2015 (4) TMI 9 - AT - Income Tax

Validity of Gift of Dividend - It was submitted by assessee that all the donor companies are shareholders of Reliance Industries Limited and received dividend income from Reliance Industries. The donor companies had given irrevocable instructions to Reliance Industries to pay dividend directly to assessee. The receipt of dividend was debited to bank account and credited to Capital reserve Account of the assessee. The assessee submitted that the Gift is in the nature of capital receipt and is not required to be credited to Profit and Loss Account of the assessee. - Regarding MAt, assessee submitted that since the accounts are prepared as per the companies Act, no adjustment is required to be made to the book profit u/s115JB on account of gift received by the assessee. - whether the same was covered under the ambit and scope of income from other sources u/s 56(1) of the I.T Act? - whether CIT (A) was justified in relying on the provisions of section 25 of Companies Act and section 80G of the I.T Act and holding that a company can make gift, without appreciating the fact that these are specific provisions stipulated by statute for specific purposes and therefore, the same cannot be applied in generality and to the facts under consideration? Held that - The companies are competent to make and receive gifts and natural love and affection are not the necessary requirements. The only requirement for a gift by a corporate entity to another corporate entity is that they are authorized to do so by their Memorandum and Articles of Association. As mentioned earlier the assessee and the donor companies are authorized in this regard for receiving and making gifts respectively by their Memorandum and Articles of Association. The position regarding the competency of corporate entities to make and receive gifts has also been upheld in the following cases, on which assessee has relied during appellate proceedings (i) CIT vs Groz-Beckert Saboo Ltd 1978 (11) TMI 2 - SUPREME Court . All the donor companies and the assessee are authorized by their Memorandum and Articles of Association for giving and receiving gifts. Proper resolution in the Board Meeting have been passed by all the four companies for making the gift to the assessee and assessee, has also accepted the said gifts by way of adopting a resolution in the meeting of Board of Directors. Therefore, the element of gifts i.e. delivery, donative intent-4 and acceptance by the donee are present in the transactions of gifts received by the assessee. Therefore, in view of the above discussion, submission of the assessee, case laws and in particular the decision of Hon ble ITAT in the case of D.P. World (2012 (10) TMI 444 - ITAT MUMBAI ), it is held that the amounts received by the assessee-company from the said four concerns are valid gifts Validity of Gifts - Furthermore, As per section 56(2)(viia) and 56(2)(viib), gift of certain kind of shares received by a company in which the public are not substantially interested are taxable and, therefore, it is clear that the Income-tax Act, itself provides that companies can receive gifts, of course, gifts of only shares of certain kind received by certain category of companies are taxable. (The provisions of section 56(2)(viia) and (viib) are applicable w.e.f. 1/6/10 and 1/4/13 respectively). Therefore, it cannot be said that the assessee could not have received such gifts from other companies. It is also clear from the Transfer of Property Act that companies can receive and make gifts and there is no requirement of any natural love and affection for making or receiving a gift by companies. Even the Income-tax Act by way of Section 56(2)(viia) and 56(2)(viib) provides that gifts of certain kind of shares are taxable in the hands of certain category of companies. Taxability of gifts - held that - In the case of CIT Vs. Groz- Beckert Saboo Ltd. 1978 (11) TMI 2 - SUPREME Court the Hon ble Supreme Court has an occasion to consider the gift of raw material being stock in trade received by a company and its taxability under the Act. The Hon ble Supreme Court has held that the gift of stock in trade received constituted a capital receipt in the hands of an assessee and on its conversion to stock in trade the market value as on the date of receipt of gift has to be allowed as deduction against the computation of taxable profit. The Supreme Court thus held the gift received being capital in nature and hence not chargeable to tax on the contrary the market value of gift received was allowed as deductible expense while computing the total taxable income. In view of judicial pronouncements discussed above the gift of ₹ 161,86,77,034/- received by the assessee from corporate bodies are in the nature of capital receipt not liable to tax under the provisions of the Income Tax Act. Applicability of Section 82 of the Companies Act - Held that - There in no impediment for assessee or donor companies under the Companies Act to make / receive dividend as gift. - Section 122 of the Transfer of Property Act provides for making of a gift and permits transfer of moveable or immovable property but without any consideration. The shares or interest in a company is a moveable asset as per the Companies Act. Further as per section 5 of the Transfer of Property Act, a company is a living person, competent to transfer a property 88 per the Act and therefore the Transfer of Property Act permits a limited company to be a donor. Whether Artificial company can make gifts - Held that - Three elements are essential in determining whether or not a gift has been made, a) delivery. b) donative intent, and c) acceptance by the donee. All the above essentials stated by the AO are duly been fulfilled by the assessee and all the four donor of gifts. With respect to delivery of gift, the dividend has actually been received by the assessee in its bank account which conclusively prove the delivery of the gift from donor to donee. With respect to intent of donor, all four donors have passed a resolution in the meeting of shareholders and board of Directors that they intend to transfer the dividend on shares of Reliance Industries held by them to the assessee donee as gift. Thus, the donative intent to transfer the dividend as gift is clear from the resolution passed by the donors. With respect to acceptance by the donee, the assessee has duly passed a resolution in the meeting of shareholder and board of directors duly conveying their acceptance of the gift. Thus all the essential requisites of gifts stated by the AO in assessment order have been duly fulfilled by the assessee and no adverse conclusion can be drawn in the case of the assessee. Taxability u/s 56 - Held that - Legislature again indicated its intention that certain gifts received by individuals and HUFs only will be taxed under the Income-tax, in the hands of the recipient, but gifts received by companies or any other person other than individuals and HUFs were not brought under the tax net. With the passage of time, it was realized that certain kind of transactions of transfer of certain kind of shares by certain category of companies only further need to be taxed and accordingly the - legislature brought provisions of section 56(2)(viia) and 56(2)(vilb) of Income-tax Act in the statute with effect from 01/06/2010 and 01.04.2013 respectively, but any other gift by companies or any other person other than individual and HUF still left outside the tax net. - transaction involved in the present appeal is nothing but a Gift and thus it is a capital receipt not taxable under the alleged provisions of the Act. Taxability as Deemed Dividend u/s 2(22)(e) - Held that - there has to be an advance or loan given by a company to a substantial shareholder with 10% interest or to a concern in which such shareholder is holding not less than 20% of the voting power/shares for taxing such loan u/s. 2(22)(e). Whereas, in the case under consideration, there is no common shareholding between the assessee and the other four companies who have made the gifts. Therefore, no addition can be considered in the case of the assessee u/s. 2(22)(e) of Income-tax Act. Minimum Alternate Tax (MAT) - Computation of book-profit u/s. 115JB - Held that - A.O. has made addition of the gifts received by the assessee to the income of the assessee, while computing the income u/s. 115JB also holding that it is credit to profit and loss A/c. as an item of exceptional nature - Held that - The receipts totaling to ₹ 161,86,77,034/- are capital receipts as discussed and decided against the earlier grounds of appeal in this order, whereas, there is no requirement of Schedule VI to credit to profit and loss A/c. any capital receipt and, therefore, assessee has rightly taken them directly to the Balance-Sheet. Section 115JB does not prescribe any such item to be added to book-profit while computing the income u/s. 115JB, the items mentioned from (a) to (i) in explanation 1 to subsection 2 of section 115JB do not include any such item by which the book-profit is to be increased. Therefore, it cannot be added to the book-profit u/s. 115JB. Hence, the addition made by the A.O. to the book-profit of ₹ 161,86,77,034/- is deleted. The amount of gift so received is neither taxable as income from other sources u/s. 56 nor as capital gain nor as income u/s.2(22)(e) nor u/s.115JB of the I.T.Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the receipt of Rs. 161,86,77,034/- by the assessee qualifies as a gift.
2. Whether the receipt is taxable under the Income Tax Act, 1961.
3. Whether the receipt should be included in the book profits under Section 115JB of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Whether the receipt of Rs. 161,86,77,034/- by the assessee qualifies as a gift:

