Delhi HC Quashes ITAT Order Invalidating Gift Tax Proceedings since Taxability of Transaction was not considered [Read Judgment]

In the case of Commissioner of Gift Tax vs. M/s Jindal Equipment Leasing, High Court of Delhi recently held that the order passed by the Income Tax Appellate Tribunal (ITAT) invalidating gift tax proceedings is bad in law since the taxability of transaction was not considered.

Assessee in the present case, is an Equipment Leasing & Consultancy Services Company and the Assessee was entitled to one right share valued at a face value of Rs 10 and a non-convertible portion, at Rs.60.  The assessee renounced its rights and obtained consideration therefore. They also claimed loss on account of the difference between the material value shown by them (of the rights issue) and the consideration received by them.

During the assessment proceedings, the Assessing Officer (AO) observed that the transaction was sham and proceeded to disregard the claim for capital loss. However, the assessment was concluded on the basis that the amounts received were in fact business receipts.

On appeal, the ITAT allowed the appeal filed by the Assessee. Aggrieved by the order, the Revenue filed an appeal before the Court.

Gift Tax Officer formed an opinion that the renouncement of the right issue by the assessee was for inadequate consideration and therefore, amounted to a notional or deemed gift under Section 4(1)(a) of the Gift Tax Act.

After considering the facts and circumstances of the case, Justice S.Ravindara Bhat and Justice A.K.Chawla observed that the consideration received and shown by the assessee to be a capital loss in income tax proceedings was a device. “At the same time while holding that the characteristic of the sale proceeds as a capital loss which was bogus and the same did not ignore the underlying validity of the share transaction or transfer”. The sole issue in the present case is the said amount should be treated – either as business receipts or as business losses, he said.

The Court further observed that “the ITAT intervened in gift tax proceedings, it considered only the validity of the proceedings, but, did not consider whether in fact the transaction under Section 4(1)(a) amounted to a deemed gift”.