Commissioner Of Income-Tax (And Other Cases) v. Master Gaurav Dalmia

S. Ranganathan, J.:— All these petitions under section 256(2) of the Income-tax Act, 1961, can be disposed of by a common order as they raise a common issue.

2. All the petitions relate to the assessment year 1977-78. The petitioners are various members of the Dalmia family. Each of the petitioners purchased during the previous year a certain number of shares' in the Dalmia Dairy Industries Limited (DDIL). In seven of these cases, the shares were purchased from a company known as Dalmia Cement (Bharat) Limited (DCB) and in the other three cases, the shares were purchased from a company known as Shevaroy Investment (SI). The shares were of the face value of Rs. 10 and were purchased from DCB on May 25, 1976, at Rs. 10 per share and from SI on February 16, 1977, at Rs. 11.20 per share. The Income-tax Officer was of the opinion that the real or intrinsic value of these shares on the date of purchase on the breakup value basis was Rs. 292.13 per share. We found that each of the petitioners had a relative who was a director in DCB or SI as the case may be. He thus concluded that the assessee had been able to purchase for Rs. 10/11.20 a share whose real market value on the date of purchase was Rs. 292.13 He, therefore, held that each of the assessees was assessable on the difference between Rs. 292.13 and Rs. 10/11.20, the difference being treated as income by virtue of section 2(24)(iv) which in so far as is relevant reads as follows:

“(iv) The value of any benefit or perquisite, whether convertible into money or not, obtained from a company… by a relative of the director”

3. The short question is whether this conclusion was justified. The Tribunal traced the history of the transaction. They found that the DDIL was originally a wholly owned subsidiary of DCB Ltd., all the 60,000 shares of the company being held by DCB Ltd. Some time later, the company issued a large number of shares to the shareholders of DCB Ltd. It was, however, the desire of the company to raise Rs. 24 lakhs by way of share capital and it proposed to do so by issuing shares for public subscription. At this stage, DCB agreed to offer 21,000 of the equity shares held by it for sale at par with a view to enable DDIL to comply with the stock exchange regulations for enlistment of the company on the Delhi Stock Exchange. Thus, on February 17, 1976, DDIL issued a prospectus offering for sale 1,26,360 equity shares together with 21,000 equity shares held by DCB. It was made clear that the entire equity shares issued and offered for sale would rank pari passu in all respects (including payment of dividends except for the year 1974-75) with the existing issued equity shares of the company. DCB Ltd. appointed DDIL irrevocably as their attorneys for effecting the sale of 21,000 of the fully paid-up shares held by it as per the terms of the prospectus. In pursuance of this, the shares were listed for public subscription between March 22, 1976, and April 3, 1976, and the list closed on April 3, 1976. 2,050 of the shares offered for sale and-13, 910 out of the shares offered for subscription (totalling 15, 960) remained unsubscribed. These were eventually allotted to the underwriters on the basis of their underwriting commitments. Seven out of the ten present petitioners purchased the shares at the time of this public subscription but the shares they purchased were those that were offered for sale by DCB Ltd. They were allotted the shares they applied for and they were registered as shareholders of the company on May 25, 1976. In the case of the other three petitioners, they purchased the shares from SI on February 16, 1977, for Rs. 11.20 as already mentioned. In the light of the above facts, the Tribunal pointed out that at the time when each of the assessees acquired the shares, a very large number of shares had been thrown open to the public for subscription at the par value of Rs. 10. When any member of the public could have obtained a share of DDIL for Rs. 10 per share, the Tribunal concluded, the present petitioners cannot be said to have obtained any benefit by acquiring the shares at the same price. In other words, they concluded that neither DCB Limited nor SI conferred any benefit on the petitioners by virtue of their being relatives of a director of the respective companies. This applies not merely to the shares issued for public subscription by that company but also to the shares of DCB Ltd., offered for sale along therewith. DCB also made a public offer for the sale of its 21,000 shares and these were open to be subscribed by any member of the public and indeed several of the shares were also subscribed for. It was also pointed out that the DCB did not directly sell the shares to the petitioners but they were sold by appointing DDIL as an irrevocable power of attorney agent to sell the shares in pursuance of the prospectus. The Tribunal also pointed out that, in the light of the decision of the Supreme Court in Commissioner Of Gift Tax, Bombay v. Smt Kusumben D. Mahadevia , [1980] 122 ITR 38, it was not proper to ascertain the market value of the shares of a going concern on the basis of the break-up value of the assets of the company. They, therefore, held that none of the assessees derived any benefit by the purchase of the above shares at the rates stipulated in the prospectus and that, in any event, there was no material to indicate that at the time of the sale of the shares, the market value of the shares was more than the consideration shown in the prospectus.

