1. These two tax cases arise out of an order of the Tribunal dated May 18, 1974. At the instance of the Commissioner of Gift-tax, the first reference was made, and as he was not satisfied with the questions actually referred, a further petition under Section 26(2) of the G.T. Act was filed as a result of which certain other questions were directed to be referred and they form the questions referred in T.C. No. 343 of 1978.
2. We shall first deal with the reference under Section 26(1) of the G.T. Act and that is in T.C. No. 158 of 1975. The questions referred therein are as follows;
'(1) 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 meaning of Section 4(1)(a) of the Gift-tax Act, 1958, in the assessee's case
2. Whether, on the facts and in the circumstances of the case, the gift made in the assessee's case would be exempt under Section 5(1)(xiv) of the Gift-tax Act, 1958?'
2. The assessee is a private limited company, which came into existence on 19th May, 1948, with three shareholders, viz., P. R. Dharmarajan, P. R. Ramanathan and P. S. Ramaswamy, who were also directors of the said company. This company acquired as a going concern the whole of the business of a partnership by name 'Indo Traders and Agencies' with all the assets including the goodwill and liabilities of the said business. The resolution of the board of directors of the assessee, dated 24th June, 1948, shows that the assets and liabilities as disclosed in the balance-sheet of the firm, were taken over by the company. In the balance-sheet of the firm, one of the assets is 'goodwill' valued at Rs. 3,000. This company carried on business for several years. At an extraordinary general meeting held on 2nd May, 1964, the directors of the company were authorised to transfer all the assets and liabilities of the company to the firm known as 'Indo Traders and Agencies' which was to come into existence on 5th May, 1964. An agreement was entered into with the firm. The resolution passed at the meeting was to the effect that the company should execute a deed of transfer pursuant to the agreement entered into, and the resolution, in so far as it is material, runs as follows:
'The company shall transfer and the firm shall take over from the company its business with all its stock-in-trade, sundry debtors, furniture and fixtures, office equipment, cycle, refrigerator, etc., loans and advances (excluding bank balances) belonging to the company in connection with the said business as existing on May 6, 1964, together with the goodwill of the business, import-export quota rights and licence rights, permits, privileges, concessions and rights attached to the business, for a consideration equal to the book value of the assets, less liabilities according to the books as on the said date....
(4) The company shall put the firm in possession of all the assets of the business on 6-5-1964, and the firm shall be entitled to continue to carry on the said business as a going concern in the name of 'Indo Traders & Agencies' or in such other name or names as the firm may decide.
(5) The firm shall be entitled to and liable to carry out all pending contracts, the particulars of which shall be furnished by the company to the firm.'
3. The deed of transfer executed on 2nd June, 1964, contained more or less the same clauses, as extracted above. The assets of the business as on 6th May, 1964, taken over by the firm, came to Rs. 1,67,666.07. The liabilities taken over came to Rs. 1,52,952.85. There was a difference of Rs. 14,713.25 which was described as the amount due to the assessee-company from the firm. In other words, the firm by paying this amount took over all the assets as well as the liabilities as mentioned above.
4. The GTO issued a notice under Section 16(1) of the G.T. Act and in response to it, the assessee filed a 'nil' return on 22nd September, 1967. In the view of the GTO, the assessee had transferred to the firm not only its liabilities and assets but also its goodwill, import/export quota rights and licence rights, etc., as a going concern. The goodwill was sought to be valued on the basis of the average profits of the last five years. The total profits for the said period came to Rs. 81,815 and one year's average profit came to Rs. 16,363. The goodwill was valued at three years' average profits which amounted to Rs. 49,089. This amount was treated as a gift by the limited company in favour of the firm. The firm took over the stock-in-trade, which was valued in the balance-sheet of the assessee-company at Rs. 1,38,102. The actual realised value of the said stock-in-trade taken over was Rs. 2,71,546 and the difference between the two amounts came to Rs. 1,33,444. This amount was also treated as a gift. The result was that the assessee-company was assessed to gift-tax on a sum of Rs. 1,82,533, being the total of Rs. 49,089 and Rs. 1,33,444. In the assessment order, there is no reference to any particular provision on the basis of which these amounts were brought to tax.
