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Taxability of a revocable transfer as deemed gift u/s 4(1)(c) of the Gift-tax Act

CLR Editorial Notes: In this case, it was noted that the assessee owned 6000 shares of a certain company. In the year 1982, he executed a deed of revocable transfer of shares in favour of another person. In this deed the assessee was permitted to exercise the power of revoking the gift, after completion of 74 months but before expiry of 82 months from the transfer date. In other words, there was a window of 8 months within which the gift could be revoked.

The deed specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from the  company whose share was in the deed, by virtue of ownership of the said shares. Effectively, therefore, only a gift of 6000 equity shares was made by the assessee to the transferee. On certain dates in 1982 & subsequently in 1986, the company issued 4000 and 10,000 bonus shares to the transferee. In the year 1988, the assessee revoked the gift with the result that the 6000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transferee while it was the holder of the equity shares of the company continued with the transferee.

In the assessment year 1982-83, the Tax Officer held that the revocable transfer was only for the purpose of reducing the wealth tax liability and was hence this transfer was considered void. However, a protective gift-tax assessment was made. On an appeal by the assessee, The Tribunal and subsequently the Punjab and Haryana High Court reversed the order of the assessing Officer and held that a revocable transfer was valid even if its object was to avoid wealth-tax.

The assessee was hence held liable to pay gift-tax Under Section 11 of the Gift-tax Act. In the assessment year 1989-90 the Assessing Officer & CIT (A) held that the bonus 14,000 shares belonged to the assessee and as the revocation was only with respect to the 6,000 shares and the 14,000 bonus shares continued with the transferee, there was a chargeable gift to that extent.

The IT Tribunal reversed this order. A subsequent appeal followed by the department, and the Hon’ble High Court reversed the Tribunal and held that the assessee was indeed liable to a gift tax on the value of the bonus shares gifted by him to the transferee applying the principles of another case (Escorts Farms (Ramgarh) 222 ITR 509 (SC)).

On appeal by the assessee to the Supreme Court, HELD:

“The fundamental question is whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. The answer to this question lies in s. 4(1)(c) of the Gift-tax Act which provides that where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the AO to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment. On facts, the assessee had made a valid revocable gift of 6000 equity shares in the company on 20.2.1982 to the transferee. The only event that took place in AY 1989-90 was the revocation of the gift by the assessee on 15.6.1988. The question whether the revocation of the gift of the original shares in AY 1989-90 constitutes a gift of the bonus shares that were allotted to the transferee on 29.09.1982 and 31.05.1986 requires to be answered in the light of s.4(1)(c). The question of applicability of Escorts Farms has to be decided after a finding is reached on the applicability of the first part of s. 4(1)(c) (matter remanded).”

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The full case file is available for download

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Tags: AppealCITIncome taxIndiaPunjab and Haryana High CourtSupreme CourtThe HonourableTribunal

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