Capital Gain Tax Not Payable On Transfer Of Shares By Way Of Gift: Bombay High Court

The Bombay High Court has held that capital gain tax is not payable on the transfer of shares by way of gift.

The bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that Section 45 of the Income Tax Act provides that any profits or gains arising from the transfer of a capital asset have to be considered by the assessee. Only when there is consideration received can the profit or gain be measured. A gift is commonly known as a voluntary transfer of property by one person to another without any consideration. A gift does not require consideration, and if there is consideration for the transaction, it is not a gift.

The petitioner/assessee, during the previous year relevant to Assessment Year 2010-2011, transferred 30,65,600 shares of United Phosphorus Limited (UPL) and 3,06,560 shares of Uniphos Enterprises Limited (UEL), both public listed companies, to one Nerka Chemicals Private Limited (NCPL) by way of a gift in terms of a transfer deed. Since the shares were transferred by way of a gift, admittedly, no consideration was received by the petitioner. The petitioner had transferred those shares without consideration. The cost of the shares to the petitioner was Rs. 1,02,27,547.

The petitioner filed its return of income for the assessment year 2010–2011, declaring total income as nil. It was because the income of the petitioner was distributed to the beneficiaries. Petitioner also claimed refund of tax deducted at source of Rs. 547/- in the return of income.

The petitioner received a reassessment notice alleging that there was reason to believe that the income had escaped assessment for Assessment Year 2010–2011.

The petitioner challenged the legality and validity of the reassessment notice seeking to reopen the petitioner's assessment for Assessment Year 2010–2011 and the order rejecting the objections of the petitioner challenging reopening.

The petitioner contended that no income accrues or arises to the petitioner from the aforesaid transfer of shares by way of gift since it has been made voluntarily and without any consideration. The transfer of shares by way of gift is an exempt transfer under Section 47(iii) and not liable to capital gains as defined under Section 45 of the Income Tax Act.

The department contended that the court has to only consider whether the assessing officer has reason to believe has relied on some tangible material, and if that is the case, the assessee should be directed to go through the process of reopening. What is tangible is something that is not illusory, hypothetical, or a matter of conjecture.

The court noted that the principle requirement that the assessing officer has reason to believe that income chargeable to tax has escaped assessment would still survive. Though this formation of belief by the Assessing Officer must be prima facie, at the stage when the Court is testing the validity of such a notice, it would not be necessary for the Assessing Officer to conclusively establish that the income chargeable to tax had escaped assessment. For various reasons, we are convinced that the reasons for reopening lack validity.

The court held that Section 50D also does not apply for reasons that it was inserted w.e.f. April 1, 2013; Section 50D requires receiving consideration, which is not there in the present case.

The court stated that, as per AO, as an afterthought, that the assessee being a trust, it can be reasonably presumed that the transfer was for consideration because anything a trust does is for the benefit of its beneficiaries. The court held that one cannot proceed on a hypothesis and deal with such a presumptuous argument. Hence, quash the reassessment notice and the order.

Counsel For Petitioner: P.J. Pardiwalla

Counsel For Respondent: Akhileshwar Sharma

Case Title: M/s. Jai Trust Versus The Union of India

Case No.: Writ Petition No.71 Of 2016

Click Here To Read The Order