Commissioner Of Gift-Tax, Madras vs Rukmani and CO. LTD.

Venugopal, J.—The assessee is a private limited company carrying on money-lending business. All the shares of the assessee-company are

held by another private limited company under the name and style of M/s. Padmanabhan P. Ltd. and the shares of this company are held by one

Karumuttu Thiagarajan Chettiar and his wife, Radha Thiagarajan. The assessee-company had taken considerable loans from his group companies,

the interest ranging from 6 per cent. to 7 per cent. The assessee-company lent those amounts to Karumuttu Thiagarajan Chettiar and his wife

charging interest at half per cent. The GTO came to the conclusion that the assessee-company should have charged interest on the loans advanced

by it to Karumuttu Thiagarajan Chettiar, his wife and sons at least at the rate of 6 per cent. and not having done so the difference in the interest at

the rate of 5 1/2% should be taken as having been gifted to those persons by the assessee-company. The GTO concluded that such gifts amounted

to Rs. 1,58,929 for the assessment year 1962-63 and Rs. 2,65,945 for the assessment year 1963-64 and levied a gift-tax of Rs. 8,914 for the

first year and Rs. 20,714 for the second year. On appeal, the AAC held that s. 4(1)(a) of the G. T. Act is applicable where property other than

money is transferred otherwise than for adequate consideration, and no element of gift is involved in the case of the loan transaction by the

assessee-company to Karumuttu Thiagarajan Chettiar, his wife and sons, and consequently there was no liability to gift-tax by the assessee-

company. On a further appeal, the Tribunal held that though the assessee-company borrowed moneys from the group companies for carrying on

the money lending business, there is no prohibition under law for the assessee-company to lend the moneys to any person it likes free of interest or

at low rate of interest and such lending at a low rate of interest may be construed as not having been done for business purposes and the claim for

deduction of interest on moneys borrowed by it may perhaps be disallowed in the Income Tax assessments of the assessee-company and there is

no gift involved when the assessee gave loans to Karumuttu Thiagarajan Chettiar, his wife and sons charging a lesser rate of interest. At the

instance of the revenue the following questions of law have been referred to this court under s. 26 (3) of the G. T. Act.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessees non-charging of interest

on moneys lent or charging of interest at a rate less than the rate at which the assessee has borrowed moneys would not constitute a transfer of

property within the meaning of the Gift-tax Act, 1958 ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee had not forgone or given

up anything in the transaction involved ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there was no deemed gift within the

extended meaning of section 2 (xxiv ) , 4( a) and 4( c) of the Gift-tax Act, 1958 ?

The learned counsel for the revenue relying on the definition of ""transfer of property"" under s. 2 (xxiv) of the G. T. Act and also the definition of

property"" under s. 2 (xxii) of the G. T. Act, contended that there has been a transfer of property for inadequate consideration, and there is a

deemed gift under s. 4(1)(a). In the alternative, the learned counsel for the revenue contended that inasmuch as the assessee-company charged a

lesser rate of interest, there is surrender of an interest in the property by the assessee in favour of Karumuttu Thiagarajan Chettiar, his wife and

sons and such surrender shall be deemed to be a gift under s. 4(1)(c) of the G. T. Act.

Taking the first contention, it is obvious that there has been no transfer of the debt as such by the assessee-company and all that the assessee-

company had done in the present case was charging a concessional rate of interest. There is no transfer involved when the assessee-company

charged lesser rate of interest by advancing loans to Karumuttu Thiagarajan Chettiar, his wife and sons. So, s. 4(1)(a) is not obviously attracted.

Taking up the second contention, to bring the case within the ambit of s. 4(1)(c) , it must be established, firstly, that there was a release or

surrender of an interest in property and, secondly, the value of that release or surrender to the extent to which it has not been found to the

satisfaction of the GTO to have been bona fide, then it shall be deemed to be a gift by the person responsible for the release or surrender. In the

present case, there is absolutely no indication to show that the GTO found that the release or surrender by charging a lesser rate of interest was not

bona fide. In the absence of such a finding by the GTO, the transaction in question cannot be said to fall within the ambit of s. 4(1)(c). In the

assessment order made by the GTO, there is no indication to show that to the satisfaction of the GTO the surrender by the assessee-company in

the form of charging a lesser rate of interest was not bona fide. Section 4(1) (c) is, therefore, not applicable to this case. The Tribunal was,

therefore, fully justified in coming to the conclusion that there was no question of any gift involved when the assessee charged half a per cent.

interest on the loans advanced to Karumuttu Thiagarajan Chettiar, his wife and sons. All the questions referred are, therefore, answered in the

affirmative and in favour of the assessee. The assessee is entitled to costs. Counsels fee Rs. 500 one set.