|CORAM:||Beena Pillai (JM), R. K. Panda (AM)|
|SECTION(S):||45, 47(iii), 48|
|CATCH WORDS:||capital gains, gift, sham transactions|
|DATE:||May 15, 2018 (Date of pronouncement)|
|DATE:||May 24, 2018 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 56(2)(viia)/ 47(iii): Capital gains on shares transferred via "Gift": Surprising that huge volume of shares in a public limited company is transferred by assessee to another company without any consideration, without any proper documentation being executed as per law and giving it a nomenclature of “gift”. Difficult to imagine Articles of Association of a company would provide for gifting of assets of the company to another company unless it be one which has been set up for some purpose. The assessee has to establish to the hilt, the factum, genuineness and validity of the transaction, the right to enter into such transaction and bonafides of such transaction, especially when, revenue challenges its genuineness. There is no agreement/document that has been executed between group companies forming part of family realignment. To postulate that a company can give away its assets free to another even orally, can only be aiding dubious attempts at avoidance of tax payable under the Act unless it is supported by documentary evidence|
8.1. The scheme of capital gains, as set out in Section 45 to 55 of the Act, excludes certain categories of transaction from its ambit. These are, inter alia, distribution of capital assets on the partition of a Hindu family or on the dissolution of a firm; transfer of a capital asset by a company to its subsidiary or under a scheme of amalgamation; transfer of a capital assets under a gift or a will or an irrevocable trust. The provisions with which we are concerned in sub-s (iii) of Sec.47 are extracted hereunder :
“47. Nothing contained in section 45 shall apply to the following transfers -…
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust.”
Section 48 lays down mode of computation of capital gains and Section 49 refers to how cost is to be ascertained in cases of certain modes of acquisition.
In the present facts of the case upon going through various observations and documents placed in the paper book it is surprising to note that huge volume of shares in a public limited company is transferred by assessee to another company without any consideration, without any proper documentation being executed as per law and giving it a nomenclature of “gift”.
8.2. Amongst these decisions Ld.Counsel has drawn specific reference to the following decisions:
· In the case of DP World vs. DCIT (supra) there was a gift deed that was executed in respect of assets that was received by assessee therein, from its sister concern, whereas in the case of present assessee there is no gift deed that has been executed by parties assessee failed to establish its relations with Gibie Trading Pvt.Ltd. Merely by executing board resolution, the alleged transfer has been effectuated.
· In the case of Redington India Ltd vs. JCIT (supra) it was a voluntary transfer of shares without consideration to the stepdown subsidiary and the issue therein was whether the transfer of shares as a gift could be made by a company to another company. It is also observed on perusal of the said decision that DRP therein reconfirmed regarding the transfer of shares as voluntary and without any consideration which is absent in the facts of the present case. Here the Ld. AO himself has disputed the transaction to be a gift, and has instead computed consideration as fair market value of shares as on date of alleged transfer. Also it is not known whether Giebe Trading Pvt. Ltd. is a subsidiary or a group concern. Nothing is brought on record to establish if any gift deed was executed.
· In case of Redington India Ltd vs. DCIT (supra), issue under consideration before coordinate bench of this Tribunal was of a “gift” by assessee therein of shares of its wholly-owned subsidiary to another group company with an objective of raising funds for expansion of business as a part of corporate restructuring. It was observed by coordinate bench of this tribunal that the transfer of shareholding in wholly-owned subsidiary to another group company without any consideration was with the intention that post transfer, the transferee company would also be an wholly owned subsidiary. The issue raised by assessing officer therein was that such transfer could not be termed as gift for lack of natural love and affection and therefore would not be covered by exclusion under section 47 (iii) of the act. On perusal of the decision it is observed that the genuinity of the transfer of shares without consideration was not questioned by the authorities below and therefore this Tribunal decided that gift for the purposes of Gift Tax Act, 1958 qualifies a property in money or monies worth to be transferred to a person which includes “company” as well. It was observed therein that in Gift Tax Act, 1958, there’s no attributes like love and affection.
In the facts of the present case the issue is in respect of genuinity of transaction itself has been challenged by authorities below in the absence of gift deed. Even that there is no proof of any family settlement being arrived when the transferee is a party.
· In case of Hon’ble Madras High Court in CIT vs KAY AAR Enterprises (supra) had approved the decision of coordinate Bench of Chennai Tribunal in KAY AAR Enterprises vs. JCIT (supra), wherein Hon’ble Court had held that rearrangement of shareholding in the company amongst the family members under the family arrangement is not liable to capital gains tax. The factual background in that case was pursuant to a family arrangement, family members had transferred shares owned by them into companies to the family members of GE and in lieu thereof GE transferred his entire shareholding in one company to assessee therein and his family.
In the facts of the present case neither there is any family arrangement/ agreement that has been brought to the notice of authorities below nor has the assessee declared what has been received by him in lieu of alleged transfer of shares.
· In the SLP decided by Hon’ble Supreme Court filed by the revenue against the decision of Hon’ble Madras High Court in the case of CIT vs R.Jayanti (HUF) (supra) it was held that transfer of shares by way of family arrangement would not attract capital gains tax as the arrangement was to avoid possible litigation amongst family members and was made voluntarily and was not induced by fraud or coercion.
In the decision of Hon’ble Karnataka High Court in the case of CGT versus K. N. Madhusudan (supra), it was held that word ‘transfer” in section 45 does not include partition or family settlement as defined in the Act and the facts recorded in the family settlement are akin to a partition and hence the transaction cannot be taxed. Hon’ble Court observed that family members under the scheme of arrangement have an anterior title to the property which is a subject matter of partition or a family arrangement.
