ORDER
R.B. Krishna, Accountant Member
1. These appeals are preferred by the assessees and are directed against the orders of the Dy. Commissioner (Appeals) dated 28-3-1990. As common points are involved, these appeals are disposed of as per this consolidated order.
2. The assessee in GTA No. 42/90 is a HUF. The assessee in GTA No. 41/90 is an individual. Both have the previous year ended 30-6-1982. Their gift-tax assessments were completed under Section 15(3) of the Gift-tax Act on 24-2-1989.
3. The assessees were joint owners of a property situated at No. 8/87-E, Tea Estate Compound, Race Course Road, Coimbatore 640108. As per registered deed of sale dated 26-2-1982 the assessees sold the property to M/s. Premier Instruments Coimbatore Ltd. (a public limited company), which is admittedly managed by D. Vijay Mohan, one of the assessees, as its Managing Director. The sale consideration was fixed at Rs. 4,46,000 and a right vested in the two assessees to have the property re-conveyed to them after 25 years at the cost of Rs. 4,46,000 plus the depreciated value of any improvements effected. The assessees also obtained the right of pre-emption (on the same terms i.e. at Rs. 4,46,000 plus the depreciated value of any improvements effected), in case the purchaser wished to resell the property within the stated period of 25 years. The assessing officer noticed that the value of the property sold as per the guidelines fixed by the Sub-Registrar was Rs. 7,44,000 (as indicated in the sale deed itself) and that stamp duty had been paid on this value, without raising any dispute with the registering authority. The assessing officer therefore adopted this figure of Rs. 7,44,000 as the fair market value and subjected 50% of the difference between the fair market value and the apparent consideration (Rs. 4,46,000) to gift-tax in the hands of each of these two assessees under Section 4(1)(a) of the Gift-tax Act. The value of the gift taxed amounted to Rs. 1,49,000 in each case.
4.The Dy. Commissioner (Appeals) considered the document of sale in detail. He held that the conditions pertaining to the right of reconveyance/pre-emption retained by the assessees were not intended to be acted upon and were a sham. He, therefore, came to the conclusion that the actual consideration for the transaction was only Rs. 4,46,000 and that the difference between the value of the property as per the guidelines of the registering authority (Rs. 7,44,000) and the apparent consideration (Rs. 4,46,000) was rightly subjected to gift-tax. The two appellants feel aggrieved by these orders. Hence the present appeals to the Tribunal.
5. Before us the learned counsel for the assessees argued that the real consideration for the transaction was not only Rs. 4,46,000 but also the valuable rights of reconveyance and pre-emption retained by the assessees. He relied upon the Delhi High Court judgment in CGT v. Dr. (Kaviraj) Khajan Chand [1990] 182 ITR 469 and the Madras High Court judgment in CGT v. Indo Traders & Agencies (Madras) (P.) Ltd. [1981] 131 ITR 313. The learned Departmental Representative submitted as under : That the property in question was very well located in Coimbatore. It had been constructed on a site of approximately 1/2 acre. The built up area was 605 sq. mts. At Rs. 1.50 per sq. ft. the purchaser would realise about Rs. 10,000 per month as rent. Taking 8 times the rent as annual value and capitalising this at 12.5 times (period of vesting of property 25 years – average 12.5), the market value would be not less than Rs. 10 lakh. As the valuation was for 25 years, this value takes into consideration the right of pre-emption/reconveyance retained by the assessees. The valuation as per the land and building method would be far higher. Even accepting the fair market value of the transaction to be Rs. 10 lakh, the value adopted by the assessing officer of Rs. 7,44,000 (based on the guidelines fixed by the registering authority), would also be eminently acceptable. Further, no objection was taken before the registering officer with regard to levy of stamp duty on the amount of Rs. 7,44,000 (as fixed by the guidelines). He therefore contended that the assessments to gift tax were rightly made.
6. We have considered the rival contentions. It becomes necessary at the very outset to extract the relevant Clauses in the sale deed dated 6-2-1982 to enable us to appreciate the correct position :
Now this Deed of Sale Executed by Owners to Company Witnesseth :
1. In consideration of Rs. 4,46,000 (Rupees Four lakh and forty six thousand only) out of which Rs. 2,00,000 (Rupees Two Lakh only) was paid by the company on 28th Jan., 1982 by way of an advance at the time of agreement and the balance of Rs. 2,46,000 (Rupees Two Lakh and forty six thousand only) agreed to be paid by the company to the owners at the time of registration of this sale before the registering authorities, the receipts of which the owners do hereby acknowledge and in consideration of the company agreeing to reconvey the property to the owners as set out in the covenant herein below and also the first option granted to them, the owners hereby convey and transfer absolutely unto the company the property more fully set out and described in the schedule hereunder together with the all lands, appurtenances, right of way, easement, privileges and advantages whatsoever, with all and absolute right, title and interest of the owners unto and upon the properties hereby conveyed to the company to have and hold the same and to the absolute use and benefit of the company for ever and free of all encumbrances and the owners do hereby deliver possession of the property set out in the Schedule hereunder to the company.
The company do hereby agree & covenants with the owners as follows :
(a) It is agreed to between the owners and the company that the owners shall have the option to re-purchase the property either jointly or severally at any day after 25 years from the date they choose to exercise their option at a price being the cost to the company (i.e., Rs. 4,46,000) and the cost of improvements effected on the property less reasonable depreciation for the use of the property and that cost of such repurchase shall be borne by the company.
