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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3914 OF 2010

Satya Nand Munjal  …..Appellant

     Versus

Commissioner of Gift Tax    …..Respondent

WITH

CIVIL APPEAL NO. 3915 OF 2010

J U D G M E N T  

Madan B. Lokur, J.

1. Civil  Appeal  No.  3914/2010  (Assessee:  Satya  Nand  Munjal)  and  

Civil Appeal No. 3915/2010 (Assessee: Om Prakash Munjal) arise  

out of G.T.A. No. 3/2001 and G.T.A. No. 2/2001 respectively both  

decided by the High Court of Punjab & Haryana on 17th December,  

2008.  The relevant Assessment Year is 1989-90.

2. At the instance of the Revenue, the High Court was called upon to  

decide the following common substantial question of law:-

“Whether, on the facts and in the circumstances of the case,  the ITAT was right in law in quashing the gift-tax assessment  in the assessee’s case.”

3. The High Court set aside the order of the Income Tax Appellate  

Tribunal (the Tribunal) and held in favour of the Commissioner of  

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Gift  Tax  by  upholding  the  assessment  order.   It  is  in  these  

circumstances that the assessee is now before us.

4. For convenience, we refer to the facts in the case of Satya Nand  

Munjal.

The facts:

5. On 20th February 1982 the assessee, being the absolute owner of  

6000 fully paid up equity shares of the face value of Rs. 25 each  

of  M/s  Hero  Cycles  (P)  Ltd.   executed  a  deed  of  revocable  

transfer in favour of M/s Yogesh Chandra and Brothers Associates  

(the  transferee).   Under  the  deed,  the  assessee  could,  on  

completion of 74 months from the date of transfer but before the  

expiry of 82 months from the said date, exercise the power of  

revoking the gift.  In other words, the assessee left a window of  

8 months within which the gift could be revoked.

6. The deed of revocable transfer specifically stated that the gift  

shall  not  include  any  bonus  shares  or  right  shares  received  

and/or accruing or coming to the transferee from M/s Hero Cycles  

(P) Ltd. (the company) by virtue of ownership or by virtue of the  

shares gifted by the assessee and standing in the name of the  

transferee. Effectively, therefore, only a gift of 6000 equity  

shares was made by the assessee to the transferee.  

7. On 29th September 1982 the company issued bonus shares and since  

the transferee was a holder of the gifted equity shares, 4000  

bonus shares of the said company were allotted to the transferee.  

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Similarly,  on  31st May  1986  another  10,000  bonus  shares  were  

allotted to the transferee by the company.

8. Thereafter,  during  the  window  of  eight  months,  the  assessee  

revoked the gift on 15th June 1988 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.

Assessment proceedings for AY 1982-83:

9. For the Assessment Year 1982-83, the Gift Tax Officer passed an  

assessment order on 17th February 1987 in respect of the assessee.  

He  held  that  the  revocable  transaction  entered  into  by  the  

assessee was only for the purpose of reducing the tax liability.  

As such, it could not be accepted as a valid gift. For arriving  

at this conclusion, the assessing officer relied upon McDowell &  

Co. v. Commercial Tax Officer, [1985] 154 ITR 148. Accordingly,  

the assessing officer, while holding the gift to be void, made  

the assessment on a protective basis.

10. Feeling aggrieved by the assessment order, the assessee  

preferred an appeal before the Commissioner of Gift Tax (Appeals)  

but found no success. The Commissioner of Gift Tax (Appeals),  

however,  held  that  since  the  gift  was  void,  a  protective  

assessment could not be made.  

11. The  assessee  then  preferred  a  further  appeal  to  the  

Tribunal and by its order dated 23rd August 1991 allowing the  

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appeal; the Tribunal held the revocable gift to be valid.  It was  

noted that the concept of a revocable transfer by way of gift is  

recognized by Section 6(2) of the Gift Tax Act, 1958 (the Act).  

The value of the gift in such a case was to be calculated in  

terms of Rule 11 of the Gift Tax Rules, 1958.

