Compilation of Section 47(iii), section 56(2)(x)(c), 50D & 50CA -Corporate gifts- an allowable transaction under Income tax? Purpose of section 56 defeated by the ITAT judgement?
Brief overview of the judgement delivered
On October 4, 2019, in a recent judgement of M/s Direct Media Distribution Ventures Private Limited v/s Principal Commissioner of Income Tax (ITA No: 2211/Mum/2019),the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that there is nothing in law which estops corporates from making a gift of shares to each other, more so when the intention of the parties is supported by an internal restructuring exercise, which was driven by commercial reasons. Further, it has been held that sale consideration of such transfer cannot be determined and in the absence of specific charging provision under the Income Tax Act, gift is considered to be exempt in terms of section 47(iii). Thus, capital gain tax is not triggered.
Facts of the case:
During the Assessment Year 2014-15, assessee transferred equity shares to its related party at “NIL” consideration in order to consolidate onshore media assets including the shares of listed companies. The said transfer was in the form of gift by the assessee to its related party and thus, no capital gains had been offered to tax on the said transaction. The assessee had made adequatedisclosure in the financial statement w.r.t the said transaction. Also, requisite disclosure had been duly made to SEBI as required under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 about acquisition of shares by way of an off-market transaction without any consideration.
Analysis of the case / judgement:
Considering the below aspects, ITAT delivered ruling in favor of the assessee:
- The intent / purpose of transaction was not to evade tax but administrative convenience, as a result of changing business dynamics / internal business restructuring.
- Section 47 (iii) exempts transfer under gift or will. Further,it contemplates gifting of shares by a company to its employees under ESOP. This goes to prove that even the provisions of the Act dehors the provisions of section 5 of Transfer of Property Act also contain a provision of gifting of shares by a company to its employees under ESOP scheme.
- The Transfer of Property Act. 1882 (‘TP Act’) does not place any restriction on the corporate transfer of shares. The competency of corporate entities to make and receive gift has been upheld since there is no bar in law prohibiting a company from corporate transfer of shares by way of gift. In other words, there is no requirement in the TPA that a ‘gift’ can be made only between natural persons out of natural love and affection which means that as long as a donor company is permitted by its Articles of Association to make a ‘gift’, it can do so.Under section 122 of TPA, “Gift” is the transfer of certain existing movable or immovable properly made voluntarily and without consideration by one person called the donor to another called donee and accepted by or on behalf of the donee. The meaning of gift supra reflects no element of love and affection.
- When the shares are transferred for NIL consideration, market value of such shares cannot be substituted as sales consideration after having explained that the computation provisions would fail and as such, the charging section 45 would not become active, it is further submitted that the full value of consideration for the purpose of capital gains taxation should be in fact the actual consideration received by the assessee. If there is no actual consideration, it is not permissible in law to substitute with fair value/ or estimated value of the property.
In absence of any specific provision in the legislature to tax such a receipt, same is not taxable under the Act either u/s 45 or 56 of the Act. Same is in the nature of capital receipt and hence, not liable to tax.
Current provisions in respect of the above case:
Taxation in the hands of transferee / receiver in case of gift by a corporate to another corporate:
- As stated above previously (i.e. above transaction was effected in assessment year 2013-14), there was no charging section for such transaction but w.e.f. April 1, 2017, transfer of any moveable property from one person to another for a consideration which is less than aggregate fair market value of the property shall be chargeable section 56(2)(x)(c)
- Further, gifts to relative are exempt under section 56(2)(x)(c). It is worthwhile to note that definition of relative covers only individuals and no corporate relationship. To elucidate, gifts made by a corporate to its related party is chargeable to tax and not an exempt transfer
Thus, as stated above, difference between fair value & nil consideration (being the entire fair market value in this case) arising on transfer of gift being shares shall be chargeable in the hands of transferee / recipient of such gift.
Taxation in the hands of transferor in case of gift by a corporate to another corporate:
- Since 50D has been introduced w.e.f. April 1, 2013 which states that Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.
- Section 50CA states that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer
Basis above, capital tax will be triggered in the hands of transferor being the person gifting the property / shares. But intent of law is not to charge the same asset twice and hence, clarification is required to determine taxability in such unique cases.
To conclude – Current prevailing provisions under the Income Tax explicitly sheds light on the intention of law to bring corporate gifts under the ambit of taxation. Hence, the judgement delivered in this case no longer holds good in law for corporate gift transactions.