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2008] 307 ITR 312 [2009] 176 TAXMAN 142 (SC) SUPREME COURT OF INDIA Khoday Distilleries Ltd. v. Commissioner of Income-tax* S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ. CIVIL APPEAL NO. 6654 OF 2008â-  NOVEMBER 14, 2008 I. Section 4, read with section 2(xii), of the Gift-tax Act, 1958 - Deemed gift - Assessment year 1987-88 - Whether where assessee-company had allotted rights shares only to seven shareholders because other existing shareholders did not subscribe for rights, it could be said that such allotment constituted 'transfer' and there was a deemed gift within meaning of section 4(1)(a) - Held, no II. Section 2(xii) of the Gift-tax Act, 1958 - Gift - Assessment year 1987-88 - Whether there is an element of gift in a company issuing bonus shares - Held, no FACTS-I The assessee-company, on the other shareholders not exercising the option given to them to take up the rights shares, allotted all of them to the seven investment companies who were the shareholders in the assessee-company. The Assessing Officer held that the said allotment by way of rights issue was without an adequate consideration and, so, there was a deemed gift under section 4. Accordingly, the difference between the value of the shares on yield basis and the face value at which the shares were allotted was sought to be brought to tax. On appeal, though the Commissioner (Appeals) held that gift tax proceedings had to be initiated by the department not against the assessee-company but against the existing shareholders who had renounced their rights, but ultimately, he upheld the order. On second appeal, the Tribunal set aside that order holding that the allotment of rights shares by the assessee did not constitute transfer, as it did not involve any existing property at the time of such an allotment. The High Court, however, allowed the appeal of the revenue and set aside the order of the Tribunal. On appeal to the Supreme Court : HELD-I 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…

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