CONTROLLER OF ESTATE DUTY Vs. SANGHAVI D B

JUDGEMENT

(1.) THIS is a reference on a case stated under S. 64(1) of the ED Act, 1953 (referred to hereinafter as "the said Act"). The person whose estate is in question is one Babubhai M. Sanghavi who died on 24th Jan., 1960. The accountable person in respect of the said estate is the present respondent, being the son of the said deceased. On 17th Aug., 1959, i. e., within a year prior to his death, the said deceased sold 498 ordinary shares of Bhavanagar Vegetable Products Ltd., of the face value of Rs. 100 each at Rs. 125 per share to the sons and daughters of one Nagardas Ranchhoddas Sanghavi, a partner of the said deceased in the firm of M/s R. Ratilal & Company, but who was not related to the said deceased. On the same date, the said Nagardas sold an identical number of ordinary shares of the said company at the price of Rs. 125 per share to the wife, daughters and daughter in law of the said deceased. In the income tax proceedings, the ITO invoked the provisions contained in the proviso to S. 12B(2) of the Indian IT Act, 1922, for the asst. year 1960 61, on the ground that the sales were effected by the deceased with the object of avoidance or reduction of his liability to tax on the capital gains. There was some controversy about the fair market value of the shares, but the same has been finally determined at Rs. 230 per share. In the income tax proceedings, it has been held by a Division Bench of this Court in Babubhai M. Sanghvi vs. CIT (1974) 97 ITR 213 (Bom), that the first proviso to S. 12B(2) of the Indian IT Act, 1922, does not make any provision for levying a tax on fictional or deemed capital gains which ought to have been received by the transferor. The incidence being on the capital gains actually received by the assessee, the only possible manner in which the second condition mentioned in the proviso could be satisfied would be by showing that the actual consideration received by the assessee was higher than the one mentioned in the deed itself. It is quite possible that though the fair market value of a particular capital asset is high, the assessee may transfer it to a person directly or indirectly connected with him for a nominal sum, for more than one reason, and such reasons cannot partake of the object mentioned in the second condition of the proviso. It was held that where a person transferred shares in a company to a person connected with him for much less than the fair market value of the shares, the first proviso to S. 12B(2) would not apply and tax could not be levied on the deemed capital gains based on the market value of the shares. Thus the assessee succeeded in respect of the question regarding the capital gains. The amount worked out on the basis of the difference between the fair market value of the said shares and the price at which the assessee had sold them, was next sought to be taxed as a gift under the GT Act, but it was held that no liability to gift tax arose on the facts and circumstances of the case. On the same facts, the Asstt. Controller held that there was a gift of property by the said deceased to the transferee, namely, the sons and daughters of Nagardas, represented by the difference between the fair market value of the said shares and the actual consideration received by the deceased and as the said gift was made within a year prior to his death, the provisions of S. 9 of the said Act, became applicable and the property should be deemed to pass on his death. On an appeal by the accountable person, the Appellate Controller held that the aforesaid amount of difference was liable to be taxed as a gift by virtue of the provisions of S. 9 and S. 27(2) of the said Act. On a further appeal by the assessee to the Tribunal, the Tribunal on a consideration of the arguments advanced before it, held that Expln. 2 to S. 2(15) of the said Act was inapplicable to the present case, because that Explanation spoke of an extinguishment of right, whereas the deceased had no right against anybody to receive, on the sale of the shares, their market value as at the time of sale. The Tribunal held that the transaction was one of sale for consideration and the provisions of S. 9 (1) of the said Act had, therefore, no application to the facts of the case. The Tribunal further held that the provisions of S. 27(1) of the said Act had also no application to the facts of the case, as there was no transfer made by the said deceased in respect of the said shares in favour of any relatives. On these facts, the Tribunal allowed the appeal of the assessee. Arising from this decision of the Tribunal, the following question has been referred to us for determination.

(2.) BEFORE going into the arguments advanced before us, we may refer to the relevant sections of the said Act as they stood at the material time. Sub s. 1 of S. 9 of the said Act reads as follows:

(3.) IN the result, the question referred to us is answered in the negative and in favour of the assessee. The Commissioner to pay costs of this reference to the assessee.