Whereas on facts of present case, assessee has failed to establish its relation with Giebe Trading Pvt.Ltd., as well as has admittedly not executed any documents/gift deed/family settlement, in order to establish the genuineness of the transfer. Merely by stating that the transfer was effectuated in lieu of a family realignment is not acceptable without supportive documents in the eyes of law.
· Hon’ble Delhi High Court in the case of CIT vs Goodyear Tire and Rubber Company (supra) has dealt with a case where revenue contended treaty shopping as according to revenue transfer was designed to evade tax.
The facts of this case are that assessee therein was an American company was a promoter holding 74% shares of Indian company. Assessee also had a wholly owned subsidiary company in Singapore. In order to expand the role of Singapore-based company for the benefit of group entities within Asia Pacific region share contribution deed was executed to contribute voluntarily the 74% shares it held to the Singapore-based company. It was also contended that the shares of Indian company held by American company was capital asset.
On this factual background Hon’ble Authority of Advance Ruling decided that no consideration would accrue or arise to the applicant by transfer of shares and it cannot be presumed that by transfer of shares assessee would have derived any profit or gain.
In the facts of the present case the shares held by assessee is by way of investments in a public limited company which has been transferred to a 3rd company without establishing the commercial need to do so. There has been no agreement that has been executed for transfer of shares voluntarily and assessee has failed to establish the genuineness of the transaction.
· In the case of Dana Corporation (supra), the facts before the Authority of Advance Ruling was that Dana Corporation had undergone bankruptcy proceedings initiated under the Bankruptcy Code of US and in the course of proceedings Dana Corporation submitted a plan for reorganisation before the Court which was confirmed by the Court. Hon’ble Authority observed that the transfer of shares was pursuant to the plan of reorganisation that was approved by the Bankruptcy Code of US and therefore it was held that no consideration can at all be attributed to the transfer of shares. The transfer agreement specifically stated that the transfer of shares was without any consideration. In the facts of the present case there is no such urgency that has been brought to the notice by assessee either of the authorities below or before us in order to accept the transaction to be genuine without there being any consideration.
· While dealing with the decision in the case of PNB finance Ltd vs CIT (supra) by Hon’ble Supreme Court, the question considered was whether transfer of banking undertaking on nationalisation the amount received as compensation gave rise to taxable capital gains under section 45 of the Act or not. Hon’ble Supreme Court observed that PNB bank was transferred as a going concern, which consists of not only tangible items but also intangible items like Goodwill, manpower, tenancy rights and value of banking licence for which cost is not determinable. It was around this background that Hon’ble Court by placing reliance upon the decision of Hon’ble Supreme Court in the case of CIT vs. B. C. Srinivasan Setty (supra), held that earmarking item wise cost was not possible and therefore even though section 45 was applicable to the facts of the case, the computation provision could not be applied.
The above ratio is not applicable to the facts of the present case since here only the shares held by assessee as an investment has been transferred to Giebe Trading Pvt.Ltd., cost of which is determined double as on the date of transfer because the shares that were transferred worth of listed company and NSE.
8.3. Further, other decisions relied on by Ld.Counsel are factually distinguishable and not applicable to the facts of present case. Thus entire list of decisions relied upon by Ld. counsel cannot rescue assessee from tax implication as those are factually different from that of the present as has been discussed above.
8.4. Under section 82 of Companies Act 1956, as it was applicable for the relevant assessment year, shares in a company is a moveable property, transferrable in the manner provided by its Articles of Association. Assessee has not shown/established the manner in which alleged transfer that has been effectuated, was authorized by its Articles. It is difficult to imagine Articles of Association of a company providing for gifting of assets in the company to another company by way of shares in a public limited company, unless it be one which has been set up for some purpose. Ld.A.O. had rightly raised question regarding the reality and genuineness of transaction, in addition to its validity.
In fact when such transactions are entered into, involving assets substantially worth, it behoves the assessee before Ld. AO to establish to the hilt, the factum, genuineness and validity of such transaction, the right to enter into such transaction and bonafides of such transaction, especially when, revenue challenges genuineness of such transaction itself.
It has been vehemently contested by authorities below as well as Ld. CIT DR that transaction has been effectuated for avoiding payment of tax and to get out of the ambit of section 56 (2) (viia) of the Act.
And it is apparent from record that assessee has not demonstrated by way of documentary evidence or in any of the manner to prove the genuineness and validity of transaction.
8.5. Ld.Counsel has been harping that the shares held by assessee in a Public Limited Company was transferred in lieu of a family realignment, but failed to establish the relation of the alleged transferee company with that of assessee or any of the group/subsidiary companies.
Further there is no agreement/document that has been executed between group companies forming part of family realignment. To postulate that a company can give away its assets free to another even orally, can only be aiding dubious attempts at avoidance of tax payable under the Act unless it is supported by documentary evidence. In our considered opinion Assessing Officer is in a better position to make proper enquiry in to the question of reality, genuineness and validity of alleged transaction, entered into by assessee.
8.6. Assessee is thus directed to provide all necessary and relevant information/details to assist Ld. A.O., as called for, to his satisfaction, in determining correct nature of alleged transaction as per law.
It is also directed that in the event assessee fails to provide any document as called for, in order to establish the genuineness and validity of alleged transaction, as has been submitted to be for a family realignment, Ld.A.O. may compute income in the hands of assessee as per law. On the contrary if assessee is able to prove to the satisfaction of Ld.AO regarding genuineness and validity of the transaction, no addition shall be called for.
8.7. With the above directions we set aside the issue raised by assessee back to Ld. AO. who shall decide the issue as per facts and law, after giving due opportunity of being heard to the assessee.