1. This appeal by the assessee is directed against the order of Commissioner of Gift-tax (Appeals)-XVII, Bombay, and pertains to the assessment year 1989-90.
2. The assessee is a private limited company. The Chairman of the assessee-company is Shri R.N. Mafatlal. The assessee is in construction business. It had constructed flats in Altamount property. This construction work was completed in the year 1983. The occupation certificate for the first eight floors was received on 15-12-1983.
Thereafter, the flats were sold to various parties. Three flats numbering 701, 801 and 702 were left vacant. These flats were sold during the relevant year of assessment. Flat No. 702 was occupied by the assessee. Flat Nos.701 and 801 were let out on tenancy basis in the year 1985 at a monthly rent of Rs. 5,000 each to M/s. Anudeep Chemicals and SAP Chemicals. These are associated concerns of the assessee-company. All the shares in the two companies are held by Mrs.
Shaileja C. Parikh and Miss Anuradha R. Mafatlal, who are daughters of the Chairman of the assessee-company, Shri R.N. Mafatlal.
3. During the assessment proceedings for the assessment year 1984-85, the assessee had stated that unsold flats were held as 'investment'.
Cost of construction of two flats, viz.,701 and 801 came to Rs. 26,82,193 each. There is no dispute on the amount of investment.
Resolution passed on 9-12-1988 by the assessee-company reflects this amount as the cost to the assessee for the flat. Built-up area of each flat, according to the resolution, was 2912 sq. ft. and rent works out to Rs. 1.72 per sq. ft. per month. This resolution was passed on 7-1-1985.
4. The tenancy started on 1st February, 1985 and continued till March 1989 when flats were sold for Rs. 9 lakhs each to M/s. Anudeep Chemicals and M/s. SAP Chemicals, who were tenants to the assessee-company. On the relevant valuation dates, the value of each flat was found to be Rs. 40 lakhs on the basis of similar sale incidents.
5. In view of the above, the Assessing Officer applied the provisions of Section 4 of the Gift-tax Act, 1958 and levied gift tax on the two flats. The cost of construction as declared by the assessee was treated as the valuation of the flat. Therefore, the total valuation of these two flats for the purpose of gift tax was taken at Rs. 53,64,386 (2682193 x 2).
6. Shri Dilip Dwarkadas, learned counsel for the assessee, appeared before us. The only issue argued before us relates to the applicability of Section 4 of the Gift-tax Act in relation to the sale of two flats by the assessee-company. Other grounds were not pressed. We dismiss the same as not pressed.
7. Learned counsel filed before us various documents and papers in the form of a paper book. It was vehemently contended that the case of assessee falls beyond the sweep of Section 4 of the Gift-tax Act. The transaction in question cannot be construed to be a deemed gift. Our attention was invited at page 36 of the paper book at an Article of Agreement dated 27th March, 1989. Clause (iv) of the said agreement reads as under : The purchaser is thus the lawful tenant of the company in respect of the said flat No. 701 in terms of the agreement dated 31-1-1985 and entitled to protection from eviction under the provisions of the Bombay Rents, Hotels and Lodging Houses Rates Control Act, 1947; 8. It was further contended that the ownership in relation to the said flats was encumbered by the tenancy rights doth over the above named two tenants. Learned counsel adumbrated on the various complexities connected with the laws relating to tenancy and tried to demonstrate that it amounts to a depressing factor. In arriving at the real value of the premises, it is sine qua non to deduct appropriate amount on account of this depressing factor. The fact that the flats sold were not in the possession of the assessee is to be considered. It was contended that the flats were leased out and, as per the terms of the lease, tenants were entitled to assign, transfer, sublet, give on leave and licence basis or keep paying guest in the said premises or any part thereof from time to time and on such terms and subject to such conditions as the tenant may deem fit and the landlord hereby accord sanction and permission for the same. This right was assigned to a tenant for a consideration of Rs. 5,000 per month. Therefore, according to learned counsel, the transfer was made in respect of reversionary interest only. The consideration charged for the transfer of such interest is quite adequate. It was further stated that the relationship between the Managing Director of the assessee-company and the purchaser is not relevant for deciding the issue.
9. Shri R.G. Shanna, learned departmental representative, appeared before us. It was contended that the case of assessee clearly fell within the matrix of Section 4 of the Gift-tax Act. Assessee, at its own, admitted that the cost of construction of the flats was Rs. 26,82,193 each. Despite, it was given over to the company owned by the daughter of the Managing Director on a nominal rent. Ultimately it was sold for Rs. 9 lakhs only. Clearly, the arrangement was a subterfuge to avoid the tax liability. It was further stated that the transfer was not in regard to reversionary right. It was the transfer of ownership.
In the alleged lease agreement, there was no stipulation in regard to duration of term. It was a mere general letting. A lease which is silent as to duration of term would be void as a lease. Therefore, if it is to be treated as a lease, it was a void lease. It was only a case of tenancy. The real value of each flat was in the near vicinity of Rs. 40 lakhs as per the other sale incidents. For gift tax purposes, only cost price of the flat in the hands of the assessee-company was taken as its value. Learned departmental representative further relied on the orders of the revenue authorities.
10. We have heard the rival submissions in the light of material placed before us. We have perused the relevant details and papers filed at the time of hearing. The words "adequate consideration" as used in Section 4 cannot be construed with precision but it must be construed in relation to the facts and figures of each particular case. It is to be seen for invoking the provisions of Section 4 that whether there is any attempt at evasion of tax or whether the relevant transaction was bona fide. In regard to the cost of the flat, there is no dispute. It is also true that these flats were reflected in the accounts as investment. The fact that these flats were let out to the companies owned by the daughter of the Managing Director is also not in dispute.
The argument of learned counsel that consideration of Rs. 9 lakhs for each of the flats transferred was received for transferring only the reversionary rights, appears to be not correct. The term "reversionary rights" as used by learned counsel is, in our opinion, a misnomer. A careful reading of the details and the contents of agreement transpires that flats were given over on tenancy basis. The rent of each flat was fixed at Rs. 5,000. The word 'lease' is defined under Section 105 of the Transfer of Property Act, 1882 as under: 105. A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other tiling of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.
10.1. The term, or period is an essential element of a lease. A lease which is silent as to duration of term would be void as lease, though it would create a tenancy at will, which would be converted by payment of rent into a tenancy from year to year or month to month. In the present case, we find that monthly tenancy was created. Taking investment factor into consideration, rent appears not to be adequate.
The fact that the premises was let out to a company fully owned by the daughter of the Managing Director of the assessee-company, therefore, assume its relevance. The intent and purpose of this section is to discourage the tax avoidance. If the assessee proves the bona jide of the transaction, there is no reason to invoke Section 4. But unfortunately, in this case, we find that bona fide has not been proved. It is obvious that the transaction was effected with a view to avoid tax liability. We have considered the agreements having regard to the investment made in the flats and the rent fixed coupled with the fact of closeness of kinship with the Managing Director of the assessee-company and the tenant, subsequently, the transferee of the premises. It can only be said that this was only a subterfuge. In our opinion, the case of the assessee clearly falls within the ken of Section 4 of the Gift-tax Act. Accordingly, we uphold the impugned order.