UMEDRAY WORAH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) During the accounting period the assessee had transferred his shares in ten private limited ompanies for a sum of Rupees 1,40,730/- to his wife, Shrimati Rajani, and his minor sons, Bharatendu and Himangshu, and also to the Hindu undivided family consisting of himself, his wife and his two sons. The private limited companies whose shares were the subject, matter of transfer were under the control of two or three families, the family of the assessee being one of them. The shares were not quoted in the Stock Exchange. The shares had been transferred for cash consideration which the transferee had raised in their turn from gifts received by them from the brother and father of the assessee. The legality of the gifts was not challenged by the Income-tax Department. The transfers in the case of ordinary shares were made at 150 per cent of the face value. In case of preference shares of Sendra Bansjora Colliery Company Limited the transfers were made at face value. The Income-tax Officer found that the cash consideration paid was inadequate because it was far less than the intrinsic or break-up value of the shares. It was also found that in some cases the dividend income of the shares for one year alone was almost 100 per cent of the face value of the shares. The details of the transactions will appear from the following statement: <FRM>JUDGEMENT_114_AIR(PAT)_1965Html1.htm</FRM> The Income-tax Officer took the view that though the transfer of shares was made at a price higher than the face value, the price paid was much lower than the real value of the shares. In reaching this conclusion the Income-tax Officer took into account the high break-up value of the shares and the high expected yield on the basis of the dividends declared. He was accordingly of the view that the transfer of the shares came within the mischief of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act. It was contended on behalf of the assessee that according to the Articles of the Association of the companies no shareholder could transfer his holding to a person who is not an existing share-holder unless it was first offered to the other shareholders and none of them was willing to purchase those shares. It was argued that since none of the other share-holders was willing to purchase the shares offered at the prices mentioned by the assessee, it must be taken that the prices paid for the shares were adequate. This contention was rejected by the Income-tax Officer who considered that the case came within the purview of Sections 16(3)(a)(iii) and 16(3)(a)(iv) of the Income Tax Act. The assessee went up in appeal to the Appellate Assistant Commissioner who dismissed the appeal. When the matter came up in appeal before the Appellate Tribunal it was argued on behalf of the assessee that the transfer of the shares at 150 per cent of the face value should be taken to be a transfer for adequate consideration. It as also argued that the provisions of Section 16(3) of the Income Tax Act were unconstitutional as there was violation of the fundamental right of equality before the law in Article 14 of the Constitution. Both these arguments were rejected by the Income-tax Appellate Tribunal and the appeal of the assessee was dismissed.

(2.) Under Section 66(1) of the Income Tax Act the Income-tax Appellate Tribunal has referred the following questions of law for determination by the High Court:

(3.) After having heard learned Counsel for both the parties I have reframed the questions as follows in order to bring out the real points in controversy between the parties: