1. The appeal is directed against the assessment of a sum of Rs. 1 crore to gift-tax by invoking section 4(1)(c) of the Gift-tax Act, 1958.
2. The assessee is a public limited company. It is engaged in business as consulting engineers having its business spread all over the country and abroad. Its business grew and expanded multi-fold. It was, therefore, experiencing difficulties in getting accommodation to conveniently carry on the increased scale of operations. It, therefore, desired to have a building of its own. Towards this end it made application to the Government of West Bengal for allotment of land in Salt Lake City, Calcutta. By letter dated 24-8-1981, the assessee was allotted about 2 acres of land on lease for a period of 999 years on payment of Salami at the rate of Rs. 20,000 per cotta "for construction of their proposed office building". The assessee was also called upon to pay total Salami amount immediately.
3. In the meantime, there was some rethinking and it was felt by the assessee-company that is would be expedient to have a subsidiary company registered which would undertake the construction of the building. It was felt that the time and energy of the assessee-company would be considerably saved if it did not itself undertake the construction work, so that they could be channelised towards further expansion of its consultancy business. It was also felt that the management of the properties already held by it in its name was considerably hampering their business activities and the company, if possible, wished to avoid such inconvenience in the interests of its business. Therefore, a hundred per cent subsidiary by name D.C.Properties Pvt. Ltd. was incorporated on 19-10-1981. The main object of the subsidiary was to acquire land, construct building thereon and let out the same by way of lease, tenancy or in any other manner particularly to the assessee-company or its associates.
4. On 29-10-1981, i.e., immediately after the incorporation of the subsidiary company, the assessee-company wrote a letter to the Government of West Bengal which is as under : "Sub. : Allotment of Land - 2.03 acres in the Salt Lake City - Sector-II We invite your kind attention to letter No. 3176-SL(AL)/21-9/81, dated 24/25-8-1981 on the subject, a copy of which is enclosed.
Development Consultants Private Limited (DCPL) applied for land in the Salt Lake City and steps were taken to register a company under the name of "D.C. Properties Pvt. Ltd." In fact DCPL applies as Promoter of D.C. Properties Private Limited although this was not categorically mentioned in the application. We are pleased to inform you that D.C. Properties Private Limited has been incorporated with effect from 19th October, 1961 as fully owned subsidiary of DCPL to deal with the properties of DCPL particularly as its main object.
For construction of the building most efficiently and as expeditiously as possible it will require specific attention and administrative control. Maintenance of the property after construction will also involve a great deal of services and care for which additional staff will be required. For the purpose of having better organisation and control of the property, D.C. Properties Private Limited has been incorporated. Furthermore, the incorporation of this new Company will also facilitate in obtaining finance from bank or other financial institutions as working capital.
Although D.C. Properties Private Limited has a separate entity but 100 per cent ownership rests with DCPL. A copy of the memorandum and articles of association of D.C. Properties Private Limited is enclosed for your kind perusal.
In view of above we pray that the above land allotted to us in Sector-II of Salt Lake City may kindly be allotted in favour of D.C. Properties Private Limited instead of us who will use the same exclusively for the purpose of construction of an office building complex for DCPL as embodied in the main object clause of the Memorandum of Association of D.C. Properties Private Limited.
In this connection we are enclosing herewith letter dated 29-10-1981 from D.C. Properties Private Limited.
By letter dated 4th December, 1981, addressed to D.C. Properties, the allotment of the land was changed in favour of the subsidiary company.
5. Thereafter on 2-1-1982 an agreement was entered into between the assessee-company and D.C. Properties, the subsidiary. After narrating the reasons which led to the formation of the subsidiary company and after broadly indicating the arrangement proposed to be made under the agreement, it was provided that the construction of the building should be undertaken by D.C. Properties either by themselves or by contractors, with the approval of the assessee. Clause (2) provided that the assessee shall have the right to inspect and approve the work done. It was provided by clause (4) that on completion of the building, D.C. Properties shall hand over possession of the same to the assessee and shall grant licence in its favour for use and occupation, subject to payment of reasonable service charges. Clause (5) stipulated that the licence shall enure for the entire period of the lease. Clause (8) provided that in consideration of the terms and conditions contained in the agreement the assessee shall pay Rs. 1 crore to D.C. Properties towards the cost of the land and the cost of the building and shall pay further sums for the construction as may be found necessary. It was stipulated that this amount shall be treated by D.C. Properties as non-refundable deposit being "other liabilities against contract to be executed on capital account". By clause (9) it was obligatory on the part of D.C. Properties to keep the building in proper maintenance and repair and it shall have the right to receive the service charges from the occupants of the building. Clause (11) provided that in the event of the failure of the subsidiary company to complete the construction as per the terms, the assessee-company will have the right either to enforce specific performance of the agreement or to complete the construction by itself in which event the subsidiary company shall immediately hand over the unspent amount out of the deposit. The subsidiary company was also obliged to co-operate with the assessee in the further construction. Clause (12) stipulated that if the construction was delayed for any reason beyond the control of both the parties, the unutilised portion of the deposit may be refunded to the assessee or retained by D.C. Properties with the consent of the assessee for the purpose of any other project undertaken for the benefit of the assessee.
6. On 28-7-1983, the Government of West Bengal entered into a lease deed with D.C. Properties. This contains the usual terms and conditions associated with lease of land in Salt Lake City. However, clause (7) provided that the lessee, namely, D.C. Properties shall not sub-divide, sublet or grant any licence to occupy or utilise the land or building to be constructed to any party other than the assessee-company and its subsidiaries without the consent of the Government. It was further provided that the Government shall have the discretion to refuse or withhold consent if the proposed sub-lease or licence is not in favour of the assessee-company.
7. In accordance with the terms and conditions of the agreement, the assessee-company advanced the sum of Rs. 1 crore to D.C. Properties during the accounting year ended 31-12-1981. On 6-12-1982, however, at the meeting held by the Board of Directors of the assessee-company, it was decided that the non-refundable deposit was not required to be maintained in the accounts of the assessee-company for the purpose of meaningful representation of the assets of the company as the same "is not realisable under the terms of agreements with D.C. Properties Pvt.
Ltd." It was, therefore, decided to write off the amount against the reserves and surplus. A resolution was accordingly passed.
8. The Gift-tax Officer took the view that there was an abandonment of the debt which should be treated as deemed gift under Section 4(1)(c) and brought the sum of Rs. 1 crore to tax by order dated 25-3-1991. On appeal, the CIT(A), by order dated 25-2-1992 took the view that though the assessee's accounts indicated that the deposit was non-refundable, there were clauses in the agreement dated 2-1-1982 to show that in certain circumstances the deposit can be called back. He further observed that for the purpose of valuing its share, the assessee-company was still considering the deposit as an asset and that the amount was being shown by the subsidiary company as a liability. He further noted that though the companies are separate corporate entities, all the shares of the subsidiary company were held by the assessee-company and, therefore, for all practical purposes they were one and the same. According to him, in this view, it may be considered as a case of gift to oneself. For all these reasons, he concluded as under : "In view of the above discussion it is clear that the matter has to be considered not only from the narrow point of view of abandonment of right but in overall context of the treatment of the amount in income-tax and wealth-tax assessments of both the appellant-company as well as the subsidiary company.
The matter is, therefore, referred back to Assessing Officer with directions to call for such details and evidence as required by him and to re-decide the matter and producing evidence to the appellant.
In the result, for statistical purposes, the appeal may be treated to have been allowed." 9. In the fresh assessment the G.T.O. referred to the agreement between the assessee-company and D.C. Properties and held that on a conjoint reading of clause (11) and clause (8) thereof if was clear that the non-refundable deposit came to acquire the character of a debt and that the books of account of both the assessee and the subsidiary supported this conclusion. He further observed that the write off of the debt against the reserves and surplus itself implied that there was a debt due to the assessee-company. He considered such write off a gift within the meaning of section 4(1)(c) of the Act. In this view of the matter, the original assessment to gift-tax was repeated.
10. The question for consideration before us is whether the provisions of section 4(1)(c) can be invoked to the facts of the case - The gift-tax authorities have taken the view that there is an abandonment of the debt which should be deemed to be a gift made by the assessee.
Extensive arguments were addressed before us on the question as a whether there was an abandonment at all in the first place. Dr. Pal contended for the assessee that by mere adjustment by book entries no debt can be abandoned and that such adjustment cannot give rise to any liability to gift-tax, especially under the deeming provisions, of which section 4(1)(c) is one. Mr. Joshi for the department, however, submitted that the write off would constitute abandonment and the very fact that the deposit was non-refundable indicated an intention to abandon even when it was given and thus in the present case there was both an intention to abandon the debt and an overt act, clearly showing that the assessee gave up all its rights over the amounts of Rs. 1 crore. Various authorities were cited by both sides on the question as to whether there was abandonment but, in our opinion, even if it is assumed that there was an abandonment of the debt, only the extent to which it has not been found to the satisfaction of the GTO to have bona fide, it can be treated as a deemed gift and taxed as such in the hands of the assessee, as per section 4(1)(c). The question of bona fide assumes great importance in view of the clear words in the section. We could, therefore, assume for the sake of argument that there was an abandonment by virtue of the adjustment of the deposit or the write off of the same against the reserves and surplus of assessee-company. But when we turn to the question as to whether the abandonment reflected by the write off was bona fide, we are unable to say that it was not.
According to the Ld. D.R., the write off was not bona fide since the motive of the assessee was to divest itself of an asset, presumably to avoid wealth-tax. According to him, when the wealth of the assessee has been sought to be transferred by means of the book entry, the motives are highly questionable and cannot be stated to be bona fide. We are unable to accept the contention. The argument overlooks the business practicalities and the very reasons for which the subsidiary company came into existence. We had earlier referred to the reasons which prompted the assessee to get a wholly owned subsidiary company incorporated. To recapitulate briefly, the assessee-company considered that its rapidly expanding business required more office space and further that it would be expedient if another company was entrusted with the job of undertaking the construction of the buildings, as its own, energies can be channelised for productive purpose. This is a bona fide decision prompted by no other consideration except considerations of business prudence. Accordingly, the subsidiary company was got registered and the assessee had also requested the Salt Lake City authorities to transfer the allotment of the land in favour of the subsidiary company. The assessee's letter dated 29-10-1981 to the Government of West Bengal, which we have extracted fully in the earlier part of our order, clearly brings out the facts in this connection and explains why the change of the allotment was being requested. The request was accepted but with the condition, embodied in the clause (7) of the Lease Deed between the West Bengal Government and D.C.Properties, to the effect that the land and the building would be utilised only for the purpose of accommodating the assessee-company and its subsidiaries. The deposit of Rs. 1 crore made by the assessee-company with D.C. Properties was to give effect to the arrangement and was quite in keeping with the object for which the subsidiary was floated. By means of the agreement with D.C. Properties entered into on 2-1-1982 and also by clause (7) of the Lease Deed between the Government of West Bengal and D.C. Properties, it has been ensured that the building to be put the D.C. Properties would be unconditionally provided only to the assessee-company only for the purpose of housing its offices, subject to payment of reasonable service charges. The presence of clauses (11) and (12) in the agreement dated 2-1-1982 indicates that the deposit was not to remain idle except for reasons beyond control of either of the parties and that the assessee-company was quite serious in its intention to have the building completed by D.C. Properties in due time. Under clause (11) it was specifically mentioned that the assessee will have the right either to enforce specific performance as per the terms of the agreement or to complete the construction of the building by itself in the event of failure of the subsidiary company to adhere to the terms of the agreement. It was further provided that in such an event the unspent amount will have to be refunded to the assessee. These terms, the true import of which have not been kept in view by the Gift-tax authorities belie their view, canvassed before us by Mr. Joshi on their behalf, that the abandonment was not bona fide. Clause (11) has nothing to do with the write off or in other words, it will have effect notwithstanding the fact that the assessee-company wrote off the amount against the reserves and surplus. The right of the assessee-company under this clause to ask for specific performance or to ask for refund of the unspent amount of the deposit remains intact notwithstanding the write off. This clause has been inserted obviously to ensure that the construction the building proceeds in right earnest and that the subsidiary company does not take things lightly, having obtained the money. The entire documentation shows that right from the beginning the assessee-company was not in favour of undertaking the construction of a building by itself. At the same time it had to ensure that it had access to sufficient office space and the idea of floating subsidiary company, fully owned by the assessee-company, was a means of ensuring this. The arrangement, viewed as a whole, clearly gives an impression to us that it is bona fide. Thus, though there may be an abandonment of the debt by writing off the same in the assessee's books the abandonment is bona fide and if it is so, it cannot be taxed under section 4(1)(c) of the G.T. Act.
11. We are unable to accept the argument of the Ld. D.R. that the assessee was trying to avoid wealth-tax by transferring the amount to its subsidiary. The write off was made in December 1982 and at that time there was no wealth-tax on companies. It was introduced only by the Finance Act, 1983 and that too with effect from the assessment year 1984-85 only. Surely it cannot be the suggestion that the assessee company anticipated that levy of wealth-tax in December 1982. No other ulterior motive was suggested. We may briefly notice a few authorities on the question of bona fide. In the case of Sir Padampat Singhania v.CGT [1988] 172 ITR 292 (All.), it was held by the Allahabad High Court with reference to section 4(1)(c) that in order that the transaction is bona fide, it must be shown that everything was done in an open and straight-forward manner without subterfuge or concealment of any kind or without any attempt to make the transaction appear other than what it was in reality. The object of inserting the words 'bona fide' in the section was to provide for exemption in respect of a real and genuine transaction and in the context the expression conveys the absence of intent to deceive. In Wharton's Law Lexicon, the meaning of 'bona fide' is given as good faith, implying the absence of all fraud, unfair dealing or acting, whether it consists in simulation or dissimulation.
A bona fide transaction requires that there was no secret arrangements or reservations and that what is apparent is also real (please see Madras High Court decision in Chandralekha v. P.K. Sushila Rao [1969] MLJ 17). The transactions are stated to be bona fide if they are not fictitious or colourable but are real and genuine for all purposes - A.G. v. Richmond (Duke) 1909 AC 466. Applying these tests to the present case, it cannot be stated that the transaction or the write off was not bona fide. The arrangement has been done openly and without any secret reservations. Everything has been documented and disclosed to all the authorities concerned. There is no allegation of any fraud or oblique motive. Everything has been done in a straight-forward and open manner.
12. The Board issued Letter No. F.No. 1-59/GT, dated 27-2-1959 which is reproduced in Taxmann's Direct Taxes Circulars, 1988 Edn., Vol. 2, page 1940 which is as under : "85B. Whether clause (c) of sub-section (1) would be invoked only in cases where circumstances justify inference of collusion between person who makes discharge, etc., and person in whose favour discharge, etc. has been made.
Section 4(c) has been enacted with the object of roping in so-called business transactions which are really gifts in a camouflaged form.
It is not however, the intention to penalise cases where the release, discharge, surrender, forfeiture or abandonment has been made for bona fide reasons. For example, a debt may be abandoned because it is genuinely irrecoverable and the person may not have taken legal steps to recover the amount as it would have meant only throwing good money after bad. Such an abandonment will not be treated as gift. This provision would be invoked only in cases where the circumstances justify an inference of collusion between the person who makes the discharge, surrender, abandonment, etc., and the person in whose favour the discharge, surrender or abandonment, etc., has been made.
Letter : F.No. 1-59/GT9 (relevant extracts para 4), dated 27-2-1959." The above circular covers the present case. There are absolutely no circumstances justifying an inference of collusion between the assessee and its subsidiary. Thus, even applying the circular the provisions of section 4(1)(c) cannot be invoked.
13. For these reasons we hold that the assessment to gift-tax cannot be sustained. We cancel the same.
14. In the view we have taken we do not consider it necessary to decide the alternative argument addressed by Dr. Pal on the basis of section 5(1)(xiv) that the gift having been made in the course of the business, is exempt.