4. As we have earlier mentioned, there are some slight differences in the material facts in the ‘cases of the various petitioners before us. One of these, as we have already pointed out, is that in the case of seven of the petitioners, the shares were purchased from DCB Limited whereas in the case of the other three petitioners, the shares were purchased from SI Ltd. at a different price. While there is no dispute that the petitioners in I.T Cs. No. 49, 62, 63 and 174 of 1984 were directors in DCB Ltd., the position is slightly different in the case of others. The petitioner in I.T.C No. 104 of 1984 is a son of Y.H Dalmia who, it is said, was not a director at all in DCB Ltd. In I.T Cs. Nos. 55 and 97 of 1984, the assessee is a Hindu undivided family and the Appellate Assistant Commissioner has held that such a family cannot be described as a relative of a director of the transferor company. In I.T Cs. Nos. 96, 97 and 98 of 1984, the person alleged to be the relative of the petitioners was a director not in SI but in another company known as Alirox Abrasives Ltd. and a question was raised as to whether he could be said to be a director of SI also because SI was the holding company of Alirox Abrasives Ltd. In I.T.C No. 95 of 1984, the petitioner was the wife of Y.H Dalmia but the Appellate Assistant Commissioner held that he was not a director in DCB Ltd. and, on appeal, the Tribunal had left the question open. Also, as pointed out, the purchases from SI were on February 19, 1977, whereas the purchases from DCB were on May 25, 1976. We should, however, mention that these differences in fact do not make any real difference to the question at issue. No contention has been raised that the market value of the shares on February 19, 1977, was different from that on May 25, 1976. Also in view of the decision taken by the Tribuual on the principal question regarding the market value, the question whether in each of these cases any relative of the petitioner was a director of DCB Ltd. or SI also becomes academic. We, therefore, confine ourselves only to the question whether the Tribunal was justified in its conclusion that the purchase price of the shares represented the market value as on the date of purchase in the case of each of the petitioners.

5. On behalf of the Department, it is contended before us as it was contended before the Tribunal, that while the shares have ostensibly been sold for the nominal value, the true and intrinsic value of the shares was much more than the nominal value. Counsel for the Department wishes to trace back the earlier financial history of DDIL. This company previously known as Dalmia Cements Ltd. had two cement factories in Pakistan. They were sold by the company to a public sector company in Pakistan known as Pakistan Progressive Cement Industries Ltd. (PPCI) on certain conditions which are not now relevant However, the National Bank of Pakistan (NBP) had guaranteed the due payment of the purchase price of the factories to the assessee. The balance-sheet of the company as on September 30, 1973, reflected a debit balance of Rs. 1,43,88,605 in the profit and loss account which primarily represented the purchase price of the factories due from the PPCI. Apparently, in the view that these proceeds were practically irrealisable, the company proposed to reduce its share capital. Accordingly, an application was filed in the Madras High Court seeking permission to reduce the share capital of the company from Rs. 5,00,00,000 to Rs. 3.56 crores and the paid-up capital to Rs. 6 lakhs consisting of 60,000 fully paid-up shares held by DCB Ltd. In other words, the company effected a substantial reduction of capital in June, 1974. Learned counsel for the Department submits that this was done deliberately by the company to make it appear to outsiders that the company's shares were, practically worthless and its liabilities irrecoverable whereas, in fact, at that time the company was actively pursuing steps to recover the monies due from PPCI and NBP. Two awards had been made in favour of the company and against the NBP on March 1, 1972, and March 3, 1972, under which the DDIL became entitled to a huge amount in lakhs of pounds. On May 6, 1973, on the failure of the NBP to honour the terms of the award, an action was instituted by the company in the High Court in the United Kingdom for payment of damages to the company, on account of NBP's breach in not making the payment to the company in India in terms of the awards given by the arbitrator to the company. This action went on and eventually on April 16, 1976, the High Court in the United Kingdom passed a decree in favour of DDIL for £35,49,000. The NBP filed an appeal and asked for stay of recovery of the amount by the DDIL pending disposal of the appeal. The High Court, however, directed the NBP to deposit the sum of £35,49,000 in the bank account of DDIL but, as against that, the DDIL was directed to give a bank guarantee for restitution in the event of the appeal succeeding. These proceedings went on for some time and eventually the Court of Appeal dismissed the appeal on May 4, 1977, and the House of Lords rejected a petition for leave to appeal on July 20, 1977. It was at this time that the bank guarantee was discharged and the DDIL became finally entitled to the large amount mentioned above.

