Holding

The transaction was on adequate consideration because the value of the shares received equals the market value of the jewellery, so no deemed gift arises under Section 4(1)(a).

Summary

Reva Investment Pvt Ltd transferred jewellery, valued at Rs 13,91,350, to its twelve wholly‑owned subsidiary companies in exchange for fully paid equity shares having a face value of Rs 5,69,400. The subsidiaries held no assets other than the jewellery, while the shares received represented the entire shareholding of those subsidiaries. The Revenue treated the difference between the market value of the jewellery and the face value of the shares (Rs 8,21,950) as a ‘deemed gift’ under Section 4(1)(a) of the Gift Tax Act, 1958 and levied gift tax. The Assessing Officer’s order was set aside by the Commissioner (Appeals) and upheld by the Tribunal, but the Gujarat High Court reversed that view. The Supreme Court allowed the appeal, holding that the consideration – the shares – must be valued at the market value of the jewellery, making the transaction on adequate consideration and therefore not a deemed gift. Consequently, the assessee was not liable to gift tax.

Issues considered

Whether the transfer of jewellery for shares of wholly‑owned subsidiaries amounts to a ‘deemed gift’ under Section 4(1)(a) of the Gift Tax Act, 1958.
How adequacy of consideration is to be determined when the consideration consists of shares whose only asset is the transferred property.
Whether the assessing officer may treat the difference between the face value of the shares and the market value of the jewellery as a gift.

Legislation cited

Gift Tax Act, 1958s. 15(2), s. 16(1), s. 2(xii), s. 3, s. 4(1)(a)

Subjects

gift taxdeemed giftadequacy of considerationvaluation of sharestransfer of propertyGift Tax Act 1958corporate restructuringsubsidiarymarket valueface value

Judgment

A REVA INVESTMENT PVT. LTD.
v.
COMMISSIONER OF GIFT TAX, GUJARAT II

MAY 2, 2001

B [S.P. BHARUCHA AND D.P. MOHAPATRA, JJ.]

Gift Tax Act, 1958-Sections 2(xii) and 4(l)(a)-Transfer of jewellery
worth Rs. 13,91,350 to wholly owned subsidiary companies in return of
allotment of fully paid equity shares of total face value of Rs. 5,69,400-
C Deemed Gift-Inadequate consideration-Held, there is no deemed gift since
the value of the shares transferred in consideration is based on the value of
the jewellery.

Assessee-Company transferred its jewellery to its twelve wholly owned
D subsidiary companies, which in return allotted fully paid equity shares of
total face value of Rs. 5,69,400. After the transfer, the jewellery constituted
the only asset of the twelve companies against the entire share holding of
the assessee. In pursuance to a notice under Section 16(1) of the_ Gin Tax
Act, 1958, the assessee filed a 'nil' return of gifts. Another notice under
Section 15(2) of the Act was issued by the Revenue holding that the market
E value of the jewellery on the date of transfer was Rs. 13,91,350 and that
there was a 'deemed gift' of Rs. 8,21,950, being the difference between the
market value of the jewellery and the face value of shares allotted, for which
the assessee is liable to pay gift tax under the Act On appeal by the assessee,
Commissioner (Appeals) set aside the order of the Gift Tax Officer. The
Tribunal upheld the same holding that there was no 'deemed gift' !'8 the value
F taken for the jewellery must be taken to be the value offully paid up shares
issued to the assessee on the break up method of valuing of shares of private
limited companies. On a reference under Section 26(1) of the Act, the High
Court answered the question of law in favour of the Revenue. Hence the
appeal by the assessee.
G Allowing the appeal, the Court

