[Opinion] Gift by Companies | An Analysis of Amendment to Section 47(iii) of the IT Act

Bharathi Krishnaprasad & Varshini U – [2024] 166 taxmann.com 58 (Article)

1. Introduction

Chapter IV-E of the Income Tax Act, 1961 (‘IT Act‘) contains provisions relating to “Capital Gains”. Under Section 45(1), profits and gains arising from the ‘transfer’ of a capital asset effected in the previous year is chargeable to tax under the head “Capital gains”. Section 47 enlists certain scenarios where a transaction is not construed as transfer and consequently not exigible to tax as capital gains. Section 47(iii) as it presently stands excludes transactions of gift of capital asset from the ambit of ‘transfer’. Finance (No. 2) Act, 2024 has amended this clause and restrict the scope to only transfers made by individuals or HUFs. Accordingly, post this amendment, only gifts made by individuals or HUFs will not be construed as transfer, thus insulated from any exposure to capital gains tax. All other gifts will be subject to the provisions of Section 45 of the Act. This Article attempts to analyse the history that led to this amendment and the likely consequences of the same.

2. Present Position

The issue of taxation of transfer of capital assets by a company under a gift in light of the exclusion provided under Section 47(iii) has been a controversial issue in the past. Authority for Advance Ruling (‘AAR‘) in the case of Orient Green Power Pvt. Ltd., In re has observed that transfer of shares by the assessee-company to its associated enterprise without consideration would not be covered within the meaning of ‘gift’ contemplated under Section 47(iii). The AAR reasoned that transfer of capital asset under a gift or will or an irrevocable trust as contemplated in Section 47(iii) can be exercised only through a human agency. Therefore, the AAR observed that transactions involving inter-corporate gifts are strange and might be an arrangement that could aid tax avoidance. However, the matter was remanded to the assessing authority to verify the genuineness of the transaction, and the AAR declined to give a final ruling.

The Hon’ble ITAT in the case of Redington (India) Ltd. v. Jt. CIT, observed that the law governing transfer of property is Transfer of Property Act, 1882 (‘TP Act‘). According to the TP Act, a valid transfer is an act by which a living person conveys property to another living person, including transfer by gift. Further, the Hon’ble ITAT noted that ‘living person’ includes interalia a company and additionally the TP Act does not prescribe existence of ‘natural love and affection’ as a pre-condition for making a gift. Therefore, transfer of shares by a company are eligible for exemption under Section 47(iii). However, the Hon’ble High Court of Madras in Pr. CIT v. Redington (India) Ltd.3 reversed the ruling of the Hon’ble ITAT. The Hon’ble High Court observed that transfer of shares by assessee-company to its wholly owned subsidiary without consideration could not fall within the ambit of Section 47(iii). The Hon’ble High Court emphasised that to decide whether exclusion under Section 47(iii) operates, it is important to take into account the facts, documents, and the intention of the taxpayer at the time of the transaction. It was held that the transfer of shares would not be covered under Section 47(iii) for the following reasons;

• The mental act being the intention to execute the gift was missing in the transaction and
• The words ‘transfer of shares without consideration’ is not enough reason to prove that the assessee-company’s intention was to execute a gift.
• It can be inferred from the facts of the case the intention of the assessee in transferring shares without consideration was to re-structure the assessee-company

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