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Gift Of Shares By A Company Ruled Valid
The Mumbai Income Tax Appellate Tribunal (Tribunal) in a recent decision has held that transfer of shares by way of gift between corporate entities may appear strange but cannot be treated as a non-genuine transaction. Taxand India explores the case which led to this decision.
The Tribunal has held that a corporate entity can validly gift property to another corporate entity. The absence of love and affection, a general presumption in a gift transaction, should not result in the gift transaction between two corporate entities to be characterised as a "non-genuine" transaction.
The case which led to this ruling surrounded British India Steam Navigation Co (BISNCL), a UK based company which was the owner of shares of Hill Park Limited (HPL); by virtue of which it enjoyed the occupational rights of 3 residential flats in Mumbai.
BISNCL transferred the shares of HPL to its group company, DP World Private Ltd (taxpayer) under a gift deed.
The Revenue Authorities (RA), on the premise that gift cannot be logically made by one artificial juridical entity to another because the basic condition of love and affection is absent, held that the instant transaction was for business convenience. The taxpayer argued that the instant transaction is a gift of shares and consequently a capital receipt not chargeable to tax.
This ruling upholds the principle put forward in the case of Vodafone Essar Limited and Nadatur Holdings, wherein the High Courts have upheld the validity of gift transactions amongst corporate entities. However, in the recent case of Orient Green Power Pvt Ltd, the Authority for Advance Rulings declined to rule on the taxability of a gift of shares, terming a gift by a corporation to another corporation as a "strange" transaction and holding that such transactions are only an attempt at tax avoidance. Multinationals should keep abreast of cases regarding corporate gifts, as it is a hot topic in India and could have implications on foreign business.