Whether gifts of shares made by a company will be liable to capital gain tax?
Another interesting proposal made by the Finance (No.2) Bill, 2024 (FB 2024) is substitution of section 47(iii) of the Income-tax Act, 1961 (IT Act) with effect from current financial year. While a gift of capital asset by one person to another is a ‘transfer’ under section 2(47) of the IT Act, section 47(iii) provides that the same shall not be regarded as ‘transfer’ for the purposes of levy of capital gain tax under section 45 of the IT Act. There is no limitation in section 47(iii) regarding its applicability to a company.
The memorandum to the FB 2024 refers to the provisions of section 50D and 50CA inserted in the IT Act in 2012 and 2017 respectively, and then mentions that “However, in multiple cases, taxpayers have argued before the judicial fora that transaction of gift of shares by company is still not liable to capital gains tax, in view of the provisions of section 47(iii) of the Act. The matter thus remains a litigated issue leading to (a) tax avoidance and (b) erosion of Indian tax base”.
In the above background, the FB 2024 has proposed to substitute section 47(iii) of the IT Act by the following:
“(iii) any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust”.
As is clear from the above, going forward, a company will not be able to avail the provision of section 47(iii) of the IT Act.
The moot question is whether the above amendment, by itself, can result in levy of capital gain tax in the hands of the company gifting shares to another person. If the relevant documents (say gift agreement or the like) clearly mention that the shares are being transferred ‘without consideration’ and there is no other evidence with the tax authorities regarding passing of consideration for such ‘gift’, will the tax authorities be able to levy capital gain tax on the company in the absence of any consideration?
It is relevant to note that both section 50CA and section 50D use the words “Where the consideration received or accruing as a result of the transfer…”, and do not seem to cover the cases where, in fact, there is no consideration for transfer. In particular, section 50D is relevant where the consideration is not ascertainable or cannot be determined and does not seem to cover cases where there is no consideration for ‘transfer’.
In the absence of any deeming fiction to treat something as ‘full value of consideration’ in the case of a gift for the purposes of section 48 of the IT Act, it seems that there may not be a basis to levy capital gain tax in the hands of the company gifting shares.
Let us see how the law evolves on this point in the coming years. It appears that another litigation is in the pipeline in view of the poor drafting of the section.
