Taxing Gifts: Court's Ruling on Reopening of Assessments for Gifted Shares.
08 March 2024
Income Tax >> Tax Laws
In a significant ruling of M/s. Jai Trust Through its current trustee & Others v/s The Union of India Through the Secretary, Government of India, Ministry of Finance, New Delhi & Another, the Bombay High Court has quashed the Income Tax Department's attempt to reopen the income tax assessment for the Assessment Year 2010-2011. The case involved the transfer of shares as a gift, a transaction that the department sought to recharacterize as liable for capital gains tax. This article analyzes the key legal principles established in the case and its potential impact on future tax assessments.
Background:
The petitioner, a trust, had transferred a substantial number of shares in publicly-listed companies, United Phosphorus Limited (UPL) and Uniphos Enterprises Limited (UEL), to Nerka Chemicals Private Limited (NCPL) by way of a gift. The total number of shares transferred amounted to 30,65,600 shares of UPL and 3,06,560 shares of UEL, which were given to NCPL without consideration. The transfer took place on 26th February 2010, and the shares were valued at approximately Rs. 1.02 crore based on their cost of acquisition.
In July 2010, the petitioner filed its income tax return for the relevant assessment year, declaring a nil income, as the income was distributed to the beneficiaries of the trust. The return did not report any taxable income from the transfer of shares, and a refund of Rs. 547 in tax deducted at source was claimed. Following the filing of the return, no communication was received from the Income Tax Department, and the return was deemed to have been processed under Section 143(1) of the Income Tax Act, 1961.
However, on 12th March 2015, the petitioner received a notice under Section 148 of the Income Tax Act, alleging that the income for the Assessment Year 2010-2011 had escaped assessment. This notice was followed by the reasons recorded by the Assessing Officer, which contended that the transfer of shares without consideration constituted a taxable event under the head "capital gains," and the petitioner had failed to report the corresponding income.
Grounds for Objection:
The petitioner raised several objections to the reopening of the assessment, arguing primarily that the transfer of shares by way of a gift was not taxable under the Income Tax Act. Key points raised in the objections included:
Gift of Shares and Capital Gains Exemption: The petitioner relied on Section 47(iii) of the Income Tax Act, which provides that the transfer of a capital asset by way of a gift does not attract capital gains tax. This provision was cited as a clear exemption for the gifted shares, rendering them outside the purview of capital gains taxation.
Legal Precedents: The petitioner referred to a similar case, Nivi Trading Limited v. Union of India (Writ Petition No.2314 of 2015), where the Bombay High Court had quashed reopening proceedings in respect of a similar gift of shares by the petitioner to another group company. In that case, the court had ruled that no capital gains tax was payable on the transfer of shares by way of gift.
Absence of Consideration: The petitioner pointed out that since no consideration was received for the transfer of shares, there could be no "capital gains" in the first place. The Assessing Officer’s suggestion that the market value of the gifted shares could be treated as consideration for tax purposes was rejected by the petitioner, as no provision in the Income Tax Act allowed for the substitution of market value for actual consideration in such transactions.
Failure to Address Objections: Despite filing detailed objections, the petitioner argued that the Assessing Officer had failed to address the objections based on the legal provisions, including Section 47(iii) which specifically exempts the transfer of shares by way of gift from capital gains tax.
In August 2015, the objections were rejected by the Assessing Officer, and the petitioner approached the Bombay High Court, seeking to quash the reopening notice and the rejection order.
Court’s Analysis:
The Bombay High Court, after hearing the submissions of both parties, found that the reopening of the assessment lacked valid grounds. Key points from the court's reasoning included:
No Taxable Event: The court agreed with the petitioner’s argument that the transfer of shares by way of gift did not qualify as a taxable event under the Income Tax Act. Section 47(iii) clearly exempts such transfers from capital gains taxation. Since no consideration was involved, there could be no capital gain, and thus, no income to be assessed.
Relevance of Section 45 and 47: The court emphasized the importance of the statutory provisions governing capital gains taxation. Section 45 of the Income Tax Act applies to the transfer of capital assets, but for capital gains tax to apply, there must be consideration received or accrued. Since no consideration was involved in this case, the provisions of Section 45 did not apply. Moreover, Section 47(iii) explicitly excludes the transfer of capital assets by way of a gift from the scope of Section 45.
Invalidation of Market Value Substitution: The court rejected the Assessing Officer’s attempt to substitute the market value of the gifted shares as the consideration for tax purposes. The court observed that such a substitution was not supported by any provision in the Income Tax Act and that the market value was irrelevant in the case of a gift.
Lack of Tangible Material: The court further noted that for the reopening of an assessment under Section 148, the Assessing Officer must have "reason to believe" that income chargeable to tax has escaped assessment. In this case, the reasons recorded by the Assessing Officer failed to establish any tangible material that would justify the reopening of the assessment.
Precedents and Judicial Consistency: The court referred to earlier judgments, including the Prakriya Pharmacem v. Income Tax Officer case, which held that the transfer of shares by way of gift does not trigger capital gains tax. The court reiterated the principle that the transfer of a capital asset as a gift, where no consideration is involved, is outside the purview of capital gains tax under Section 45.
Conclusion:
The Bombay High Court ruled in favor of the petitioner, quashing both the notice under Section 148 of the Income Tax Act and the order rejecting the objections. The court held that the transfer of shares as a gift was exempt from capital gains tax under Section 47(iii), and no taxable income had escaped assessment. This ruling reinforces the principle that gifts, even involving shares with significant market value, do not attract capital gains tax, as long as no consideration is involved.
This judgment serves as an important reminder for the Income Tax Department to carefully consider the legal provisions governing the transfer of assets and to ensure that reopening assessments is based on valid and tangible material. It also highlights the importance of following legal precedents and respecting exemptions provided under the Act when determining tax liabilities.