HELD : 1.1. The provision of 'deemed gift' under Section 4(1)(a) of the
Gift Tax Act, 1958 is intended to bring within the purview of the tax such
transactions which are entered into between the parties to evade gift tax. For
H invoking deeming provisions of Section 4(1)(a) of the Act, inquiries have to
360
REVA INVEST PVT. LTD. v. COMMR. OF GIFT TAX 361
be made regarding: (1) the existence of transfer of property and (2) the A
extent of consideration given. It is necessary for the assessing officer to
show that the property has been transferred othenvise than for adequate
consideration. The finding as to inadequacy of the consideration is the
essential sine--qua-non for application of the provisions of 'deemed gift'. The
provision is to be construed in a broad commercial sense and not in a narrow B
sense. In order to hold that a particular transfer is not for adequate
consideration, the difference between a true value of the property transferred
and the consideration that passed for the same must be appreciated in the
context of the facts of the particular case. If the transaction involves transfer
of certain property in lieu of certain other property received then the process
of evaluation of the two items of property should be similar and on such C
evaluation, if it is found that there is appreciable difference between the value
of the two properties, then the transaction will be taken as 'deemed gift' to
the extent provided in the Section. It is to be found that the transaction was
on adequate consideration and the parties deliberately showed the valuation
of the two properties as the same to evade tax. Such a conclusion cannot be
drawn merely because according to the assessing officer there is some D
difference between the valuation of the property transferred and the
consideration received. (365-A-E]

1.2. There was no gift involved in the transaction, for whatever is the
value of the jewellery is in fact the value of the shares transferred in E
consideration. Revenue has committed an error in treating the transaction
between the parties as a 'deemed gift'. The High Court was in error in holding
that in the facts and circumstances of the case the transaction could be held
to be a 'deemed gift' within the purview of Section 4(1)(a) of the Act and in
holding the assessee liable for the tax. [366-F]
F
Bireswar Sarkar v. Gift Tax Officer, (1997) 223 ITR 404 Cal.; C.G.T. v.
lndo Traders and Agencies (Madras) P Ltd., (1981) 131 ITR 313 Mad.;
Commissioner ofIncome Tax v. Jacobs (P) Ltd.. (1999) 237 ITR 433 Ker. and
Commissioner of Gift Tax v. D. Surendranath Reddy, (1998) 233 ITR 21,
Mad., referred to. G

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1934 of
1998.

From the Judgment of Order dated 16.12.1997 of the Gujarat High Court
in Gift Tax. Reference No. 2of1983. H
362 SUPREME COURT REPORTS [2001] 3 S.C.R.

A RF. Nariman, P.H. Parekh, Sameer Parekh and Ms. Deepmala Ranganathan
for the Appellant.

Harish N. Salve, Solicitor General, Rajiv Tyagi and Ms. Sushma Suri for
the Respondent.

B The Judgment of the Court was delivered by

D.P. MOHAPATRA, J. This appeal filed by the assessee is directed
against the judgment of the Gujarat High Court on a reference made by the
Appellate Tribunal under Section 26(1) of the Gift Tax Act, 1958 (hereinafter
referred to as 'the Act'). The question which was referred for opinion reads
C as follows:

"Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in coming to the conclusion that the difference
of Rs. 8,21,950 on the sale of the jewellery by the assessee to its 12
wholly owned subsidiary companies was not liable to gift tax under
D the provisions of the Gift Tax Act, 1958."

The High Court disposed of the reference by answering the question ,..
in the negative, in favour of the Revenue and against the assessee. Hence
this appeal.

E The factual backdrop of the case relevant for the present proceeding
may be stated thus:

The assessee is a private limited investment company and the assessment
relates to the assessment year 1976-77. The assessee transferred jewellery to
twelve private limited companies which were wholly owned subsidiary
F companies of the assessee and in return the twelve private limited companies
transferred to the assessee fully paid equity shares of the face value of Rs.
100 each, the face value of all the shares being Rs. 5,69,400/-. The jewellery
thus transferred became. the only asset of the twelve companies and the
shares transferred to the assessee were the entire share holding of the twelve
G private limited companies. Since the assessee did not file any gift tax return,
a notice under Section 16(1) of the Act was served upon the assessee
pursuant to which the assessee filed a 'nil' return. Thereafter a notice under
Section 15(2) of the A.ct was issued and the proceeding for assessment was
taken up.

H In the assessment proceeding the assessee took the stand that it had
REVA INVEST. PVT. LTD. v. COMMR. OF GIFT TAX [D.P. MOHAPATRA, J.] 363
transferred jewellery to the twelve subsidiary companies of a book value of A

-·· Rs. 5,69,400 and rec~ived shares from those companies of the face value of
Rs. 5,69,400; in the circumstances there was no gift involved in the transaction.
The case of the Revenue, on the other hand, was that the market value of
the jewellery acquired by the assessee amounted to Rs. 13,91,350 on the date
of transfer, therefore, there was a gift to the extent of the amount which
exceeded the face value· of the shares, i.e., Rs. 8,21,950. ·B

The Gift Tax Officer by his order dated 12.9.1979 held that there was a
'deemed gift' to the tune of Rs. 8,21,950 for which the assessee was liable to
pay gift tax under the Act.