12. Although the decision was rendered by the Tribunal after  

the gift had been revoked by the assessee, it was held that if  

the  assessee  “does  not  exercise  an  option  to  revoke  the  gift  

within the provided for period of 82 months, then at that point  

of time also, there will be a further valuation of the residuary  

interest….”.  

13. Feeling aggrieved by the decision of Tribunal, the Revenue  

took up the matter in appeal before the Punjab & Haryana High  

Court. By its judgment and order in Commissioner of Gift-tax v.  

Satya Nand Munjal, [2002] 256 ITR 516 the High Court dismissed  

the appeal and held:

“It is a legitimate attempt on the part of the assessee to save  money by following a legal method. If on account of a lacuna in  the law or otherwise the assessee is able to avoid payment of  tax within the letter of law, it cannot be said that the action  is void because it is intended to save payment of tax. So long  as the law exists in its present form, the taxpayer is entitled  to  take  its  advantage.  We  find  no  ground  to  accept  the  contention  that  merely  because  the  gift  was  made  with  the  purpose of saving on payment of wealth-tax, it needs to be  ignored.”

14. The  position  as  it  stood,  therefore,  was  that  the  

revocable gift made by the assessee was held to be a valid gift  

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and the assessee was liable to pay gift tax on the value of the  

gift as determined under Rule 11 of the Gift Tax Rules, 1958.

Assessment proceedings for AY 1989-90:

15. All of a sudden, on 30th January 1996 the Gift Tax Officer  

issued a notice to the assessee under Section 16(1) of the Act to  

the effect that for the Assessment Year 1989-90 the gift made by  

the assessee was chargeable to gift tax and that it had escaped  

assessment for that Assessment Year.  The assessee responded to  

the  notice  by  simply  stating  that  there  is  no  gift  that  had  

escaped assessment.

16. On  24th March  1998  the  assessing  officer  passed  a  

reassessment order for the Assessment Year 1989-90. While doing  

so, he framed two issues for consideration: firstly, whether the  

transferee  becomes  the  owner  of  the  bonus  shares  particularly  

because the shares have been received by it as a result of a  

revocable transfer; secondly, whether the bonus shares received  

by the transferee could be described as a benefit derived by the  

transferee from the transferred shares.

17. The assessing officer held that the transferee does not  

become the owner of the gifted shares until the transfer is an  

irrevocable transfer. Proceeding on this basis, it was held that  

the 14,000 bonus shares allotted to the transferee were a part  

and parcel of the gifted shares and the assessee only took back  

6000 shares from the transferee pursuant to the revocable gift.  

Consequently, it was held that the assessee had surrendered his  

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right to get back 14,000 bonus shares which were treated as a  

gift by the assessee to the transferee in view of the provisions  

of  Section  4(1)(c)  of  the  Act.  The  assessee  was  taxed  

accordingly.

18. Feeling aggrieved by the reassessment order, the assessee  

preferred an appeal to the Commissioner of Gift Tax (Appeals).  

By his order dated 8th September 1998 the Commissioner held that  

since  there  was  no  regular  transfer  of  the  bonus  shares,  the  

transferee could not claim any ownership of the shares.  In fact  

he was only a trustee of the assessee in respect of the bonus  

shares.  The Commissioner also referred to  McDowell & Co. and  

held that the assessee had carefully planned his affairs in such  

a manner as to deprive the Revenue of a substantial amount of  

gift tax.  The reassessment order was accordingly upheld.

19. The assessee then took up the matter with the Tribunal  

which held in its order dated 23rd May 2000 that in view of the  

assessment to gift tax made in respect of the assessee for the  

Assessment Year 1982-83, the notice issued under Section 16(1) of  

the  Act  was  merely  a  change  of  opinion  and,  as  such  the  

reassessment proceedings could not have been taken up. On the  

merits of the case, it was noted that neither the dividend income  

on the bonus shares nor their value had been taxed in the hands  

of  the  assessee.   Consequently,  the  assessee  was  liable  to  

succeed on the merits of the case also. The gift tax reassessment  

was accordingly quashed by the Tribunal.

