No capital gain tax on transfer of shares by way of Gifts : Bombay HC

Transfer of shares by way of Gifts
Capital gain taxes are levied upon transfer of capital assets. Transfer in general sense means sale of such capital assets when capital assets in question are shares of a company. However, there are certain transfers of capital assets which are not regarded as transfers and hence such are not liable to be taxed under the head of Income from Capital Gains. 

Bombay HC has decided in the case of M/s Jai trust regarding such transfers which are not considered as transfers. 

Issues involved:
M/s Jai trust had transferred certain shares to a private limited company by way of gifts and hence no consideration was involved. 

The department had raised objections and applied for reopening of assessment on the grounds that such transfer of shares is income escaped assessment and chargeable to tax. 

The assessee had challenged legality and reopening of such assessment.

Facts of the case explained:
M/s Jai trust being the petitioner, had 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 Transfer Deed dated 26th February 2010. Since the shares were transferred by way of gift, no consideration was received by petitioner.

Under section 47(iii), any transfer of a capital asset under a gift or will or an irrevocable trust is not considered as a transfer. Exception is given where transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees’ Stock Option Plan or any employee scheme. This issue under consideration was for AY 2010-11. On 22nd July 2010 petitioner filed its return of income for Assessment Year 2010-2011 declaring total income as Nil. This was because the income of petitioner was distributed in the hands of the beneficiaries.

Petitioner received notice for reopening the assessment and in reply the petitioner filed its objections.

Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment prior to the initiation of the proceedings. This condition is not complied with in the present case because there cannot be any reason to believe that income has escaped assessment because there is no income that could be assessed to tax.

In this case, provisions of Section 45 related to transfer of shares and provisions of section 47 related to transactions not treated as transfer clearly indicates that transfer of shares in the form of gift will not be liable to tax as there is no consideration is involved in the case.

Any capital assets being transferred will generate capital gain tax liabilities only when the consideration is involved and provisions of income tax allows it. In the present case the reopening of such assessment will not be valid if there is no income escaping assessment. The HC after observing all the facts of such petition quashed the reassessment notice.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.

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