Manjula Finance Ltd. v. ITO [I.T.A. No.
3727/Del/2018, dt. 18-12-2020] : 2020 TaxPub(DT) 5487 (Del-Trib)
Shares held as stock-in-trade and gifted to another
corporate -- Taxability at fair value as business income -- Whether corporate
can make gift -- Corporate can it be part of family settlement
Facts:
Assessee was a part of OP Jindal group of companies more so
an investment and a financing entity. They had applied for an NBFC licence to
RBI which was rejected. Consequentially whatever investment in shares of the
group companies they held was confirmed as stock-in-trade. This OP Jindal group
made a family settlement to rearrange the affairs amongst the 4 brothers of the
family. Arising out of this family settlement the shares held in the group
companies by the assessee were gifted to 4 other newly formed companies. There
was no provision to gift shares in the articles of association of the assessee
and accordingly prior to the gifting the articles were amended. The assessee
claimed that this was gifting of shares which was held as stock-in-trade and
since there was no consideration and it was part of the family settlement there
cannot be any tax implications. Alternatively, they took a plea that the shares
though were held as stock-in-trade prior to gifting assumed the character of
investments; a capital asset and since it was a gifting of a capital asset it
fell in the scope of section 47(iii) and thus was exempt. There being no
consideration no imputed/deemed capital gains cannot be also taxed as computation
section also would fail. The assessing officer noting that no such family
settlement agreement was produced held that the market value of the shares
gifted was Rs. 230 crores and their cost in books was 11 crores thus held that
this gain was not shown in the books thus the books are worthy of rejection and
thus taxed and assessed the difference of Rs. 219 crores as business income. On
appeal the Commissioner (Appeals) upheld the same. On further appeal by the
assessee --
Held in favour of the assessee that there was no income
which arose in the hands of the assessee. The following key takeaway points
make it an one off decision --
1. A corporate can gift this is
no longer res integra. There was a valid gift by the assessee in the
realm of section 122 of Transfer of Property Act, 1882. The requirements
of the gift have been well met by the company viz. (1) the absence of
consideration, (2) the existence of donor, (3) the existence of donee, (4) to
be voluntary, (5) the subject matter, (6) the transfer, (7) the acceptance.
2. A company cannot be part of a
family settlement nor a family either as the corporate identity would thwart it
being thus. This is no longer res integra either as held in B.A.
Mohota Textiles Traders Pvt. Ltd. v. Dy. CIT & Anr. (2017) 397 ITR 616 :
2017 TaxPub(DT) 1734 (Nag-Trib) and in CIT & Anr. v. Sea Rock
Investments Ltd (2009) 317 ITR 253 (Kar) : 2009 TaxPub(DT) 0200 (Karn-HC).
3. The articles being amended
and the transferee all being new companies are not things which can stand in the
way.
4. There is no provision to tax
conversion of stock-in-trade into capital asset under the act until 1-4-2019
where in sections 28(via), 2(24)(xiia), 49(9) and 2(42A) clause (ba) under
Explanation 1 of (i) all have been inserted to handle the situation of the
assessee. The year of assessment is 2014-15 so none of these sections can be
applied either in this case.
5. Section 45(2) talks of
conversion of capital asset into stock-in-trade and not the vice versa case.
There are cases which have dealt transfer of stock-in-trade into capital asset
but those have involved "transfer" in some form but not as
"gift" without consideration in this case.
6. There is no income received
by the assessee. There is no provision to tax notional income either as chapter
X-A (GAAR provisions) is also not into effect for the assessment year of
appeal.
7. The family settlement
agreement whether produced or not is inconsequential to decide the case of the
assessee especially given the fact a corporate cannot be part of a family
settlement as held by courts.
8. The case of the donee's not
being held as taxable for these transfers under the family settlement also is
irrelevant to decide this case and has no impact.
9. Rejection of books simply
because there was no disclosure of the gifting is also incorrect as the said
annual accounts have shown this in the notes the board resolutions etc.
produced. There being no consideration it was not warranted to disclose the
same as there was no financial implication either.
10. The revenue has not
controverted that the stock-in-trade was converted into capital asset thus
application of section 47(iii) is also not warranted.
11. The decision of Supreme
Court Kika Bhai Premchand v. CIT (1953) 24 ITR 506 (SC) : 1953 TaxPub(DT)
0121 (SC) will need to be applied where in it was held one cannot make
profit out of oneself. This case of the assessee is one where the shares were
held as stock-in-trade and the same was given as a gift, thus there being no
external party sale, no one can profit out of oneself has to apply with no tax
being fastened notionally on the assessee on the gifting of the shares. A
notional income cannot be taxed on real income principles.
Editorial Note: A
contrary verdict but on certain facts slightly being different can also be seen
in the decision of PCIT
v. Redington (India) Limited [TCA Nos. 590 & 591 of 2019, dt. 10-12-2020].
The decision in Soni Sonu Mirchandani v.
ACIT [ITA No. 1286/Del/2020, dt. 28-9-2020] : 2020 TaxPub(DT) 3874 (Del-Trib)
may also be referred to strictly not on the same dimension of this case but on
slight remotely related parts.