5. The assessee appealed to the AAC and put forward three contentions, viz., (1) that the GTO was wrong in holding that there was a transfer of assets including goodwill in favour of the firm and in levying gift-tax; (2) that the GTO had erred in holding that there was goodwill and in fixing its value at Rs. 49,089 ; and (3) that the GTO was not correct in treating the sum of Rs. 1,33,444 as the value of the gift in respect of the stock-in-trade. There was also an additional contention that even if there was a gift, it was exempted under Section 5(1)(xiv) of the Act. The AAC rejected all these contentions.
6. The assessee took up the matter on appeal to the Tribunal and only at the stage of the Tribunal, reference was made to Section 4(1)(a) in support of the assessment by the representative of the department. The assessee's contentions before the Tribunal were more or less identical to those taken before the AAC. The Tribunal, after examining the facts of the case, was unable to accept the department's case that the consideration in this case was inadequate so as to justify application of Section 4(1)(a) of the Act. In the alternative, the Tribunal held that the assessee was entitled to the exemption under Section 5(1)(xiv). It is these conclusions which have given rise to the main reference in T.C. No. 158 of 1975.
7. The gift-tax assessment order contains a list of the assets which were taken over at the book value, viz., Rs. 1,67,666.07. There is also a list of the liabilities taken over by the firm amounting to Rs. 1,52,952.82. It is the balance of Rs. 14,713.25, which represented the excess of the assets over the liabilities, that was to be paid by the firm to the limited company, the assessee. It is clear from the resolution, extracted above, which also forms the basis of the agreement between the limited company and the firm that the transfer of the business is as a going concern. The only assets excluded from the transfer were, (1) the bank balance, and (2) the refunds that may be due in respect of sales tax. All the other assets as well as the liabilities were taken over. The firm had also to execute contracts which had been undertaken by the limited company, a list of which was to be furnished by the limited company to the firm, so as to enable execution thereof.
8. The GTO has in effect chosen two items of assets for the purpose of gift-tax in respect of this transaction. Those two amounts are : (1) goodwill; and (2) stock-in-trade. As far as the goodwill is concerned, it is found from the statement of the case that it was valued at a sum of Rs. 3,000 in June, 1948, at the time when the limited company took over the business from the pre-existing firm. Even assuming that the value of the goodwill had increased as a result of the trade having been carried on for several years since 1948, still the effect of the transaction is not to value the goodwill at all, though goodwill was referred to as one of theassets taken over. In this view, the assessee should be deemed to have parted with the goodwill for no consideration at all. As far as stock-in-trade is concerned, the basis of the assessment is to value the stock-in-trade in May, 1964, at the price realised subsequently and to treat the difference between the realised price and the book value as the subject-matter of the gift. It is with reference to these facts we have to consider the applicability of Section 4(1)(a) of the G.T. Act.
9. The G.T. Act levies tax in respect of the gifts made by a person during the previous year. The previous year in this case is the year ending 31st March, 1965, relevant to the assessment year 1965-66. 'Gift' is defined in the Act as meaning the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer or conversion of any property referred to in Section 4 deemed to be a gift under that section.
10. Section 4(1)(a) of the G.T. Act, which is the only material provision, to be referred to runs as follows:
'For the purposes of this Act- (a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor.'
11. In order to apply this provision, it is necessary for the GTO to show that the property is transferred otherwise than for adequate consideration. There can be no dispute about the fact that there was a transfer in the present case. Though the limited company consisted of the same shareholders as those who constituted the firm, the two entities are separate and independent. The Tribunal had, therefore, rightly come to the conclusion that there was a transfer of the assets in this case from the limited company to the firm. The question to be examined is whether this transfer is for adequate consideration
12. From a perusal of this provision, it would be clear that this provision is designed to check evasion of tax by persons transferring properties for inadequate consideration. For instance, if a person had effected a gift which would be without consideration, he would be liable to be taxed under the Act. The same person may in order to avoid the tax transfer properties for a paltry consideration so as to get out of the operation of the G.T. Act. It is this attempt at evasion which was sought to be thwarted by enacting Section 4(1)(a). Section 16 of the Indian I.T. Act, 1922, was enacted to cover a similar attempt at evasion of income-tax by transferring properties by the husband to the wife or to the minor children. The said section provided that where assets were transferred otherwise thanfor adequate consideration in favour of a wife or minor children, as the case may be, then the income from the assets so transferred would be taxable in the hands of the transferor. In considering this provision a Full Bench of the Patna High Court in H.P. Banerjee v. CIT : 9ITR137(Patna) examined the earlier cases regarding the interpretation of the expression 'adequate consideration'. The distinction between 'good consideration' and 'adequate consideration' was pointed out and in the judgment of Manohar Lall J., reference was made to some of the earlier authorities on the point. In Tennent v. Tennent  LR 2 Scotch and Divorce Appeal Cases 6, Lord Westbury observed :
'But the transaction having been clearly a real one, it is impugned by the appellant on the ground that he parted with the valuable property for a most inadequate consideration. My Lords, it is true that there is an equity which may be founded upon gross inadequacy of consideration. But it can only be where the inadequacy is such as to involve the conclusion that the party either did not understand what he was about or was the victim of some imposition. It is impossible to say that the inadequacy of consideration in this case amounts to anything like proof to warrant either of those conclusions.'
13. The same conclusion was reached by the other members, who decided the case in the House of Lords.
14. In Administrator-General of Bengal v. Juggeswar Roy ILR  Cal 192 , the case arose out of a suit instituted by the Administrator-General to set aside the conveyance executed by one Jackson on the ground that he was a minor at the time of the execution and that he was fraudulently induced to part with his property, without fully understanding the nature of the transaction and for an inadequate price. The matter reached the Privy Council and their Lordships were unable to come to the conclusion that the evidence of inadequacy of price was such as to lead them to the conclusion that the plaintiff did not know what he was about or was the victim of some imposition, or that the son at the relevant dates was altogether in the position of a minor without any one to advise him. At p. 197 of the report, Sir Montague Smith, in delivering the judgment of the Board, made these observations (p. 197):
'Independently, however, of this consideration, it cannot, their Lordships think, be said that the purchase money was so grossly inadequate that its inadequacy amounts to proof of an imposition upon the plaintiff.'
15. In Coles v. Trecothick  9 Ves. J 234, Lord Chancellor Elden held with regard to the facts of the case before him that inadequacy of price was out of the question and made the following observation at p. 246 :
'Inadequacy of price does not depend upon a person giving pretium affectionis, from any peculiar motive, beyond what any other man would give, the reasonable price. But, further, unless the inadequacy of price is such as shocks the conscience, and amounts in itself to conclusive and decisive evidence of fraud in the transaction, it is not itself a sufficient ground for refusing a specific performance.'
16. 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 : 9ITR137(Patna) . The judgment of the Patna High Court has been approved by the Supreme Court in a later decision, Tulsidas Kilachand v. CIT : 42ITR1(SC) . 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.
17. 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 a 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.
18. 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 G.T. Act can be applied on the ground that the consideration stipulated in the document is inadequate. If, however, theconsideration that passed between the parties can be considered to be reasonable or fair, it cannot be considered to be inadequate.
19. It is this aspect which has been pointed out by the Bombay High Court in CGT v. Cawasji Jehangir Co. (P.) Ltd. : 106ITR390(Bom) . In that case, a private limited company with six shareholders had a paid-up capital of Rs. 1,80,18,000. The company decided to reduce its share capital to Rs. 18,01,000, and the sum of Rs. 1,62,16,200 was proposed to be returned to the shareholders in the form of shares in other companies and other securities in which the funds of the company were invested. The resolution for reduction of capital was passed on 10th January, 1958, and was confirmed by the High Court on 21st February, 1958. On 20th March, 1958, the shares and securities were handed over by the company to the respective shareholders. With reference to this transaction, the question was whether there was a gift by the limited company in favour of the shareholders. The value of the shares and the securities as on 20th March, 1958, came to Rs. 1,04,64,157. The value as on 10th January, 1958, was Rs. 97,75,539. The company had transferred the shares at the prevailing price on that date. It is this difference of Rs. 6,87,618 that was sought to be taxed on the ground that the company had parted with the shares, etc., otherwise than for adequate consideration. Vimadalal J., in his judgment at p. 398, made the following observations :
'In my opinion, the expression, 'adequate consideration' has to be construed in a broad sense, and merely because there may be some difference between the consideration for a transfer, and the true value of the property transferred, the same would not attract the applicability of Section 4(1)(a) of the Act. In order that the court may hold that a particular transfer is not for adequate consideration, the difference between the true value of the property transferred, and the consideration that passed for the same, must be appreciable in the context of the facts and figures of the particular case. It may be that in a given case a few hundred rupees would lead to the conclusion of inadequacy of consideration, whereas, in another case, a few lakhs of rupees may not lead to such conclusion. The expression 'adequate consideration' cannot be construed with precision but, as already stated above, it must be construed in relation to the facts and figures of each particular case.'
20. On the facts it was held that there was no gift.
21. The fallacy in the argument of the standing counsel may be examined now. The market value of the stock-in-trade has been taken to be the price subsequently realised. There is no information on record to show that even in May or June, 1964, the goods shown in the books commanded a higher market value. Merely because, subsequently, the prices realised werehigher, it does not follow that on the date when the transaction took place there was a higher price for them, and that it should be taken into account as adequate consideration. The relevancy of the market price as shown by the provision is only to fix the quantum of the value of the gift after it is found that the transaction was for inadequate consideration. When once the GTO assumes jurisdiction and is in a position to establish that the property has been transferred otherwise than for adequate consideration, then there is no option for him but to take the market value of the property as on the date of the transfer and compare it with the value of the consideration as shown by the parties. The difference will be deemed to be a gift made by the transferor. If the Legislature had contemplated as a universal rule that the market value should alone be the criterion for testing the adequacy of consideration, the provision would have been differently worded. The wording would then have been, 'where the property is transferred for less than its market value, then the difference between the market value and the consideration stipulated, shall be deemed to be the gift made by the transferor'. Parliament not having made any such provision, it would not be for us to take the market value of the property for determining the adequacy of consideration in all events.
22. We have already mentioned that as far as goodwill is concerned, there is no separate mention of it in the balance-sheet as an asset with any value. Assuming that the standing counsel is right in his contention that there was goodwill and that it had been transferred to the firm by the limited company, then the transfer is without consideration, and in such an event Section 4(1)(a) of the G.T. Act has no scope for application. Therefore, the assessment based on Section 4(1)(a) of the Act as far as the goodwill is concerned cannot stand. The application of that provision only shows that what was treated as the subject-matter of a transfer or gift was the transfer of the business as a going concern by the limited company in favour of the partnership. No attempt has been made by the GTO to evaluate the business as a going concern in order to examine the adequacy of the consideration.
23. The assessment cannot also stand for one more reason. In CGT v. Gheevarghese : 83ITR403(SC) , the assessee who was carrying on a business as a sole proprietor converted it into a partnership in which his two daughters joined. All the assets of the proprietary business were transferred to the partnership. The GTO considered that the assessee had transferred the share of the goodwill transferable to the share of the two daughters who joined the firm and to that extent he was stated to have parted with the goodwill in their favour. The value of goodwill to the extent of 1/8th share was taxed. The validity of the assessment came to be examined by the Supreme Court and it was pointed out by their Lordships that the departmental authorities had picked up one of the assets of the assessee's proprietary business, viz., its goodwill, and regarded that as the subject-matter of the gift to the daughters and that this approach was wholly incomprehensible. It would follow from this decision that the GTO could not have picked out goodwill separately when what was transferred was as a going concern and try to evaluate goodwill alone for the purpose of arriving at the value of the gift. Therefore, the assessment cannot be considered to be valid on this account also.
