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Capital Gains Tax Not Payable on Transfer of Shares by Way of Gift: Bombay High Court

Case title: Jai Trust & ANR vs The Union of India & ANR
Case no.: WRIT PETITION NO.71 OF 2016
Dated on: 8th MARCH 2024
Quorum: Justice Hon’ble Mr. Justice K. R. SHRIRAM & Justice Hon’ble Ms. Justice DR. NEELA GOKHALE.

FACTS OF THE CASE
The Petitioner is challenging the legality and validity of notice dated 12th March 2015 issued under Section 148 of the Income Tax Act, 1961 (the Act) by respondent no.2 seeking to reopen petitioner’s assessment for Assessment Year 2010-2011 and the order dated 18th August 2015 passed by respondent no.2 rejecting the objections of petitioner challenging reopening. Petitioner, during the previous year relevant to Assessment Year 2010-2011, transferred 30,65,600 shares of United Phosphorus Limited (UPL) and 3,06,560 shares of Uniphos Enterprises Limited (UEL) both public listed companies to one Nerka Chemicals Private Limited (NCPL) by way of a gift in terms of Transfer Deed dated 26th February 2010. Since the shares were transferred by way of a gift, admittedly no consideration was received by petitioner. We say admittedly because it is also respondents’ case that petitioner had transferred those shares without consideration. The cost of the shares to petitioner was Rs.1,02,27,547/-. On 22nd July 2010 petitioner filed its return of income for Assessment Year 2010-2011 declaring total income as Nil. This was because the income of petitioner was distributed in the hands of the beneficiaries. Petitioner also claimed refund of tax deducted at source of Rs.547/- in the return of income. In the return of income, petitioner had disclosed the investment of Rs.8,92,335/- standing as of 31st March 2010 in the balance sheet and also the sum of Rs.1,02,27,547/- as gift which was debited to the profit and loss account.
Petitioner did not receive any communication after the return of income was filed and since no communication or order was received within the prescribed time, petitioner has proceeded on the basis that the said return of income is deemed to have been processed under Section 143(1) of the Act. On or about 19th March 2015 petitioner received a notice dated 12th March 2015 from respondent no.2 under Section 148 of the Act alleging that there was reason to believe that the income has escaped assessment for Assessment Year 2010-2011. Petitioner was provided with the reasons for initiating the proposed reassessment by a letter dated 7th July 2015 after two reminders.

CONTENTIONS OF THE APPELLANT
The learned counsel for appellant submitted that the proceedings under Section 148 of the Act could be validly initiated, there are certain jurisdictional preconditions to be complied with one of which is that the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment prior to the initiation of the proceedings. This condition is not complied with in the present case because there cannot be any reason to believe that income has escaped assessment because there is no income that could be assessed to tax. Respondent no.2 has accepted that petitioner has transferred 33,72,160 shares to NCPL without any consideration. Once respondent no.2 has accepted that the shares are transferred without any consideration, there can be no material on the basis of which any person could have validly formed a reason to believe that any income is chargeable to tax. Only if petitioner had received any consideration as a result of the transfer of such shares, then the same could be charged to tax under the head “capital gains” in terms of Section 45 read with Section 48 of the Act. Since the shares were transferred without any consideration, there cannot be any gain which has accrued to or been received by petitioner which can be held liable to be taxed under the head “capital gains” Before any income can be brought to charge under the head “capital gain” in terms of Section 45 of the Act, the computation provision of Section 48 must be capable of being applied as the charging and the computation provision are integrated code. In the present case, as the computation provision fail in as much as there is no consideration, there can be no reason to believe that any income has escaped assessment. Respondent no.2 could not have held that the market value of shares gifted by petitioner was found out to be Rs.48,49,77,920/- and petitioner did not offer the resultant income for tax and in view of this, petitioner has understated the income and the same has been under assessed. the reliance by respondent no.2 on Explanation 2(c)(i) of Section 147 of the Act to the facts of the present case is not correct.

