Gifted shares may escape capital gains tax if HC ruling sets precedent

The court held that a gift is a voluntary transfer and does not require consideration. Only when there is consideration received can profit or gain be measured

If shares are transferred as a gift, there may not be capital gains tax on them, provided a recent Bombay High Court ruling sets a precedent.

In a case related to Mumbai-based Jai Trust versus Union government, the court ruled that a gift is a consideration-less transaction, and hence, not liable for capital gains tax.

It quashes the reassessment notice issued by the tax authorities alleging that a specific income has escaped assessment on transfer of shares as gift by the trust.

The court held that a gift is a voluntary transfer and does not require a consideration, and when there is a consideration received, only then can the profit or gain be measured.

 

The assessee being a trust, had filed a ‘zero’ return of income, which was accepted and processed.

The assessee had transferred shares of United Phosphorus (UPL) and Uniphos Enterprises Limited (UEL), both public listed companies, to one Nerka Chemicals Private Limited (NCPL). It was by way of a gift without any consideration.

Thereafter, the trust received notice and filed its objections against reopening of assessment, which the assessing officer had rejected.

The assessee challenged it through a writ petition in the court.

The court observed that when all three conditions — capital asset, transfer of such capital asset and profit/gains arising on such transfer — are fulfilled, the profit or gain can be charged to income tax under the head capital gains.

It also observed that for computing capital gains, there should be consideration received. The income chargeable under the head capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset.

The court also observed that the assessing officer submitted an after thought — that the assessee being a trust, it can be reasonably presumed that the transfer was for a consideration. This is because anything a trust does is for the benefit of its beneficiaries. 

It held that one cannot proceed on hypothesis and deal with such a presumptuous argument.

Manish Garg, transfer pricing and litigation expert at AKM Global, said the judgment is likely to provide clarity on transactions where capital assets are transferred without consideration.

He said the tax department often views these transactions as tax planning tools and tries to plug the underlying evasion.

Historically, transactions involving the transfer of capital assets by trusts have been a matter of litigation on a variety of issues, he said. He added that transfer of shares is taxable in the hands of the recipients under the head income from other sources.