6. Learned counsel for the petitioners refers to all these incidents to show that the shares of the DDIL were really worth much more than what was reflected by the balance-sheet of the company. He submitted that the directors of the company as well as the directors of the DCB who were all close relatives were fully aware of all these proceedings. They knew full well that the DDIL had obtained an award against the NBP and they were sure eventually that the proceeds of this award will come to the company and that the value of the shares as a result of these important developments was much more than the face value of the shares. They transferred the shares to their own relatives at the face value which was much lower than the intrinsic value of-the assets on the break-up method. He, therefore, contends that the petitioners should be held to have received a benefit as a result of these transfers from the company of which their relatives were directors and that the value of this benefit, as worked out by the Income-tax Officer, was rightly assessable under section 2(24)(iv) of the Act.

7. We think that the Tribunal has rightly rejected these contentions on behalf of the Department. In the first place, as against the positive evidence available in the face of actual allotments of the shares of DDIL to members of the public at Rs. 10 per share in April, 1976, there is no necessity to go in for some other method of ascertaining the market value of the shares such as the break-up value method. It is not the suggestion of the Department that the public issue for subscription in April, 1976, was a make-believe or a sham affair. On the other hand, as we have mentioned earlier, these shares have been subscribed for, to a substantial extent, by members of the public. There is, therefore, positive evidence that at the relevant time, shares of the company were available in the market for allotment at Rs. 10 per share. This is a clinching circumstance under which, in our opinion, the Tribunal was right in rejecting any other artificial method of looking at the market value.

