Ss. 28(iv)/56(2) – Gift of residential flats through transfer of shares by foreign company to Indian company – Whether taxable – Held no.
Facts:
The assessee had received by way of a gift, three residential flats in Hill Park from its sister concern viz., BISNCL, a UK based company. BISNCL was holding shares of Hill Park Ltd. which entitled it for use and occupation of the said three flats and the gift was effected by transfer of the said shares. Both, the assessee and BISNCL, were 100% subsidiary of a U.K. based entity which in its turn was 100% subsidy of a Dubai based entity. This transaction, in the eyes of the AO, was a colourable device who taxed the value adopted for WT purpose as income from other sources. However, the same, in the eyes of the CIT[A], was nothing but a benefit derived by the donee out of its business relations with the donor company and therefore, he taxed the same as profit and gains of business & profession.
The issue before the tribunal was whether such transaction can be termed as a ‘Gift ‘or Income in the hands of the Donee.
Held:
According to the tribunal, such a transfer may trigger capital gains ramifications in India, since the shares of an Indian company were situated in India and when the transferor is a non-resident, the deeming provisions of section 9(i)(i) of the I.T. Act, 1961 came into play. However, referring to section 47(iii), the tribunal noted that the transfer of a capital asset, amongst others, under a gift is not treated as transfers for the purposes of section 45 of the Act. Referring to the provisions of section 5 and section 122 of the Transfer of Property Act (‘TPA’), the tribunal noted that there was no requirement in the TPA that a ‘gift’ can be made only between two 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. In case where donor is a foreign company, the tribunal noted that the relevant corporate/commercial law of the jurisdiction where the donor is based needs to be considered. Referring to the Certificate and Attestation by the Notary Public of the City of London, England, wherein the authority has inter alia certified and attested that the Deed of Gift was binding on BISNCL in accordance with the relevant provisions of English law, the tribunal concluded that BISNCL was legally authorised to give gift of shares.
Therefore, it held that the gift of shares of an Indian Company by a foreign company without consideration has to be treated as gift within the meaning of section 47(iii) of the Act.
As regards the order of the CIT(A) applying the provisions of section 28(iv), it observed that simply because both the donor and the donee happened to belong to the same group cannot ipso facto establish that they have any business dealings to attract the provisions of section 28(iv). Therefore, it was held that in the absence of any specific provision taxing a Gift as a deemed business income, provisions of section 28[iv] cannot be applied
As regards the applicability of the provisions of section 56 relied upon by the AO, the tribunal noted that a plain reading of the provisions show that not every receipt is taxable under the head ‘Income from other sources‘ but only those which can be shown as ‘Income‘ can be brought to tax under this head, if it does not fall directly under other heads of income specified in section 14 of the Act. According to it, the issue involved under the present appeal got covered under the clause (viia) of section 56(2). However, the said clause was introduced with effect from 1st day of June, 2010, hence, not applicable to the case of the assessee.
Accordingly, it was held that the transaction involved in the present appeal was nothing but a Gift and thus it was a capital receipt not taxable under the provisions of the Act.
