By TIOL News Service

NEW DELHI, MAY 31, 2018: THE ISSUE IS - Whether when a limited company transfers its shares to a group company as Gift but fails to prove that it was a part of the family settlement, even then it can escape from the claws of capital gains. NO IS THE VERDICT.

Facts of the case

The assessee company had filed its return for relevant AY. The case was selected for scrutiny and statutory notices were issued. During assessment, AO noted that the assessee company held certain equity shares of Jindal steel & Power Ltd (JSPL). The assessee company gave certain shares of JSPL as gift without consideration to Giebe Trading Pvt.Ltd (GTPL), which was another company of the same Group. The assessee had claimed this transaction not covered by section 56(2)(viia) but was exempt from tax u/s 47(iii) of the Act. The AO observed that gift by a corporation to another corporation was a strange transaction as there could not be a gift between artificial entities. The AO noted that by transferring its investment to its sister concern by way of gift, the assessee reduced its income to the extent that would have accrued if the company would have sold the shares in the open market. The AO held that provisions of Sec 47(iii) did not apply to facts of present case. According to AO the transfer of shares to GTPL was a transfer within the meaning of section 2(47) of the Act and taxed it u/s 45. He computed the value of shares transferred to GTPL by taking market value of each share transferred. On appeal, CIT(A) upheld the order of AO.

Tribunal held that,

++ scheme of capital gains, as set out in Section 45 to 55 of the Act, excludes certain categories of transaction from its ambit. These are, distribution of capital assets on the partition of a Hindu family or on the dissolution of a firm; transfer of a capital asset by a company to its subsidiary or under a scheme of amalgamation; transfer of a capital assets under a gift or a will or an irrevocable trust. It was noted that huge volume of shares in a public limited company is transferred by assessee to another company without any consideration, without any proper documentation being executed as per law and giving it a nomenclature of gift;

++ AO had rightly raised question regarding the reality and genuineness of transaction, in addition to its validity. It has been vehemently contested by authorities below as well as CIT that transaction has been effectuated for avoiding payment of tax and to get out of the ambit of section 56 (2) (viia) of the Act. It is apparent from record that assessee has not demonstrated by way of documentary evidence or in any of the manner to prove the genuineness and validity of transaction. Counsel of assessee has been harping that the shares held by assessee in a Public Limited Company was transferred in lieu of a family realignment, but failed to establish the relation of the alleged transferee company with that of assessee or any of the group/subsidiary companies. Further there is no agreement/document that has been executed between group companies forming part of family realignment. To postulate that a company can give away its assets free to another even orally, can only be aiding dubious attempts at avoidance of tax payable under the Act unless it is supported by documentary evidence. The AO is in a better position to make proper enquiry in to the question of reality, genuineness and validity of alleged transaction, entered into by assessee;

++ the assessee is directed to provide all necessary and relevant information/details to assist AO, in determining correct nature of alleged transaction as per law. It is also directed that in the event assessee fails to provide any document as called for, in order to establish the genuineness and validity of alleged transaction, as has been submitted to be for a family realignment, AO may compute income in the hands of assessee as per law. On the contrary if assessee is able to prove to the satisfaction of AO regarding genuineness and validity of the transaction, no addition shall be called for. Hence it was decided to set aside the issue raised by assessee back to AO who shall decide the issue as per facts and law, after giving due opportunity of being heard to the assessee. In the result appeal filed by assessee stands allowed for statistical purposes.

(See 2018-TIOL-776-ITAT-DEL)