2008 (12) TMI 757 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the asset gifted by the donor.
2. Validity of the gift in law.
3. Head of income under which the sale of shares should be taxed.
4. Computation of income under the head capital gains.

Issue-wise Detailed Analysis:

(I) Nature of the Asset Gifted by the Donor:
The case revolves around the nature of the asset gifted by the donor, SCL, to the assessee. The assessee claimed that the donor gifted application money for Optionally Fully Convertible Debentures (OFCDs) in ADIL. However, the Tribunal noted that no debenture issue was brought out by ADIL, and the amount advanced by SCL was shown as unsecured recoverable loans in the accounts. It was inferred that no such issue of debentures was made, and the amount advanced was a simple loan transaction. The Tribunal concluded that the asset gifted was an unsecured loan with a realizable value of Rs. nil, not OFCDs.

(II) Validity of the Gift in Law:
The Tribunal examined whether the transfer of debt by the donor to the assessee constituted a valid gift. The conditions of Sections 122 and 123 of the Transfer of Property Act were scrutinized. The Tribunal found that the gift was made voluntarily by the donor and accepted by the donee, fulfilling the criteria of Section 122. Additionally, the gift of the actionable claim was considered valid under Section 123, as it could be made by delivery, which in this case was through writing and acceptance. The Tribunal held that there was a valid gift of an unsecured loan with a book value of Rs. nil.

(III) Head of Income for Taxation of Sale of Shares:
The Tribunal addressed whether the income from the sale of shares should be taxed under the head 'Profits and gains of business or profession' or 'Capital gains.' The assessee had not carried on any business in prior years or during the year under consideration. The shares were reflected as investments in the assessee's accounts, and no business of dealing in shares was conducted. The Tribunal concluded that the shares were held as investments and not as stock-in-trade. Therefore, the profit from the sale of shares should be taxed under the head 'Capital gains.'

(IV) Computation of Income under the Head Capital Gains:
The Tribunal examined the computation of capital gains. The assessee declared income under the head 'Capital gains' at Rs. nil by reducing the cost of shares sold by invoking Section 49(1). The AO had held the transaction of gift as non-genuine and computed income under 'Profits and gains of business or profession' with a cost of Rs. nil. The Tribunal noted that the learned CIT(A) erred in examining the nature of the capital asset gifted and overlooked vital aspects affecting the computation of capital gains. The Tribunal directed the AO to decide the computation of capital gains afresh, considering the cost of the actionable claim and the applicability of Section 49(1).

Conclusion:
The Tribunal held that the gift of an unsecured loan with a book value of Rs. nil was valid. The income from the sale of shares should be taxed under 'Capital gains.' The computation of capital gains was remitted to the AO for fresh consideration, with the scope limited to the computation part. The Tribunal clarified that issues decided in the earlier part of the order would not be re-argued before the AO.