24. Learned counsel for the department drew our attention to a decision of this court in CGT v. A.M. Abdul Rahman Rowther : 89ITR219(Mad) and to the passage therein where CGT v. Gheevarghese : 83ITR403(SC) was distinguished. In the case cited, goodwill was not one of the items mentioned as transferred and, therefore, it was separately valued and brought to tax as gift. This court upheld the assessment and distinguished the applicability of the decision in CGT v. Gheevarghese : 83ITR403(SC) . In the present case, all the assets as a going concern have been transferred to the firm by the limited company. It is not as if any asset stood out so as to be separately dealt with for gift-tax assessment as in the case of CGT v. A.M. Abdul Rahman Rowther  89 ITR 219. This decision has, therefore, no scope for application to the facts here.
25. Learned counsel drew our attention to two more decisions, viz., Addl. CGT v. S.V.R. Cycle Mart : 110ITR429(Mad) and an unreported decision in CIT v. Bharani Pictures (T.C. Nos. 220 and 221 of 1975) of this court, dated 16th February, 1979 [since reported in : 129ITR244(Mad) ]. In both these cases, the question as regards the interpretation of the expression 'adequate consideration' had not been examined. Therefore, we do not find these decisions to be of assistance in the cases before us.
26. Another decision which was cited was of the Andhra Pradesh High Court in CWT v. Khan Saheb Dost Mohd. Alladin : 91ITR179(AP) . In that case, there were agreements between the respective assessees and their wives regarding dower at the time of their marriage. Subsequently, the dower amounts were increased, and for the increased amount there was a transfer of properties in their names. The question arose as to whether the properties transferred to the respective wives could be taxed in the hands of their respective husbands under Section 4(1)(a) of the W.T. Act. It is in that context the expression 'adequate consideration' was examined. However, the court did not have to go into the question before us, as it was not argued in the manner in which it was argued before us. Section 4(1)(a) of the W.T. Act is differently worded and the question of market value being liable to be treated as adequate consideration, did not call for examination.
27. The result is that question No. 1 in T.C. No. 158 of 1975 is answered in the affirmative and in favour of the assessee. In this view, it is unnecessary to go into question No. 2 in T.C. No. 158 of 1975. The questions referred in T.C. No. 343 of 1978 were only different aspects of the subject-matter of the contentions of the parties before the Tribunal on the two points. In substance, the first question in T.C. No. 343 of 1978 challenges the existence of the materials in support of the Tribunal's conclusion that there was adequate consideration for the transfer of the properties to the firm. We have already pointed out that the consideration was based on the difference between the value of the assets and the value of the liabilities. The Tribunal has accepted the balance-sheet as the basis for the valuation of the consideration at the time of the transfer. The materials in the balance-sheet could very well form the basis of the Tribunal's conclusion and it cannot be stated that there was no material to support the Tribunal's conclusion regarding the adequacy of consideration. The Tribunal has also taken into account the fact that the shareholders and the partners were the same and that there was no question of any profit to be made by the shareholders, which they would forgo. This cannot be said to be an irrelevant consideration in testing the adequacy of the consideration.
28. The result is that question No. 1 in T.C. No. 343 of 1978 is answered in the affirmative and in favour of the assessee. The other questions, viz., questions Nos. 2 and 3, will go along with question No. 2 in T.C. No. 158 of 1975 and as we did not consider it necessary to answer the said question in T.C. No. 158 of 1975, we do not consider it necessary to answer these two questions also. The result is, as far as the three questions are concerned, the reference is returned unanswered. As far as the other two questions are concerned, they are already answered as indicated above. The assessee will be entitled to its costs. Counsel's fee Rs. 500 one set.