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1976 Supreme(Mad) 626
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE M M ISMAIL & THE HONOURABLE MR. JUSTICE SETHURAMAN
Additional Commissioner of Gift Tax, Madras-I - Appellant
Versus
S. V. R. Cycle Mart - Respondent
Case No : Tax Case No. 279 of 1972
Decided On : 16 November 1976
The transfer of shares by a firm to its partners is a transfer within the meaning of the Gift-tax Act and the transfer of shares to the wives and mother of the partners for inadequate consideration is a deemed gift under section 4(1)(a) of the Gift-tax Act.
Headnote:
GIFT TAX - Transfer of shares by firm to partners and to wives and mother of partners - Whether transfer to partners was a transfer within the meaning of the Gift-tax Act - Whether transfer to wives and mother was for inadequate consideration.
Fact of the Case:
A partnership firm sold shares in a company to its partners and to the wives and mother of the partners. The Gift-tax Officer held that the transfer of shares to the partners was a transfer within the meaning of the Gift-tax Act and that the transfer to the wives and mother was for inadequate consideration. The Appellate Assistant Commissioner held that there was no transfer of shares to the partners and that the transfer to the wives and mother was for adequate consideration. The Tribunal held that there was no transfer of shares to the partners and that the transfer to the wives and mother was not for inadequate consideration.
Finding of the Court:
The court held that the transfer of shares to the partners was a transfer within the meaning of the Gift-tax Act and that the transfer to the wives and mother was for inadequate consideration.
Issues: 1. Whether the transfer of shares by the firm to its partners was a transfer within the meaning of the Gift-tax Act? 2. Whether the transfer of shares to the wives and mother was for inadequate consideration?
Ratio Decidendi: 1. The court held that the transfer of shares to the partners was a transfer within the meaning of the Gift-tax Act because the partners became exclusively entitled to the shares which had been sold to them and the other partner had no interest in those shares. 2. The court held that the transfer of shares to the wives and mother was for inadequate consideration because the Gift-tax Officer had adopted the break-up value method to determine the market value of the shares and the transfer price was less than the market value.
Final Decision: The court answered both questions in the negative and against the assessee.
ISMAIL J.
At the instance of the Additional Commissioner of Gift-tax, Madras-I, the Income-tax Appellate Tribunal, Cochin Bench, under section 26(1) of the Gift-tax Act, has referred the following two questions for the opinion of this court :
"1. Whether, on the facts and in the Circumstances of the case, the Tribunal was right in holding that there was no transfer of shares in the Chettinad Mercantile Bank Ltd. by the assessee-firm to its partners within the meaning of the Gift-tax Act, 1958 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transfer of 270 shares in the same company by the assessee to the three ladies was not for inadequate consideration and, hence, provisions of section 4(1)(a) of the Gift-tax Act are not attracted ?" *
The assessee is a partnership firm consisting of two partners, Veerappa Chettiar and Chinnan Chettiar. The partnership firm owned 520 shares in the Chettinad Mercantile Bank Ltd. The original cost of acquisition of these shares was Rs. 60 per share. The assessee-firm sold these shares to the following persons at the prices noted against each one of them :
Name of the transferees Number of Cost per Price
shares transferred share realised
Rs. Rs.
1. Veerappa Chettiar
(partner) 125 50 6, 250
2. Chinnan Chettiar (Partner) 125 50 6, 250
3. Alagammai Achi
(wife of partner No. 1) 125 75 9, 375
4. Umayal Achi
(wife of partner No. 2) 120 75 9, 000
5.Alamelu Achi
(mother of partner No. 1) 25 75 1, 875
Total 32, 750
The Gift-tax Officer came to the Conclusion that the transfer of shares was for inadequate consideration, and, therefore, there was a deemed gift under section 4(1)(a) of the Gift-tax Act by the assessee firm to the five persons mentioned above. Since the shares transferred by the assessee-firm were not quoted shares, the Gift-tax Officer, by adopting the break-up method, ascertained the value per share at Rs. 99.40, and the value of 520 shares at that rate worked out to Rs. 51, 688. Since the assessee-firm had sold 520 shares for a total sum of Rs. 32, 750, the difference between these two amounts was assessed to gift-tax. Against this assessment, the assessee preferred an appeal to the Appellate Assistant Commissioner. That officer held that there could be no transfer of the shares by the firm to its partners, and hence there was no liability to gift-tax. With regard to the transfer in favour of the three ladies, that officer held that the price of Rs. 75 per share cannot be said to be inadequate consideration merely because the value arrived at by the break-up method was found to be more than the price for which the assessee-firm sold the shares to these three persons. Consequently, the Appellate Assistant Commissioner allowed the appeal preferred by the assessee. Against the order of the Appellate Assistant Commissioner, the department preferred an appeal to the Tribunal. Before the Tribunal, the revenue contended : (i) the firm and the partners constituting the firm are two different units of assessment and there can be a legal transfer by the firm to its partners; and (ii) section 6(3) of the Gift-tax Act provides that in regard to any property whose value cannot be estimated as it is not saleable in the open market, its value should be determined in the manner prescribed by the Rules, and rule 10(2) provides for determining the value of unquoted shares by the break-up value method, and since there is a difference between the value arrived at by the break-up method and the price for which the shares were sold by the assessee-firm, there was a deemed gift under section 4(1)(a) and the gift-tax assessment should, therefore, be upheld. The Tribunal held, (i) when the assessee-firm transferred the shares to its partners, there was no transfer involved as defined under section 2(xxiv) of the Gift-tax Act; (ii) the mere difference between the sale price of the shares and the value of the shares as arrived at by the break-up value method, i
