Jagan Nath Syal (Deceased) vs Commissioner Of Gift Tax
2015 Latest Caselaw 5164 Del

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*    IN THE HIGH COURT OF DELHI AT NEW DELHI
R-38
+                GTR 1/2002

       JAGAN NATH SYAL (DECEASED)                  ..... Petitioner
                    Through: Mr. Shashwat Bajpai, Advocate.

                          versus

       COMMISSIONER OF GIFT TAX                           ..... Respondent
                     Through:
       CORAM:
       HON'BLE DR. JUSTICE S.MURALIDHAR
       HON'BLE MR. JUSTICE VIBHU BAKHRU

                          ORDER

% 20.07.2015

1. This reference under Section 26 (1) of the Gift Tax Act, 1958 pertains to

Assessment Year („AY‟) 1992-93.

2. The questions framed by the Special Bench „A‟ of the Income Tax

Appellate Tribunal („ITAT‟) by its order dated 2 nd September 2002 for

consideration before this Court read as under:

"(1) Whether on the facts and circumstances of the case and in law the Tribunal was justified in holding that a share in the DSE as also membership of DSE were property/assets and transfer thereof was exigible to tax under the Gift-tax Act, 1958?

(2) Whether on the facts and circumstances of the case and in law the Tribunal was justified in opining that composite value of share and ticket was to be adopted?"

3. The Assessee filed its income tax return declaring a gift of Rs. 2,85,504.

This pertained to the gift of one share of the Delhi Stock Exchange Ltd.

(„DSE‟) by the Assessee to his son, Mr. Vijay Kumar Syal, on 9 th March

1992. The Assessing Officer („AO‟) was of the view that the donee, as a

result of the said gift, acquired the right to enter the trading ring on the floor

of the stock exchange as a broker. According to the AO, the composite

value of the gift of the share of DSE comprised both the share itself and the

right to enter the trading ring as member of the DSE. Thus, he worked out

the value of the gift at Rs. 40 lakhs.

4. The appeal of the Assessee was rejected by the Commissioner of Gift-

Tax (Appeals) [„CGT (A)‟] and the further appeal filed before the Special

Bench, ITAT was disposed of by its order dated 8th November 1999

upholding the order of the CGT (A). Thereafter, a reference was sought and

the above questions framed by the Special Bench, ITAT.

5. On the first question, learned counsel for the Assessee first referred to the

Memorandum and Articles of Association („AoA‟) of the DSE to urge that

membership of the DSE was independent and distinct from holding shares

in it. He referred to the decision in Stock Exchange, Ahmedabad v. ACIT

(2001) 248 ITR 209 (SC), Techno Shares and Stocks Limited v. ACIT

(2010) 327 ITR 323 (SC), Vinay Bubna v. Stock Exchange, Mumbai AIR

1999 SC 2517, DCIT v. Ashwin C. Shah (2002) 254 ITR 90 (Mum) (AT)

to urge that membership of the stock exchange is in the nature of personal

permission and is not a tangible asset.

6. The Court has perused the memorandum and AoA of the DSE. It shows

showed that the issue and transfer of shares has been dealt with separately

and differently from the membership of the stock exchange. Article 18 of

AOA states that the Board shall not register any transfer of any share(s) to

any person other than a member of the stock exchange or a candidate for

membership who has been duly elected as eligible for membership under

the provisions of Article 25 and the Board may refuse to register any

transfer or shares(s) to an existing member or may impose such condition in

respect of any such last mentioned transfer as they may deem fit. Under

Article 21 of the AoA any person who becomes entitled to a share in

consequence of the death of a share holder of the company shall have the

right to be registered as a share-holder in respect of the said share or, instead

of being registered himself, to make such transfer of the share as the

deceased person himself could have done, provided he is otherwise

qualified to be so registered under the AoA. Article 24 of the AoA pertains

to membership of the stock exchange and describes further conditions to be

satisfied before a share holder can become a member. These conditions are

further enumerated in Article 25. The procedure with regard to enrolment,

admission or election of new members of the stock exchange is set out in

Article 26. Article 34 states that membership shall not be transferable

except in accordance with the rules. Article 43 talks about the termination of

the membership and sets out the instances resulting in the same.

7. In Vinay Bubna v. Stock Exchange, Mumbai (supra) the Supreme Court

was considering the question whether under the Rules of the Bombay Stock

Exchange the membership card could be said to be an asset of the

shareholder. In answering that question, the Supreme Court observed that

"the membership card of a share broker is not his personal property which,

on default being committed by him and his ceasing to be a member, can be

sold and the proceeds distributed amongst his creditors." Subsequently, a

similar question was addressed by the Supreme Court in Stock Exchange

Ahmedabad v. ACIT (supra). On analysis the bye-laws of the stock

exchange, which is more or less similar to the rules of the DSE, the

Supreme Court concluded that "it is clear that the right of membership is

merely a personal privilege granted to a member, it is non-transferable and

incapable of alienation by the member or his legal representatives and heirs

except to the limited extend as provided in the rules on fulfilment of

conditions provided therein. The nomination wherever provided for is also

not automatic. It is hedged by rules." The Court was categorical that "the

membership right in question was not the property of the assessee and

therefore, it could not be attached under Section 281B of the Income Tax

Act."

8. The above legal position has been reiterated in Techno Shares and

Stocks Ltd. v. ACIT (supra) and followed by the Mumbai Bench of the

ITAT in DCIT v. Ashwin C. Shah (supra).

9. In view of the above settled legal position, and in light of its analysis of

the relevant provisions of the AoA of the DSE, the Court is of the view that

the first question requires to be answered in favour of the Assessee. It is

accordingly held that the ITAT was not justified in holding that membership

of the DSE was an asset of the Assessee and transfer thereof was exigible to

gift tax under the taxation under the Gift Tax Act, 1958.

10. In view of the answer to the first question, the second question is

answered in the negative. It is accordingly held that the ITAT was not

justified in adopting the composite value of the share as well as the ticket

for the purpose of gift tax.

11. The CGT (A) had in his order dated 31st August 1985 held that as per

the decision of the Supreme Court in Bharat Hari Singhani v. CWT 207

ITR 1, valuation of the share must mandatorily be as per Schedule III of the

Wealth Tax Act. The CGT (A) proceeded on the basis that that "the same

value has to be taken for both wealth tax and the gift tax purposes." The

CGT (A) further proceeded on that basis and the valuation of shares of DSE

was undertaken as per Rule 11 of Schedule III to the Wealth Tax Act.

12. The Court finds that no such question as such has been raised by the

Revenue as regards the value of the shares for the purpose of gift tax.

Consequently, this Court is not called upon to examine the correctness

valuation of the shares transferred by the assessee in favour of his son for

the purposes of gift tax.

13. The reference is disposed of in the above terms.

S.MURALIDHAR, J

VIBHU BAKHRU, J JULY 20, 2015 Rk