0

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

Blog, Bombay High Court , , ,

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).

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

Judgement Reviewed by – HARIRAGHAVA JP

Click here to read the judgement

 

 

 

 

0

The High Court of Delhi Sustained Tax Assessment, Dismissed Appellant’s Claims: Cites Reason as Assessments Deemed Valid After Review

Blog, Delhi High Court , , ,

Case Title – Sunita Goel Vs. Deputy Commissioner of Income Tax Central, Circle 1, Delhi

Case Number – W.P. (C) 5132/2021

Dated on – 8th May, 2024

Quorum – Justice Yashwant Varma & Justice Purushaindra Kumar Kaurav

FACTS OF THE CASE
In the case of Sunita Goel Vs. Deputy Commissioner of Income Tax Central, Circle 1, Delhi, the Appellant, Sunita Goel, filed her Income Tax Return (ITR) on dated 7th of November, 2014, declaring a total income of INR 39,76,435 for the AY 2014-2015. On the 15th of December,2016, a search operation under Section 132 of the Income Tax Act was conducted at 157, Harsh Vihar, Pitampura, New Delhi, against Mr. Hemant Kumar Sharma, Director of M/s. Almina Textiles Pvt. Ltd. During the search, it was unveiled that Mr. Hemant Kumar Sharma had sold a property at 153, Harsh Vihar, Pitampura, new Delhi, to the Appellant for a total consideration of INR 26,170,000. Out of these, INR 99,50,000 was received vide cheque, and INR 1,62,20,000 was received in cash. An assessment order dated 30th of December,2018 was passed against Mr. Hemant Kumar Sharma, adding INR 1,62,20,000 as unexplained money under Section 69A of the Income Tax Act, 1961. Subsequently, the proceedings of the assessment were initiated against the petitioner under Section 153C of the Income Tax Act, 1961, and notices were served to her. The Appellant was provided with opportunities to respond to the notices and furnish with explanations regarding the cash transaction. Despite, being provided with multiple opportunities, the Appellant did not respond to the notices promptly. Eventually, the AO passed an order under Section 153C of the Income Tax Act, 1961, adding INR 1,62,20,000 to the total income of the Appellant for AY 2014-2015. Aggrieved by this order, the Appellant approached the High Court through a Writ Petition, primarily alleging a violation of principles of natural justice.

ISSUES
The main issue of the case whirled around whether the Assessment order passed against the Appellant under Section 153C of the Income Tax Act, 1961, adding INR 1,62,20,000 to her total income for the AY 2014-2015 valid?
Whether the AO complied with the principles of natural justice while passing the assessment order against the petitioner?
Whether the Appellant was provided with adequate opportunities to respond to the notices and furnish explanations concerning the cash transactions in questions?
Whether the initiation of the assessment proceedings against the Appellant under Section 153C of the Income Tax Act, 1961, was justified based on the material unearthed during the search operation conducted against Mr. Hemant Kumar Sharma?

LEGAL PROVISIONS
Section 69A of the Income Tax Act, 1961 prescribes the Unexplained money, etc.
Section 132 of the Income Tax Act, 1961 prescribes the Search and seizure
Section 142(1) of the Income Tax Act, 1961 prescribes the Inquiry before assessment
Section 143(2) of the Income Tax Act, 1961 prescribes the Definition of Assessment
Section 144 of the Income Tax Act, 1961 prescribes the Best Judgment Assessment
Section 153A of the Income Tax Act, 1961 prescribes the Assessment in case of search or requisition
Section 153C of the Income Tax Act, 1961 prescribes the Assessment of income of any other person

CONTENTIONS OF THE APPELLANTS
The Appellants, through their counsel, in the said case contented that the search and seizure operation conducted by the Income Tax Authorities against Mr. Hemant Kumar Sharma was invalid and illegal and that the Section 132 of the Income Tax Act, 1961were not complied with, either in terms of procedural requirements or substantive grounds, rendering the search operation null and void.
The Appellants, through their counsel, in the said case contented that there were jurisdictional issues regarding the authority of the AO to initiate the proceedings of the assessment against them under Section 153C of the Income Tax Act, 1961 and that there was no valid basis for extending the assessment to them, particularly if they were not directly connected to the person searched or if the seized assets were not linked to them.
The Appellants, through their counsel, in the said case contented that the assessment was made arbitrarily and without proper consideration of the evidence, resulting in an erred determination of their taxable income.

