and Mansarovar Investment Ltd., held shares in Jindal Strips Limited (JSL). JSL issued Partly Convertible Debentures (PCDs) where shareholders were entitled to right shares and a non-convertible portion. The non-convertible portion could be sold to M/s. Citibank at a discount. The assessee renounced its rights and received consideration, claiming losses. The Assessing Officer (AO) treated the transaction as sham and the amounts received as business receipts. The assessee's appeals to CIT(A) and ITAT were successful, but the Revenue's appeal to the High Court reversed the ITAT's findings, holding the transaction was a device. Subsequently, the Gift Tax Officer initiated proceedings under Section 16(1) of the Gift Tax Act, opining that the renouncement of rights for inadequate consideration constituted a deemed gift under Section 4(1)(a). The ITAT quashed these proceedings, leading to the present appeals by the Revenue.

What were the issues?

1. Whether the ITAT was correct in law in quashing the assessment framed by the Assessing Officer under Section 16(1) of the Gift Tax Act on the ground that the condition precedent for reassessment under the said provision was not satisfied? Assessee's contentions: The assessee argued that the ITAT's approach, recognizing the transaction as a device or invalid, was logical. Once the transaction was deemed invalid, there was no basis for resorting to Section 16 of the Act for gift tax purposes. Revenue's contentions: The Revenue contended that the ITAT erred by assuming that its findings regarding the sham nature of the transaction absolved the assessee of gift tax liability. It was also argued that the ITAT placed undue importance on the timing of share sale transactions. The Revenue relied on the High Court's previous judgment in Commissioner of Income-tax Vs. Jindal Equipment Leasing & Ors. and cited Commissioner of Income-tax, Delhi Vs. Abhinandan Investment Ltd. (2015) 63 taxmann.com 263 (Delhi), Reva Investment Pvt. Ltd. Vs. Commissioner of Gift Tax, (2001) 249 ITR 337 (SC), and Rule 20 of the Third Schedule to the Wealth Tax Act.

Which sections of the Income-tax Act were involved?

Section 16(1),Section 4(1)(a)

AI-generated summary — verify with the full judgment below

GTA 1/2005, 2/2006 & 3/2007

Page 1 of 4

$~28, 29 & 32 * IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision: 29.01.2018 + GTA 1/2005

COMMISSIONER OF GIFT TAX

..... Appellant versus

M/S JINDAL EQUIPMENT LEASING

..... Respondent

GTA 2/2006 COMMISSIONER OF GIFT TAX

.....Appellant versus

M/S STAINLESS INVESTMENTS LTD.

..... Respondent

GTA 3/2007

COMMISSIONER OF INCOME TAX DEL ..... Appellant versus

MANSAROVER INVESTMENT LTD.

..... Respondent

Present: Mr. Deepak Anand, Jr. Standing counsel for appellant. Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocates for respondents.

CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE A.K. CHAWLA

HON'BLE MR. JUSTICE S. RAVINDRA BHAT (ORAL) % The sole question for consideration in these appeals formulated on 18.11.2005, is as follows:

“Whether the ITAT was correct in law in quashing the assessment framed by the Assessing Officer under Section 16 (1) of the Gift Tax Act on the ground that condition precedent for reassessment of the proceedings under the said provision was not satisfied?

2.

The necessary facts in this case are that the assessee (M/s Jindal

GTA 1/2005, 2/2006 & 3/2007

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Equipment Leasing & Consultancy Services Ltd) held shares in Jindal Strips Limited (JSL). Similarly, Stainless Investments Ltd. and Mansarovar Investment Ltd (the appellants in GTA 2/2006 and GTA 3/2007)) also held shares. The JSL made an announcement, issuing Partly Convertible Debentures (PCD). According to the scheme, each of its shareholder was entitled to one right share valued at a face value of `10/- (at a premium of `40/-) and a non-convertible portion, at `60/-. The non-convertible portion could, however, be sold to M/s. Citibank at a discounted rate of `38/-. The assesee renounced its rights and obtained consideration therefor. They also claimed losses on account of the difference between the material value shown by them (of the rights issue) and the consideration received by them. The Assessing Officer (AO), while considering the income tax returns, held that the transaction was sham and proceeded to disregard the claim for capital loss. However, the assessment was concluded on the basis that the amounts received were in fact business receipts. The assessee’s appeals before the CIT(A) and ultimately to the ITAT were successful. The Revenue appealed to this Court. By a judgment (Commissioner of Income Tax Vs. Jindal Equipment Leasing & Ors. ITA 174/2003 and connected cases), the Court reversed the findings of the ITAT. 3. In the meanwhile, Gift Tax Officer formed an opinion that the renouncement of the right issue by the assessee was for inadequate consideration and therefore, amounted to a notional or deemed gift under Section 4(1)(a) of the Gift Tax Act. Notice was issued on the basis that by virtue of second explanation to Section 16(1), failure to

GTA 1/2005, 2/2006 & 3/2007

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file returns, empowered the tax authorities to assess the alleged omission. Taking clue from its order made in the income tax proceedings, the ITAT reversed the stand of the AO. It is in this background that the Revenue urges that the notice under Section 16 in the present case is valid. 4. Apart from relying upon the findings of this Court in Commissioner of Income-tax, Delhi Vs. Abhinandan Investment Ltd. (2015) 63 taxmann.com 263 (Delhi), learned counsel for the Revenue submits that the ITAT proceeded on an erroneous assumption that its findings with respect to the nature of the transaction ( i.e. as sham) absolved the assessee from any gift tax liability. It is also urged that the ITAT fell into error in placing too much importance on the facts that the cost of the shares in this case was determined on the basis of a transaction that took place after the actual sale of shares in this case. 5. Learned counsel relied upon the judgment of Supreme Court in Reva Investment Pvt. Ltd. Vs. Commissioner of Gift Tax, (2001) 249 ITR 337 (SC). He also relied upon Rule 20 of the Third Schedule to the Wealth Tax Act in support of the Revenue’s arguments. 6. Learned Senior counsel for the assessee contended that the approach and findings of the ITAT, taking cognizance of the fact that the declaration with respect to the transaction being sham, was logical. It was urged that once the ITAT took note of the fact that the transaction was invalid or a device, the position with respect to how it had to be treated between the two parties was clear. In these circumstances, there was no question of resorting to the assessee under Section 16 of the Act in the present case.

GTA 1/2005, 2/2006 & 3/2007

Page 4 of 4

7.

This Court has considered the submissions. It is not disputed that in Abhinandan Investments, this Court reversed the ITAT’s findings and held that the consideration received and shown by the assessee to be a capital loss in income tax proceedings was a device. At the same time while holding that the characteristic of the sale proceeds as a capital loss, was sham, the Court did not ignore the underlying validity of the share transaction or transfer. It proceeded to bring the amounts into question to tax – either as business receipts or as business losses. Such being the case, this Court is of the opinion that alike treatment had to be given. Furthermore, at the stage, when the ITAT intervened in gift tax proceedings (which are the subject matter in these appeals), it considered only the validity of the proceedings, but, did not consider whether in fact the transaction under Section 4(1)(a) amounted to a deemed gift; no conclusive finding in that regard was rendered; nor any finding could have been rendered or was given. 8. For the above reasons, the impugned orders are hereby set aside. The matters are remitted to the ITAT for fresh consideration in accordance with law. 9. The appeals are allowed in the above terms.

S. RAVINDRA BHAT, J

A.K. CHAWLA, J JANUARY 29, 2018/rc

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