CONTENTIONS OF THE RESPONDENTS
The respondent submitted that that the Court has to only consider whether the Assessing Officer in the reason to believe has relied on some tangible material and if that is the case, assessee should be directed to go through the process of reopening. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. We are conscious that in this case return was accepted under Section 143(1) of the Act. Even in that case, the principle requirement that the Assessing Officer has reason to believe that income chargeable to tax had escaped assessment would still survive. Though this formation of belief by the Assessing Officer must be prima facie and at the stage when the Court is testing validity of such a notice, it would not be necessary for the Assessing Officer to conclusively establish that the income chargeable to tax had escaped assessment, for various reasons we are convinced that the reasons for reopening lack validity. In this case, Section 45 read with Section 47 read with Section 48 of the Act makes it clear that the Assessing Officer could not have any tangible material to form a belief that income has escaped assessment. On scrutiny of the statutory provisions as the transaction in question does not invite any tax liability, we cannot accept Mr. Sharma’s submission that there is some tangible material to form a belief that there is an escapement of income. Therefore, under Section 45 of the Act any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head “capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. Therefore, (a) there has to be a capital asset, (b) there has to be a transfer of such a capital asset and (c) there has to be a profit or gain arising from the transfer. Only when these three conditions are fulfilled, can the profit or gain be charged to income tax under the head “capital gains”. Section 47 (1)(iii) of the Act, which deals with transactions not regarded as transfer, expressly provides nothing contained in Section 45 shall apply to any transfer of a capital asset under a gift or will or an irrevocable trust. The proviso in clause (iii) of Section 47 of the Act for apparent reasons is not applicable to the case at hand. This proviso is in the nature of exclusion to main provisions of sub-clause (iii) of Section 47 of the Act. The case in hand, therefore, would be governed by the main body of sub-clause (iii) of Section 47 of the Act. Therefore, even if there is a transfer of a capital asset under a gift, which admittedly in the case herein, it shall not amount to a transfer under Section 45 of the Act. If it does not amount to a transfer under Section 45 of the Act, no capital gains will be payable because Section 45 is the only taxing provision for capital gains. Consequently, the provision of Section 45 of the Act pertaining to capital gain would not apply.

LEGAL PROVISIONS
Section 148 of the Income Tax Act, 1961: It gives authority to the Assessing Officer to send notice to a taxpayer whose income has not been properly assessed
Section 143(1) of the Act, 1961: It provides a preliminary assessment of the taxpayer’s tax liability and highlights any adjustments made by the Income Tax Department.
Section 45 of the Act, 1961: that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head Capital Gains.
Section 47(iii) of the Income Tax Act, 1961: any transfer of a capital asset under a gift or will or an irrevocable trust:
Section 48 of the Income Tax Act, 1961: it states that the income chargeable as “capital gains” must be calculated after deducting specified amounts from the returns one has received after selling off a capital asset.
Article 226 of the constitution of India : That every High Court shall have the powers throughout the territories in relation to which it exercised jurisdiction to issue writ or orders to any person or authority.

COURT’S ANALYSIS AND JUDGEMENT
The respondent submission that the reliance on Section 50CA of the Act in this regard has to be rejected because (a) Section 50CA of the Act was inserted with effect from 1st April 2018 by the Finance Act, 2017 and (b) it applies to a capital asset being share of a company other than a quoted share (in this case shares transferred were quoted shares) and also applies only where the consideration received or accruing as a result of such transfer. Mr. Sharma’s reliance on Section 50D of the Act also has to be rejected because (a) it was inserted by Finance Act, 2012 with effect from 1st April 2013 and (b) there also the Section postulates receiving consideration and not a situation where admittedly no consideration has been received. A gift is commonly known as voluntary transfer of property by one to another without any consideration. A gift does not require a consideration and if there is a consideration for the transaction, it is not a gift. Since in the reason to believe it is admitted that shares were transferred by assessee to NCPL without consideration, certainly it is a gift. Infact it is not even respondents’ case that is it not a gift. Mr. Sharma submitted, as an afterthought, that assessee being a Trust it can be reasonably presumed that the transfer was for a consideration because anything a Trust does is for the benefit of its beneficiaries. It is not the case of the Revenue in the reasons to believe or in the order disposing objections or even in the affidavit in reply. Therefore, this submission of Mr. Sharma cannot be even considered. We cannot proceed on hypothesis and deal with such presumptuous argument. Moreover, if the transfer is not valid, the property. still remains with the Trust and in such a situation, there can be no capital gain. In the circumstances, the Rule issued on 11th February 2016 is made absolute in terms of prayer clause that this Hon’ble Court be pleased to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the Petitioner’s case and after examining the legality and validity thereof quash and set aside the Impugned Notice dated 12 March 2015 issued by Respondent No.2 under section 148 of the Act (Exhibit A) and the Impugned Order dated 18 August 2015 (Exhibit B).

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Judgement Reviewed by – HARIRAGHAVA JP

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