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Capital gains tax applicable on gifted shares? Here’s what Bombay High Court ruling says

May 13, 2024 

Setting a precedent, the Bombay High Court has ruled that shares transferred by way of gift cannot be subject to capital gains tax. In a case of transfer of shares pertaining to Mumbai-based Jai Trust, justices K R Shriram and Neela Gokhale held that capital gains tax cannot be claimed when there is no consideration in a transaction.

Quashing a reassessment notice issued by tax authorities to Jai Trust, the court observed that in gifting of shares, there was no consideration in the transaction, so there was no basis for assessing capital gains tax.

Jai Trust transferred shares of United Phosphorus and Uniphos Enterprises to Nerka Chemicals through a gift deed dated February 26, 2010. In its income tax return (AY 2010-2011), Jai Trust showed ‘NIL’ total income since its income was distributed among beneficiaries. The return duly disclosed the shares transferred as gifts, according to Taxguru, a taxation portal.

Jai Trust received a notice under Section 148 of the Income Tax Act in March 2015. The notice alleged that income had escaped assessment. Jai Trust objected to the income tax authorities’ argument, citing previous court judgments and the exemption of capital gains on gift transfers under Section 47(iii) of the Act. The trust also mentioned the absence of provisions allowing the adoption of market value as consideration for computing capital gains on share transfers, according to the portal.

The assessing officer, however, was not convinced by Jai Trust’s argument. The trust then filed a petition to challenge the notice and subsequent order. The High Court looked into all the contentions raised and delivered a detailed judgment.

The Bombay High Court observed that the assessing officer’s reasons for reopening the assessment did not take into account Section 47(iii) of the Act, which exempts gift transfers from capital gains tax liability. The court observed that no income would attract capital gains tax because the shares were transferred without consideration.

The court also stressed that in order to bring an income under the capital gains tax liability, three conditions are needed to be met. These conditions are: there must be a capital asset, there must be a transfer of such asset, and there must be a profit or gain from the transfer of that asset. Since the transfer of shares was a way of gift, the transfer came under the exemption provided by Section 47(iii), and therefore, the provisions of Section 45 pertaining to capital gains were not applicable.

Section 45 of the Income Tax Act

According to Section 45, any profits and gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head ‘Capital Gains’ in the previous year in which transfer took place unless such capital gain is exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54H.

[The Financial Express]

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