The assessee received Rs. 161,86,77,034/- from four corporate donors, which was claimed as gifts. The identity of the donors, their capacity, and the genuineness of the transactions were established. The donors were shareholders of Reliance Industries Ltd. and directed their dividend income to be credited to the assessee. The transactions were supported by resolutions passed by the Board of Directors of both the donor companies and the assessee. The assessee argued that the gifts were voluntary and without consideration, and thus, qualified as capital receipts.

2. Whether the receipt is taxable under the Income Tax Act, 1961:

The primary contention was whether the receipt could be taxed under Section 56 or any other provision of the Income Tax Act. The assessee argued that the receipt was a capital receipt and not taxable as income. The legislative history and judicial precedents indicated that gifts received by companies were not taxable unless specifically covered by provisions such as Section 56(2)(v), (vi), (vii), or (viia). The Tribunal, relying on various judicial pronouncements, including the Supreme Court's decision in CIT vs. Groz-Beckert Saboo Ltd. (116 ITR 125), held that gifts are capital receipts and not taxable under the Income Tax Act.

3. Whether the receipt should be included in the book profits under Section 115JB of the Income Tax Act:

The Assessing Officer (AO) included the gift amount in the book profits under Section 115JB, arguing that it should be credited to the Profit & Loss Account as an item of exceptional nature. However, the Tribunal, following the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT (255 ITR 273), held that the AO has limited power to adjust the book profits as provided in the Explanation to Section 115JB. Since the gift was not credited to the Profit & Loss Account, no adjustment was required under Section 115JB.

Conclusion:

The Tribunal concluded that the receipt of Rs. 161,86,77,034/- by the assessee was a valid gift and a capital receipt, not taxable under the Income Tax Act. Additionally, it should not be included in the book profits under Section 115JB. The detailed findings and judicial precedents supported the assessee's claim, leading to the deletion of the addition made by the AO.