WG CMDR A G MATHEWS RETD Vs. COMMISSIONER OF GIFT TAX
HIGH COURT OF KERALA
Wg Cmdr A G Mathews Retd
COMMISSIONER OF GIFT TAX
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G.SIVARAJAN, J. -
(1.) THE Income Tax Appellate Tribunal, Cochin Bench has referred the following questions of law for decision by (this court under section 26(3) of the Gift Tax Act (hereinafter referred to as Act) at the instance of the assessee pursuant to the direction issued by this court in the judgment dated 17 -11 -1998 in O.P. No. 13793 of 1997.
'1. Whether in the facts and circumstances of the case, the Tribunal should have upheld that deemed gift theory was not applicable to the sale of the unquoted shares made on compelling circumstances, which are amply established by the petitioner ? 2. Whether in the facts and circumstances of the case, the Tribunal was wrong in upholding the application of wealth tax valuation in the place of valuation as per the yield method, with regard to the sale of unquoted shares ?'
(2.) THE brief facts necessary for adjudication of the abovesaid questions of law are as follows : The applicant -assessee was holding 14,040 equity shares in Malayala Manorama Co. Ltd., Kottayam. The said shares had a face value of Rs. 10 each. In October, 1985 the assessee sold the said shares to Smt. Rachel Mammen and Shri Roy Mammen, Bangalore at Rs. 5 per share. The Gift Tax Officer noted that the purchaser are the grand children of Sri. K.M. Mathew, who is the uncle of the assessee. The officer was of the view that the shares had been sold at a price lower than the market value and so the provisions of the Act were attracted. The officer had also noted that in the wealth tax assessment in the case of another shareholder the market value of the shares had been assessed at 44.14 per share, The officer accordingly, proposed to take the market value of the unquoted equity shares by applying the provisions of rule 1D of the Wealth Tax Rules and adopted the value of Rs. 44.14, The market value of 14,040 shares was thus determined at Rs. 6,19,725. As the consideration received by the assessee at Rs. 5 per share was only Rs. 70,200, the balance amount of Rs. 5,49,525 was deemed to have been gifted to the purchasers who were his relatives. The officer had accordingly brought the difference of Rs. 5,4,9,525 to tax after allowing the exemption provided under section 5(2) of the Act. The Commissioner (Appeals) in the appeal filed by the assessee did not accept the contention of the assessee that he was badly in need of funds to celebrate the marriage of his son and so he had to dispose of the shares at the price given by the transferees. The Commissioner (Appeals) however accepted the contention of the assessee that the shares should be valued on yield basis following the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia.(1980) 122 ITR 381. Being aggrieved by the said order the department filed appeal before the Tribunal. The assessee also filed a cross -objection. The Tribunal allowed the appeal filed by the department and dismissed the cross objection filed by the assessee.
The Tribunal had relied on the decision of a Division Bench of this court in CGT v. Mammen Mathew (1986) 158 ITR 466 where it was held that in the absence, of any provision for valuation of unquoted shares in the Gift Tax Rules the provisions of the sister enactment, namely rule 1D of the Wealth Tax Rules has to be applied for determination of the market value of the shares and that the provisions of rule 1D of the Wealth Tax Rules are mandatory. The Tribunal also relied on the decision of the Supreme Court in Bharat Hari Singhania v. CWT : 207ITR1(SC) where it was held that rule 1D is mandatory and has to be applied. It is in these circumstances the questions of law specified above have been referred to this court for decision.
(3.) WE have heard Sri, K.P. Dandapani, learned counsel for the applicant and Sri. PK.R. Menon, learned senior Central Government standing counsel for Taxes appearing for the respondent. Sri. Dandapani submitted that the assessee had sold the shares in Malayala Manorama Co. Ltd., Kottayam since he was badly in need of money for celebrating the marriage of his son, that there was nobody to purchase the said shares at a higher price at that time and therefore he was forced to sell the said shares to Smt. Rachel Mammen and Sri. Roy Mammen, Bangalore at Rs. 5 per share. The counsel submitted that the two persons mentioned above are not the grand children of Sri. K.M. Mathew as alleged by the officer. He submitted that the said two persons are the grand children of Sri. K.M. Jacob, the brother of Sri. K.M. Mathew and that the assessee had married the daughter of Sri, K.M. Oommen, another brother of Sr. K.M. Mathew. The counsel submitted that the purchasers are not the relations of the assessee as understood in the taxation laws. He also submitted that the assessing officer had valued the shares at the value fixed in the case of another assessee in the wealth tax assessment by applying rule 1D of the Wealth Tax Rules. The counsel submitted that rule 1D of the Wealth Tax Rules was omitted with effect from 1 -4 -1989 by the Wealth Tax (Second Amendment) Rules, 1989. The counsel also submitted that though the Commissioner (Appeals) had not accepted the case of the assessee that no gift is involved in the transaction the said authority relying on the decision of the Supreme Court in Smt. Kusumben D. Mahadevias case (supra) which held that the appropriate method for valuation of unquoted shares is the yield method and not the break -up method and the shares were valued by applying the yield method. The counsel also submitted that the assessee had also remitted the gift tax due as per the said valuation Though the counsel had argued for the acceptance of the case that there is no gift involved in the transaction ultimately the counsel submitted that the Tribunal was not justified in setting aside the order of the Commissioner (Appeals). The counsel in support of his contentions relied on the decision of the Supreme Court in CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai : 170ITR144(SC) and also certain observations in the decision of the Supreme Court in Bharat Hari Singhanias case (supra). The counsel had also relied on the decision of the Bombay High Court in Seth Hemant Bhagubhai Mafatlal v. M. Rama Iyer GTO : 144ITR737(Bom) .;
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