On appeal by the assessee, the Commissioner of Gift Tax (Appeals) held C
that inasmuch as the jewellery is the only asset of the subsidiary companies
the value of the consideration was the value of the jewellery and no 'deemed
gift' can be attributed. The Appellate Authority set aside the order of the Gift
Tax Officer.

Both the assessee and the Revenue filed appeals before the Tribunal. D
The Tribunal upheld the conclusion of the Appellate Authority and held that
when the oniy asset of the pure.basing companies is jewellery purchased and
their capital consists only ofl the shares issued to the assessee company,
there is no question of any 'deemed gift' as whatever will be the value taken
for the jewellery will become the value of fully paid up shares issued to the E
assessee on the break up method of valuing of shares of private limited
companies. The Tribunal rejected the contention of the Revenue on this
point.

In the Reference Application filed by the Revenue the question quoted
earlier was referred to the High Court. The High Court came to the conclusion F
that the Tribunal had committed an error in law in coming to the conclusion
that the difference of Rs. 8,21,950 on the sale of the jewellery by the assessee
to its twelve wholly owned subsidiary companies was not liable to gift tax
under the provisions of the Act and accordingly answered the question in
the negative in favour of the Revenue. The High Court did not accept the G
contention that in case of the transfer of the entire paid up share holding of
the twelve subsidiary companies in lieu of the jewellery transferred by the
assessee the value of the jewellery must be taken to be the value of the shares
transferred by the subsidiary companies. The High Court was of the view that
the shares which were to be passed on for the purchase of property were
different anci independent of such property and would have their valuation H
364 SUPREME COURT REPORTS [2001] 3 S.C.R.

A and to say that the value of such consideration, in the instant case the shares,
should be read as whatever the value of property intended to be purchased
would be to defeat the very purpose underlying the provision in Section
4(l)(a) of the Act.

The term 'gift' is defined in Section 2(xii) of the Act to mean "the
B transfer by one person to another of any existing movable or immovable
property made voluntarily and without consideration in money or money's
worth, and includes the transfer or conversion of any property referred to in
Section 4, deemed to be a gift under that section". The expression 'taxable
gifts' is defined under Section 2(xxiii) to mean "gifts chargeable to gift tax
C under the Act". Section 3 which is the charging section lays down that
"subject to the other provisions contained in the Act, there shall be charged
for every assessment year commencing on and from the 1st day of April, 1958,
a tax referred to as gift tax in respect of gifts made by a person during the
previous year at the rate or rates specified in Schedule I.
(Emphasis supplied).
D
Section 4 makes provisions for gifts to include some transfers. Sub-
section (1) clause (a), which is relevant foTthe purpose of the case, reads as
under:

" 4(1) For the purpose of this Act-
E
(a) where property is transferred otherwise than for adequate
consideration, the amount by which the [value of the property as on
the date of the transfer and determined in the manner laid down in
Schedule II] exceeds the value of the consideration shall be deemed
F to be a gift made by the transferor.

[P~ovided that nothing contained in this clause shall apply in any
case where the property is transferred to the Government or where the
value of the consideration for the transfer is determined or approved
by the Central Government or the Reserve Bank of India]"
G
Ordinarily, a gift is a transfer of property without consideration; but for
the purpose of the Act a transfer for inadequate consideration is to be
deemed to be a gift under section 4(1) (a). By the inclusive definition in
section 2(xii) of the Act a 'deemed gift' is also a gift. The provision of deemed
gift in section 4 (1) (a) is intended to bring within the purview of the tax such
H transactions which are entered between the parties to evade the tax.
I