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20. The Revenue then came up in appeal before the High Court  

with the substantial question of law mentioned above.

21. In  the  impugned  order,  the  High  Court  held  that  the  

assessee was liable to gift tax on the value of the bonus shares  

which were a gift made by the assessee to the transferee.  It was  

held that the bonus shares were income from the original shares  

by relying upon Escorts Farms (Ramgarh) Ltd.  v. Commissioner of  

Income Tax, [1996] 222 ITR 509. Accordingly, the order of the  

Tribunal was set aside and the reassessment order upheld.

Discussion and conclusions:

22. Although  learned  counsel  for  the  assessee  seriously  

doubted the correctness of the impugned judgment and order on  

several grounds, we find that it is not necessary for us to go  

into all the issues raised by him.

23. The fundamental question before the High Court was whether  

there was in fact a gift of 14,000 bonus shares made by the  

assess to the transferee. The answer to this question lies in the  

interpretation  of  Section  4(1)(c)  of  the  Act  which  reads  as  

follows :-

“Gifts to include certain transfers. 4. (1) For the purposes of this Act,-

(a) xxx

(b) xxx

(c)  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  Assessing  

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Officer 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;

(d) to (e) xxx”  

24. A  perusal  of  the  impugned  judgment  and  order  facially  

indicates that there has been no consideration of the provisions  

of  Section  4(1)(c)  of  the  Act.   From  the  rather  elaborate  

narration of facts, it is quite clear that the assessee had made  

a valid revocable gift of 6000 equity shares in the company on  

20th February 1982 to the transferee. This is a finding of fact  

conclusively determined by the High Court in the assessee’s own  

case.

25. The  only  event  that  took  place  in  the  previous  year  

relevant to the Assessment Year 1989-90 was the revocation of the  

gift by the assessee on 15th June 1988.  Was this event enough for  

the Gift Tax Officer, in 1996, to re-open the assessment for the  

year 1989-90, while keeping in mind the fact that bonus shares  

were allotted to the transferee on 29th September 1982 and 31st May  

1986? It is possible, on an interpretation of Section 4(1)(c) of  

the Act to answer this question either way, but unfortunately the  

High Court did not even notice this provision of the Act. Of  

course, the submission of learned counsel for the assessee is  

that  on  an  interpretation  of  Section  4(1)(c)  of  the  Act,  it  

cannot be said by any stretch of imagination, that the assessee  

had made a gift of 14,000 bonus shares to the transferee in the  

previous year relevant to the Assessment Year 1989-90.

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26. However, we are not inclined to decide this issue finally  

since  we  do  not  have  the  view  of  the  High  Court  on  the  

interpretation of Section 4(1)(c) of the Act. Nor do we have the  

view of the High Court on the applicability or otherwise of the  

principle laid down in McDowell & Co.

27. As far as the applicability of Escorts Farms is concerned,  

the question that arose for consideration in that case was the  

determination of the cost of acquisition of the original shares  

when bonus shares are subsequently issued. That is the second  

part of Section 4(1)(c) of the Act and that question would arise  

(if at all) only after a finding is given by the High Court on  

the first part of Section 4(1)(c) of the Act. But, as we have  

noted above, the High Court has not considered the interpretation  

of Section 4(1)(c) of the Act.

28. Under the circumstances we have no option but remand the  

matter for  de novo consideration by the High Court keeping in  

mind the provisions of Section 4(1)(c) of the Act as well as the  

orders passed in the case of the assessee for the Assessment Year  

1982-83. We do so accordingly.  

29. In view of the above, both the Civil Appeals are allowed  

and the impugned judgment and order of the High Court is set  

aside but without any order as to costs.

30. We make it clear that the parties are entitled to raise  

all contentions before the High Court and are at liberty to file  

additional documents, if necessary.  

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      ….…….……………………..J.   (D.K. Jain)

                     ….…….……………………..J.   (Madan B. Lokur)

New Delhi; January 22, 2013

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