CONTENTIONS OF THE RESPONDENTS
The Respondents, through their counsel, in the said case contented that the search and seizure operation conducted against Mr. Hemant Kumar Sharma was valid and conducted in accordance with the provisions of Section 132 of the Income Tax Act, 1961.
The Respondents, through their counsel, in the said case contented that the AO had the jurisdiction to initiate the proceedings of assessment against the Appellants under Section 153C of the Income Tax Act, 1962.
The Respondents, through their counsel, in the said case contented that the principles of natural justice were fully complied with during the proceedings of the assessment and that the Appellants were given adequate opportunities to participate in the proceedings, submit their explanations, and present their case before the AO.
The Respondents, through their counsel, in the said case contented that the assessment was conducted on the basis of credible evidences and in accordance with the provisions of the Income Tax Act, 1961.

COURT ANALYSIS AND JUDGMENT
The court in the case of Sunita Goel Vs. Deputy Commissioner of Income Tax Central, Circle 1, Delhi, discovered that the Appellant was indeed provided with ample opportunities to present her case and that notices were issued, and the Appellant was given the chance to respond to each of them. Moreover, a satisfaction note, detailing the incriminating material, was provided to the Appellant, allowing her to understand the basis on which the assessment proceedings were initiated. The court observed that the assessing officer duly considered the responses of the Appellant before passing the impugned order. The court, concerning the assertion of delay, referred to relevant legal precedents, especially the decision in the case of Calcutta Knitwears, which stressed on the significance of the assessing whether any delay in the proceedings of the initiation were unreasonable. The court stated that a delay of 5 months, as in the present case, cannot be deemed unreasonable, specifically when it falls within a reasonable period from the date of closure of assessment of the searched person. The court concluded that the contentions of the Appellant lacked merit and that was no violation of the principles of natural justice, and the delay in the initiating proceedings was not reasonable. Thus, the impugned order adding INR 1,62,20,000 to the total income of the Appellant for AY 2014-2015 was upheld. The court in this case, dismissed the Writ Petition instituted by Sunita Goel challenging the order passed under Section 153C of the Income Tax Act, 1961. The court found no grounds to interfere with the assessment proceedings, as the Appellant was provided with ample opportunity to present her case and the delay in initiating proceedings was deemed reasonable.
“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”
Judgement Reviewed by – Sruti Sikha Maharana
Click Here to View Judgment

0

Delhi High Court Nullifies Tax Assessments Due to Lack of Valid Transfer Order Citing Procedural Deficiencies: Emphasizes Importance of Proper Transfer Orders

Blog, Delhi High Court , ,

Case Title – Raj Sheela Growth Fund (P) LTD. Vs. Income Tax Officer, Ward-21(1), Delhi

Case Number – W.P. (C) 3777/2022 & CM APPL. 11224/2022

Dated on – 8th May, 2024

Quorum – Justice Yashwant Varma & Justice Purushaindra Kumar Kaurav

FACTS OF THE CASE
The case of Raj Sheela Growth Fund (P) LTD. Vs. Income Tax Officer, Ward-21(1), Delhi, revolves around the taxation matters concerning Raj Sheela Growth Fund (P) LTD., a private limited company which falls under the jurisdiction of the Income Tax Department. The office of the Central Circle-16, New Delhi, later renamed Central Circle-20, New Delhi, pursuant to an order of centralization dated 16th of July, 2008, had the jurisdiction over the case of the Appellant. For the Assessment Year (AY) 2015-2016, Raj Sheela Growth Fund, declaring a total amount of INR 7,920, filed its Income Tax Return (ITR). The case of the Appellant was picked up for inspection, and thereafter, a notice under Section 143(2) of the Income Tax Act, 1961, was issued by the office of the Income Tax Officer (ITO) Ward 21(1), New Delhi, on 21st of March, 2016. Furthermore, an assessment order was passed on the dated 31st of December, 2017, adding an amount of INR 1,35,11,59,300 to the total income of the Appellant under the Section 56(2) (viia) of the Income Tax Act, 1961. Being aggrieved by the assessment order, the Appellant instituted an appeal before the Commissioner of the Income Tax (Appeals)(CIT(A)), which was duly rejected. Subsequently, the Appellant appealed to the Income Tax Appellate Tribunal (ITAT), which partially allowed the appeal on the 9th of August, 2019 and handed over the matter back to the Assessing Officer (AO) to ascertain whether the transfer order under Section 127 of the Income Tax Act, 1961 was passed. On the dated 22nd of September, 2021, the Appellant instituted an application under Section 144A of the Income Tax Act, 1961, before the Assistant Commissioner of Income Tax (ACIT) inquiring regarding the transfer of the order under Section 127. Pursuant to this, an order was passed on dated 27th of September, 2021, confirming the transfer order and directing the AO to continue with the proceedings of the assessment. Thus, on the 30th of the September,2021, an assessment order was passed by the ITO Ward 21(1), New Delhi, making an addition under Section 56(2)(viia) of the Income Tax Act, 1961. The Appellant challenged the orders dated 31st of December,2017 and 30th of the September,2021, asserting lack of jurisdiction due to the absence of a valid transfer order under Section 127 of the Income Tax Act, 1961. The matter was brought before the Delhi High Court for the purpose of resolution.