~

REVA INVEST. PVT. LTD. v. COMMR. OF GIFT TAX [D.P. MOHAPATRA, J.] 365

The question which arises for determination in this case is whether the A
transaction made by the assessee can be said to be a 'deemed gift' under
Section 4(l)(a) of the Act. For invoking the deeming provisions of section
4(l)(a) of the Act inquiries have to be made regarding - (i) the existence of
a 'transfer of property' (ii) the extent of consideration given i.e. whether the
consideration is adequate. It is necessary for the assessing officer to show B
that the property has been transferred otherwise than for adequate
consideration. The finding as to inadequacy of the consideration is the
essential sine-qua-non for application of the provisions of 'deemed gift'. The
provision is to be construed in a broad commercial sense and not in a narrow
sense. In order to hold that a particular transfer is not for adequate consideration
the difference between a true value of the property transferred and the C
consideration that passed for the same must be appreciated in context of the
facts of the particular case. If the transaction involves transfer of certain
property in lieu of certain other property received then the process of
evaluation of the two items of property should be similar and on such
evaluation if it is found that there is appreciable difference between the value
of the two properties then the tra~saction will be taken as a 'deemed gift' to D
the extent as provided in the Section. It is to be found that the transaction
was on inadequate consideration and the parties deliberately showed the
valuation of the two properties as the same to evade tax. Such a conclusion
cannot be drawn merely because according to the assessing officer there is
some difference between the valuation of the property transferred and the E
consideration received.

In the present case, as notbi earlier, the face value of the shares of the
1 12 fully paid subsidiary companies of the assessee was Rs. 5,69,400 which
was taken to be the value of the jewellery that was transferred in exchange
by the assessee to the subsidiary companies. The subsidiary companies had F
no other asset. The value of the jewellery as determined by the assessing
officer being Rs. 13,91,350 the real value of the shares may be said to be Rs.
13,91,350, but there was thus no gift involved in the transaction for whatever
is the value of the jewellery is infact the value of the shares transferred in
consideration. In the circumstances the assessing officer committed an error G
in treating the transaction between the parties as a 'deemed gift'.

At this stage we may notice a few decisions of different High Courts
to which our attention was drawn. In the case of Bireswar Sarkar v. Gift Tax
Officer, (1997) 223 ITR 404 (Cal) the High Court allowed the writ petition and
quashed the notice under section 16 of the Act, inter alia, on the ground that H
366 SUPREME COURT REPORTS [2001] 3 S.C.R.

· A as far as the question of inadequacy of the consideration is concerned no
answer could be given by the respondent authorities as to the adoption of
different standards for the purpose of evaluating the value of the assets
transferred and for evaluating the consideration received.
''· l

The Madras High Court in the case of C. G. T. v. lndo Traders & Agencies
B (Madras) P. Ltd., (1981) 131 ITR 313 (Mad) observed that the provision is
designed to check evasion of tax by· persons transferring properties for
inadequate consideration; If a person had effected a gift v1liich would be
· i 'i
;i..' • . \ i~ ~
• - ' ' C:.. .:. " -

without consideration, he would be liable to be taxed under the Act; the same
person may, In order to a~oid the tax, ir~~sfer properii.es for -paltry a
C consideration ~o a~ to get out'
of the 'operation of the· Acnhen· he can· be
made liable under section 4(1)(a) . It is this attempt at eva~ion whicli· was
sought to be thwarted'by enacting S. 4(l)(a). '

A similar view was taken by the Kerala High Court in the case of
Commissioner of Income-Tax v. Jacobs (P) Ltd., (1999) 237 ITR 433.
D
The High Court of Madras in the case of Commissioner of Gift-Tax v.
D. Surendranath Reddy, ( 1998) 23 3 ITR 21 observed that adequate consideration
is not necessarily, what is ultimately determined by some-one else as market
value; unle~s the pike wa's such as to shock the' conscience of the court, it
wciuld not be: possible to hold" "that the. transaction is ~thehvise. than' for
E adequate consideration. ' · · · ' '
- .~-· l ... ..,., - .. iltJ

In view of the discussions in the foregoing paragraphs, it is clear that
the High Court was in error in holding that in 'the facts and Cir~umst~nces of
the case' the"' frinsactiori. could be held to be a 'deemed gift'. within the
purview of Section 4(1)(a) of the Act ~nci in. holding the assessee liable for
F the tax~ Accordingly, th'e appeal is ?llowed;. ~he. judgment of the High Court
under
....
challenge. is
.·
set ~side and thelh(.'r·•
order of •the tribunal is-coilfirnied. There
-~--~~-1 f ;~1.,·~·.!··" (fF" *I 't"

wdl, .
however, be no order
- . . i:· '.
as to
.
costs.
•

B.S. Appeal allowed.