No Capital Gain Tax on Transfer of Share by way of Gift: Bombay HC [Read Order]

The Bombay High Court has held that capital gain tax is not payable on the transfer of shares by way of gift. It was observed that  Section 45 of the Income Tax Act, 1961 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.

M/s. Jai Trust, the petitioner/assessee transferred 30,65,600 shares of United Phosphorus Limited (UPL) and 3,06,560 shares of Uniphos Enterprises Limited (UEL), both publicly listed The Bombay High Court has held that capital gain tax is not payable on the transfer of 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.

A reassessment notice was issued 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.

It was contended by the petitioner 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.

The court observed that it would not be necessary for the Assessing Officer to conclusively establish that the income chargeable to tax had escaped assessment. The court viewed 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.

A division 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.

The Court quashed the reassessment notice and the order. Mr. P.J. Pardiwalla, Senior Advocate appeared along with Ms. Vasanti B. Patel on behalf of the petitioner. Mr. Akhileshwar Sharma appeared on behalf of the respondent Revenue.

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