KHODAY DISTILLERIES LTD. versus COMMISSIONER OF INCOME TAX AND ANR.

Citation: [2008] 15 S.C.R. 1133 · Decided: 14-11-2008 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

-
[2008] 15 S.C.R. 1133 
~ 
KHODAY DISTILLERIES LTD. 
A 
v. 
COMMISSIONER OF INCOME TAX AND ANR. 
(Civil Appeal No. 6654 of 2008) 
NOVEMBER 14, 2008 
B 
[S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.] 
Gift Tax Act, 1958: 
ss. 2(xii), 4(1) -
Rights issue by Company -
Not c 
subscribed by shareholders -
Allotment to remaining 
shareholders-investment companies - Liability of Company 
to pay gift tax - Held: Such allotment was not transfer -
There was no element of existing right - Thus, no 'gift' arose 
..: 
in terms of s. 2(xii)- Deemed gift uls. 4(1)(a) also not attracted 
D 
- In any event, liability to: pay gift tax would be on donor-
shareholder who exercised the option to renounce and. not 
on the company - Despite decision of Appellate Authority, 
Department did not initiate gift tax proceedings against 
renouncer shareholder -
As regard, evasion of tax, 
E 
submission of Department was conflicting - Thus, order of 
High Court that Company was liable to pay gift tax for transfer 
of shares to investment companies, set aside. 
-" 
s. 2(xii) - Bonus shares - Exigibility to gift tax - Held: 
Fully paid bonus shares are merely distribution of capitalized 
F 
undivided profit -
Recipients of bonus shares cannot be 
called donees of shares from the company - Thus, there is 
no element of 'gift' as defined u/s. 2(xii). 
Word and Phrases: 'Allotment' of shares' - Meaning of G 
-
Held: Word 'allotment' indicates creation of shares by 
1-
appropriation out of the unappropriated share capital to a 
particular person - Company Law. 
There were twenty seven shareholders of the 
1133 
H 
1134 
SUPREME COURT REPORTS 
[2008] 15 S.C.R. 
A appellant company including the seven investment 
companies. Appel!ant company announced issue of 
rights. Twenty shareholders did not subscribe to the 
rights issue. Appellant company allotted the shares to the 
remaining shareholders-seven investment companies. 
B Thereafter, appellant also issued bonus shares in the ratio 
of 1 :23. The Assessing Officer(AO) held that the allotment 
by way of rights issue being without adequate 
.,_ 
consideration, was a deemed gift u/s. 4(1) of the Gift Tax 
Act, 1958 and the difference between the value of shares 
c on yield basis and the face value of Rs. 10/- at which 
sh~res were allotted was to be taxed. AO also levied gift 
tax Qn the bonus shares issued by the appellant. In 
appeal, CIT (A) held that the entire exercise undertaken 
by the appellant was to avoid payment of wealth tax, 
0 thus, the company was liable to pay gift tax for transfer 
~ 
of the said shares to the seven investment companies,· 
despite observing that the Department should initiate gift 
tax proceedings against the renouncer shareholders and 
not against the appellant company. Appellant company· 
filed appeal which was allowed. The tribunal held that the 
E allotment of rights_ by the appellant did not con_stitute 
'transfer' as it did not involve any existing property at the 
time of such allotment, thus there was no element of .gift 
u/s. 4(1)(a) of the 1958 Act; and that the seven-investment· 
companies made payment towards the face value of the 
F shares, thus, the contract was not without consideration. 
G 
H 
Aggrieved, respondent-Department filed appeal which 
was disposed of in its favour. Hence the present appeal. 
Allowing the appeal, the Court 
HELD: 1.1 There is a vital difference between 
'creation' and 'transfer' of shares. The words 'allotment 
of shares' have been used to indicate the creation of 
shares by appropriation out of the unappropriated share 
capital to a particular person. A share is a chose in action. 
KHODAY DISTILLERIES LTD. v. COMMISSIONER OF 
1135 
INCOME TAX AND ANR 
A chose in action implies existence of some person 
A 
entitled to the rights in action incontradistinction from 
rights in possession. There is a difference between issue 
of a share to a subscriber and the purchase of a share 
from an existing shareholder. The first case is that of 
creation whereas the second case is that of transfer of B 
chose in action. In the instant case, when twenty 
shareholders did not subscribe to the rights issu.e, the 
appellant allotted them to the seven investment 
companies, such allotment was not transfer. In the 
circumstances, s. 4(1)(a) of the Gift-Tax Act, 1958 was not · c 
applicable as held by the tribunal. [Para 8] [1142-C-E] 
1.2. There is a difference between "renunciation" and 
"allotment". In the instant case, the Department did not 
keep 

Excerpt shown. Read the full judgment & AI analysis in Lexace.