ISSUES
The main issue of the case whirled around whether the assessment order passed by the ITO Ward 21(1), New Delhi, for the AY2015-2016 is valid?
Whether the AO lacked jurisdiction to assess the income of the Appellant due to the absence of a valid transfer order under Section 127 of the Income Tax Act, 1961?
Whether the Ao followed proper procedural requirements in issuing the assessment orders?
Whether all the relevant legal provisions were adhered to throughout the process of assessment?

LEGAL PROVISIONS
Section 64 of the Income Tax Act, 1961 prescribes the Income of individual to include income of spouse, minor child etc
Section 120 of the Income Tax Act, 1961 prescribes the Jurisdiction of income-tax authorities
Section 124 of the Income Tax Act, 1961 prescribes the Jurisdiction of assessing officer
Section 127 of the Income Tax Act, 1961 prescribes the Power to transfer cases
Section 143(2) of the Income Tax Act, 1961 prescribes that An incorrect claim, if such incorrect claim is apparent from any information in the return
Section 144A of the Income Tax Act, 1961 prescribes the Power of Joint Commissioner to issue directions in certain cases

CONTENTIONS OF THE APPELLANTS
The Appellants, through their counsel, in the said case contented that the AO lacked jurisdiction to assess their income for the AY2015-2016 due to the absence of a valid transfer order under Section 127 of the Income Tax Act, 1961 and that the AO did not have the authority to assess their income, as the case was not properly transferred to them.
The Appellants, through their counsel, in the said case contented regarding the validity of the assessment orders dated 31st of December,2017 as well as dated 30th of September,2021 that these orders are void ab initio since they were issued without jurisdiction and that any assessment made without proper jurisdiction is null and void in the eyes of law.
The Appellants, through their counsel, in the said case contented that it was a failure on the part of the assessing authority to follow the proper procedural requirements in issuing the assessment orders and that the AO did not adhere to the requisite legal provisions and failed to provide them with adequate opportunities to present their case or challenge the assessment.

CONTENTIONS OF THE RESPONDENTS
The Respondents, through their counsel, in the said case contented that AO had the proper jurisdiction to assess the income of the Appellant for the AY2015-2016.
The Respondents, through their counsel, in the said case contented that the assessment orders dated 31st of December,2017 as well as dated 30th of September,2021 were issued according to the provisions of the Income Tax Act, 1961 after due consideration of the relevant facts and evidences.
The Respondents, through their counsel, in the said case contented that the Ao followed all the requisite procedural requirements in issuing the assessment orders.

COURT ANALYSIS AND JUDGMENT
The court in the case of Raj Sheela Growth Fund (P) LTD. Vs. Income Tax Officer, Ward-21(1), Delhi, scrupulously reviewed the legislative framework laid down in Section 127 of the Income Tax Act, 1961, which governs the transfer of the cases between the Aos. The court stated the underlying principles of public interest and administrative convenience that guide such transfers. Stressing on these principles, the court illuminated the significance of ensuring that the transfer under Section 127 of the Income Tax Act, 1961, are executed in accordance with the law. The court considered various judicial precedents and stressed on the importance of the Section 127 of the Income Tax Act, 1961, in the context of the administrative efficiency and taxpayers’ rights. The court focused on the absence of a valid transfer order under Section 127 of the Income Tax Act, 1961 in the present case. The court observed that the case of the Appellants had been purportedly transferred to the ITO Ward 21(1), New Delhi, without the required transfer order mandated by the Income Tax Act, 1961. The court stated that such a transfer order is a prerequisite for any legal transfer under Section 127 of the Income Tax Act, 1961. The court, in this case, held that the impugned orders dated 31st of December,2017 as well as dated 30th of September,2021, which were issued without a valid transfer order under Section 127 of the Income Tax Act, 1961, were legally flawed and therefore set them aside. The court in the said case, allowed the petition of the Appellant.
“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”
Judgement Reviewed by – Sruti Sikha Maharana
Click Here to View Judgment