8. Secondly, learned counsel for the petitioner is not right in saying that the financial history which he has traced was within the exclusive knowledge of the directors of the DDIL or DCB. The reduction of the share capital of the company was referred to in the annual report of DDIL to its shareholders for 1973-74. While it is true that at this time the company had obtained an award, the NBP had refused to comply with the terms of the award and an action had been filed for damages in the London courts. At this stage, there is nothing to show that the company could have entertained any reasonable hopes of realising the entire amount of the award or even a substantial part thereof. In fact, the company's annual reports for 1972-73 and 1973-74 do mention that the company had obtained awards in its favour from the arbitrator. There is, therefore, no reason to show that the reduction of share capital was effected with a view to make it appear to the public as if the shares of the company were worth nothing (although the company had some sort of hidden assets in the shape of awards in its favour). Now turning to the prospectus issued at the time of the offer of the shares for public subscription and sale, this also gives full details. It refers to the entire history mentioned by counsel for the petitioner. It refers to the fact that the High Court had concluded its hearings and that judgment was being awaited and that the claim of the company against the NBP stood at about Rs. 6.80 crores. Reference has been made to the earlier reduction of share capital. Reference has been made to the desire of the company to increase its equity capital and the fact that 1,73,640 shares had been issued earlier and that 1,26,630 shares were being offered for subscription now along with 21,000 equity shares held by DCB Ltd. The reason why the DCB's shares were being placed for sale is also mentioned. In other words, all these facts clearly show that the company had not withheld either from its annual report or from the prospectus any of the facts to which attention is drawn by learned counsel for the Revenue. In spite of all these facts being available, the shares issued for subscription and sale were not fully subscribed. If, as is now urged by the Department, all the above facts clearlys how that the shares were intrinsically worth many times more than the face value, one would have expected the shares to be fully or oversubscribed. As we have already mentioned, it is not suggested that there was a mere ruse to issue the shares to the public and that the shares have been allotted among close relatives secretly. Actually, one can also appreciate the reason why the shares were not fully subscribed at that time. At that time the company had no doubt obtained awards against the NBP but proceedings were pending in the London High Court and judgment had not been given at the time the prospectus was issued. Of course, the judgment came in a few days later, i.e, on July 21, 1976, but even if subsequent facts are to be taken into account, the position was that the NBP had preferred an appeal. It was very difficult for anybody, particularly members of the public in India, to gauge with any sense of realism the prospect of the company eventually being able to recover the huge amount awarded earlier or to retain the benefit of the decree given by the High Court at London. At that time, there was only a litigation pending and the amount had been deposited in the bank account of the company but against that the company had given a bank guarantee for restitution in the event of its failure in the appeal. The entire matter was in the womb of litigation and it could hardly be forecast with certainty that the intrinsic value of the shares was much more than the face value as is alleged on behalf of the Department now. Perhaps, it is this lack of confidence of the public that led to the public issue remaining unsubscribed to some extent.

9. Thirdly, the Department has proceeded on the footing that the market value of the shares on the date of purchase was the break-up value with reference to the balance-sheet as on September 30, 1976, after adding to it the amounts realised effectively by the company subsequently from the NBP. Apart from the fact that, as has been held by the Supreme Court in the case referred to by the Tribunal, in the case of a going concern, the break-up value of the shares is not a proper method of valuing the shares, it is doubtful how far as on September 30, 1976, the balance-sheet should be adjusted by taking into account the amounts received from the NBP overlooking that, as on September 30, 1976, there was a guarantee outstanding against the company for the due redemption of these amounts pending disposal of the appeal by the court of appeal. But above all, as we have already pointed out, there is clear evidence of the market value of the shares in this case for the simple reason that the shares have been acquired by each of the assessees in response to a prospectus which shows, that at that point of time, any one could have obtained these shares for the face value of Rs. 10. The fact that not many of the members of the Dalmia family had to apply for some of these shares is a totally irrelevant consideration. The fact is that a number of people apart from the members of the public did so and that in the event the members of Dalmia family have acquired these shares at this price, there is no reason to consider the petitioners as having received any benefit from having purchased the shares at that price at that time. Learned counsel for the Department also made a point that there was some difference between the shares issued by DDIL in April, 1976, and the shares of DCB which were offered for sale at that time. We have not been able to see any difference, except that since the shares held by DCB were also held during the earlier year, they would have been entitled to the dividends payable in respect thereof for the year 1973-74. Actually, there was no dividend issued by the DDIL for the year 1974-75 in view of there having been losses in the company. But even assuming that there is some difference, there is no justification for treating the market value of the shares to be equal to the break-up value and bringing to assessment the large sums that are in question in the present case.

10. Since the amounts involved are substantial and since there is also a batch of cases on the same point, we have discussed the matter at some length. But we should like to make it clear that only a very short question is involved, namely, what was the market value of the shares in May, 1976, or February, 1977, as the case may be. Having regard to the public subscription on that day, the Tribunal has accepted the position that the market value of the shares as on that date was only the value for which the assessees purchased the shares. This is a simple conclusion of fact based on the ample material before the Tribunal. The Department is just attempting to make the matter look somewhat complicated by referring to certain earlier history which is not material and which is also not helpful to it. The basic question is a pure question of fact. We are, therefore, of the opinion that no reference is called for in any of these cases. We, therefore, dismiss these petitions and having regard to the circumstances, we make no order as to costs.