(b) If at any time before 25 years the company decides to sell the property, more fully set out and described in the schedule hereunder, the owners are hereby given the right of first option to insist to have the property sold to both or either of them or to any of their nominee.
(c) If mutually the owners and company agree to reconvey the property at any time before 25 years as described in the schedule hereunder in the name of owners, their nominees or their successor, the company is hereby given the right to do so at company’s cost as stated in column 5(a).
The company agrees not to sell the property set out in the schedule hereunder to any other person without obtaining first the refusal from the owners in writing.
In support of the same, the owners have handed over to the company, the following documents of titles:
1. A photostat copy of the Memorandum-dated 4-2-1975 evidencing the arrangement of partition between Sri D. Vijay Mohan and his brothers.
2. Property tax receipts.
3. Copy of the wealth-tax order assessing the property in the name of the owners, Sri D. Vijay Mohan and his wife Mrs. Vanitha Mohan.
7. It is clear from a perusal of these Clauses that the consideration for the transfer was not only the sum of Rs. 4,46,000 but also rights of re-conveyance and first option retained by the assessees. It is also seen that unlike, as in other sale deeds, the original documents have not been handed over to the purchasers. This shows that ultimately the assessees did intend to exercise their right of reconveyance at the end of 25 years.
8. The question that now arises, is how to wax value these rights of re-conveyance and first option retained by the assessees? No doubt these are very valuable rights. And probably through efflux of time the rights would appreciate along with the value of the property.
9. Obviously the aggregate consideration attributable to the transaction would be a sum of Rs. 4,46,000 plus the value of these rights. It is not as if there is any prima facie under-statement of consideration in the instrument of transfer.
10. A reference may be made at this stage to the observations of the Madras High Court in the case of Indo Traders & Agencies (Madras) (P.)Ltd. (supra) on pages 320 &321:
The considerations which weighed with the courts in examining the adequacy of the consideration in respect of the sale by a minor or in respect of a relief for specific performance would also apply in the examination of a transaction under Section 4(1)(a). Unless the price was such as to shock the conscience of the court that it cannot be the reasonable consideration at all, it would not be possible to hold that the transaction is otherwise than for adequate consideration.In fact, in the Full Bench judgment of the Patna High Court, it is mentioned by Chief Justice Harries, that the adequacy of consideration is a matter for the parties. (See 1941-9 ITR 137, 148). The judgment of the Patna High Court has been approved by the Supreme Court in a later decision, Tulsidas Kilachand v. CIT [1961] 42 ITR 1 (sic). Of course it is not enough if a transfer is for ‘good consideration’. It should also be for adequate consideration. Adequate consideration is not necessarily what is ultimately determined by someone else as market value.
Learned standing counsel for the Commissioner stressed that the adequacy of the price has to be judged only in the light of the market value of the property transferred and according to him, there is no other yardstick which could be applied to a situation like this. We are unable to agree. We may explain why we disagree with him by taking an example. Supposing an old lady who owns a neighbouring property, wants to part with it to a medical practitioner, so that the medical practitioner would be of immediate assistance to her as and when she needs it and she parts with the property at what the parties conceive to be a reasonable price, could it be said that there was gift of the property to the extent of the difference between what is later taken to be the market value and what was conceived to be the reasonable price for the property.It has also to be remembered that the computation of market value is in most cases a matter of estimate, which may also vary. Such a variable concept would not have been made the yardstick.
The investigation to be made in the case of such a transaction could only be to see whether there is any attempt at evasion of tax or whether it is a bona fide transaction. If there is any attempt at evasion of tax, then Section 4(1)(a) of the GT Act can be applied On the ground that the consideration stipulated in the document is inadequate. If, however, the consideration that passed between the parties can be considered to be reasonable or fair, it cannot be considered to be inadequate.
[Emphasis supplied]
11. If we apply these principles to the facts of the case before us, we find that there was adequate consideration to support the transaction. Even assuming that the real value of the asset transferred was Rs. 7,44,000 (as fixed by the guidelines) or Rs. 10,00,000 (as estimated by the learned Departmental Representative), the consideration for the transaction would be not only Rs. 4,46,000 but also the value of the rights retained by the assessees, which, as we have already noticed are very valuable rights.
12. In effect we have to come to the conclusion that there was no question of inadequacy of consideration involved in the transaction. As a matter of fact, the Delhi High Court in the case of Dr. (Kaviraj) Khajan Chand (supra) upheld the finding of the Tribunal that market value of Rs. 3,37,792 with respect to land gifted, where there was a complete prohibition of transfei by sale for the first ten years would stand reduced to Rs. 15,136 (the original cost of the land) for the purposes of gift-tax assessment. What has been transferred in the case before us is right to property circumscribed by rights of re-conveyance and pre-emption. The net value of the property transferred (bereft of these rights) would certainly be far lower than the real value.
13. The fact that the valuation by the registering authority was not contested cannot be held against the assessees. This does not and cannot preclude the assessees from bringing out the correct facts before the Income-tax Department and claiming that there was no element of gift involved.
14. Respectfully following the Madras High Court decision in lndo Traders & Agencies (Madras) (P.) Ltd.’s case (supra), we have no hesitation in finding that the consideration for the sale is reasonable and adequate. It follows, therefore, that the provisions of Section 4(1)(a) would not apply. Hence, we set aside the orders of the authorities below and cancel the gift-tax assessments made.
15. The assessees’ appeals are allowed.